PART
I
|
ITEM
1.
|
IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISERS
|
Not
applicable.
|
ITEM
2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not
applicable.
Selected
Consolidated Financial Data
The
following table presents selected financial data regarding our business. It should be read in conjunction with our
consolidated financial statements and related notes contained elsewhere in this annual report and the information under Item 5,
“Operating and Financial Review and Prospects.” The selected consolidated statement of income data for
the Company’s fiscal years ended December 31, 2016, 2015 and 2014, and the selected consolidated balance sheet data as of
December 31, 2016 and 2015, have been derived from our audited consolidated financial statements that are included in this annual
report beginning on page F-1. The selected statement of income data for the fiscal year ended December 31, 2013 and 2012 and the
balance sheet data as of December 31, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements
that are not included in this annual report.
Our
consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the
United States, or U.S. GAAP. The selected financial data information is only a summary and should be read in conjunction
with the historical consolidated financial statements and related notes contained elsewhere herein. The financial statements
contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance.
(In
thousands of U.S. Dollars, except number of shares and per share data)
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Operating income (loss)
|
|
|
(909,729
|
)
|
|
|
(530,998
|
)
|
|
|
(285,783
|
)
|
|
|
(107,988
|
)
|
|
|
(59,322
|
)
|
|
Net income (loss) before non-controlling interest
|
|
|
(4,141,618
|
)
|
|
|
(528,468
|
)
|
|
|
(284,673
|
)
|
|
|
(107,491
|
)
|
|
|
(59,047
|
)
|
|
Net income (loss)
|
|
|
(4,120,829
|
)
|
|
|
(514,431
|
)
|
|
|
(284,673
|
)
|
|
|
(107,491
|
)
|
|
|
(59,047
|
)
|
|
Weighted average ordinary shares
|
|
|
83,109,978
|
|
|
|
83,109,978
|
|
|
|
83,173,778
|
|
|
|
83,173,778
|
|
|
|
83,173,778
|
|
|
Weighted average number of diluted ordinary shares
|
|
|
83,109,978
|
|
|
|
83,109,978
|
|
|
|
83,173,778
|
|
|
|
83,173,778
|
|
|
|
83,173,778
|
|
|
Basic income (loss) per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.008
|
)
|
|
|
(0.003
|
)
|
|
|
(0.003
|
)
|
|
Diluted income (loss) per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.008
|
)
|
|
|
(0.003
|
)
|
|
|
(0.003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
2,624,873
|
|
|
$
|
1,115,548
|
|
|
$
|
304,955
|
|
|
$
|
183,097
|
|
|
$
|
123,464
|
|
|
Total assets
|
|
|
2,632,224
|
|
|
|
1,118,429
|
|
|
|
304,955
|
|
|
|
183,097
|
|
|
|
123,464
|
|
|
Total current liabilities
|
|
|
2,252,146
|
|
|
|
2,243,605
|
|
|
|
2,304,751
|
|
|
|
2,452,951
|
|
|
|
2,610,773
|
|
|
Total liabilities
|
|
|
2,488,546
|
|
|
|
2,480,005
|
|
|
|
2,304,751
|
|
|
|
2,452,951
|
|
|
|
2,610,773
|
|
|
Non-controlling Interest
|
|
|
1,083,073
|
|
|
|
1,079,563
|
|
|
|
1,079,563
|
|
|
|
1,079,563
|
|
|
|
1,079,563
|
|
|
Shareholders’ equity (deficit)
|
|
|
(939,395
|
)
|
|
|
(2,441,139
|
)
|
|
|
(3,079,359
|
)
|
|
|
(3,349,417
|
)
|
|
|
(3,566,872
|
)
|
Capitalization
and Indebtedness
Not
applicable.
Reasons
for the Offer and Use of Proceeds
Not
applicable.
Risk
Factors
You
should carefully consider the risks described below, which constitute the material risks facing us. If any of the following risks
actually occur, our business could be harmed. You should also refer to the other information about us contained in this Annual
Report, including our financial statements and related notes.
We
currently have no business operations nor any revenues or earnings from operations.
We
currently have no business operations or any revenues or earnings from operations. Neither do we have significant assets or financial
resources; and we will, in all likelihood, continue to sustain operating expenses without corresponding revenues until the development
of a new business plan or the consummation of a business combination. The auditor issues an audit opinion including an explanatory
paragraph regarding going concern in our audited financial statements.
Our
proposed operations are purely speculative.
The
success of our proposed plan of operation will depend to a great extent on the operations, financial condition and management
of the identified target company. While business combinations with entities having established operating histories are preferred,
there can be no assurance that we will be successful in locating candidates meeting these criteria. If we complete a business
combination, the success of our operations will be dependent upon management of the target company and numerous other factors
beyond our control. There is no assurance that we can identify a target company and consummate a business combination.
We
may have significant difficulty in locating a viable business combination candidate.
We
are and will continue to be an insignificant participant in the business of seeking mergers with and acquisitions of business
entities. A large number of established and well-financed entities, including venture capital firms, are active in mergers and
acquisitions of companies which may be merger or acquisition target candidates for us. Nearly all of these competitors have significantly
greater financial resources, technical expertise and managerial capabilities than we do and, consequently, we will be at a competitive
disadvantage in identifying possible business opportunities and successfully completing a business combination. Moreover, we will
also compete with numerous other small public companies in seeking merger or acquisition candidates.
It
is possible that the per share value of your stock will decrease upon the consummation of a business combination.
A
business combination normally will involve the issuance of a significant number of additional shares. Depending upon the value
of the assets acquired in a business combination, the per share value of our ordinary shares may decrease, perhaps significantly.
Any
business combination that we engage in may have tax effects on us.
Federal
and state tax consequences will, in all likelihood, be major considerations in any business combination that we may undertake.
Currently, a business combination may be structured so as to result in tax-free treatment to both companies pursuant to various
federal and state tax provisions. We intend to structure any business combination so as to minimize the federal and state tax
consequences to both us and the target company; however, there can be no assurance that a business combination will meet the statutory
requirements of a tax-free reorganization or that the parties will obtain the intended tax-free treatment upon a transfer of stock
or assets. A non-qualifying reorganization could result in the imposition of both federal and state taxes which may have an adverse
effect on both parties to the transaction.
Our
ordinary shares are quoted on the OTC Market which may have an unfavorable impact on our stock price and liquidity.
Our
ordinary shares are 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 shareholders to trade shares of our ordinary shares, could depress the trading price of our ordinary shares and could
have a long-term adverse impact on our ability to raise capital in the future.
Future
sales or perceived sales of our ordinary shares could depress our stock price.
A
substantial number of shares of our ordinary shares held by our current shareholders are freely tradable. If the holders
of these shares were to attempt to sell a substantial amount of their holdings at once, the market price of our ordinary shares
could decline. Moreover, the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares
and investors to short the ordinary shares, a practice in which an investor sells shares that he or she does not own at prevailing
market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number
of our ordinary shares for sale to increase, our ordinary shares market price would likely further decline.
We
do not intend to pay dividends on our ordinary shares for the foreseeable future.
For
the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not
anticipate paying any cash dividends on our ordinary shares. Accordingly, investors must be prepared to rely on sales of their
ordinary shares after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends
should not purchase our ordinary shares. Any determination to pay dividends in the future will be made at the discretion of our
board of directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed
by applicable law and other factors our board deems relevant.
We
are a “foreign private issuer,” and have disclosure obligations that are different than those of U.S. domestic reporting
companies so you should not expect to receive the same information about us at the same time as a U.S. domestic reporting company
may provide.
We
are a foreign private issuer and, as a result, we are not subject to certain of the requirements imposed upon U.S. domestic
issuers by the SEC. For example, we are not required by the SEC or the federal securities laws to issue quarterly reports or proxy
statements with the SEC. We are allowed four months following the end of our fiscal year to file our annual report
with the SEC. We are not required to disclose certain detailed information regarding executive compensation that is
required from U.S. domestic issuers. Further, our directors and executive officers are not required to report equity holdings
under Section 16 of the Securities Act. As a foreign private issuer, we are also exempt from the requirements of Regulation
FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information
about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC,
such as Rule 10b-5. Since many of the disclosure obligations required of us as a foreign private issuer are different
than those required by other U.S. domestic reporting companies, our shareholders should not expect to receive information
about us in the same amount and at the same time as information is received from, or provided by, other U.S. domestic reporting
companies. We are liable for violations of the rules and regulations of the SEC which do apply to us as a foreign private issuer.
Violations of these rules could affect our business, results of operations and financial condition.
You
may have difficulty enforcing judgments obtained against us.
We
are a BVI company and substantially all of our assets are located outside of the United States. Virtually all of our assets and
a substantial portion of our current business operations are conducted in the PRC. In addition, almost all of our directors
and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these
persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the
United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments obtained
in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers
and directors, many of whom are not residents in the United States and whose assets are located in significant part outside of
the United States. In addition, there is uncertainty as to whether the courts of the British Virgin Islands or the PRC would recognize
or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities
laws of the United States or any state. In addition, it is uncertain whether such British Virgin Islands or PRC courts
would be competent to hear original actions brought in the British Virgin Islands or the PRC against us or such persons predicated
upon the securities laws of the United States or any state.
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, or 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
Security Review Rules may make it more difficult for us to make future acquisitions or dispositions of our business operations
or assets in China.
The
Security Review Rules, effective as of September 1, 2011, provides that when deciding whether a specific merger or acquisition
of a domestic enterprise by foreign investors is subject to the national security review by MOFCOM, the principle of substance-over-form
should be applied and foreign investors are prohibited from circumventing the national security review requirement by structuring
transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore
transactions. If the business of any target company that we plan to acquire falls within the scope subject to national security
review, we may not be able to successfully acquire such company by equity or asset acquisition, capital increase or even through
any contractual arrangement.
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.
If
we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S.
and China, and our PRC tax may not be creditable against our U.S. tax.
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 ordinary shares purchases such ordinary shares 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, or FCPA, and other laws that prohibit improper payments or offers of payments
to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the
purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China.
The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments
or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always
be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our
existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents,
or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese
anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could
negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
If
we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we
may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock
price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed
and resolved favorably.
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.
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 disclosure.
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 takes place in China, it may be more difficult for the staff of the SEC to overcome
the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for
similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports
and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For
example, the disclosure in our SEC reports and other filings are not subject to the review of the 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.
Because
we are incorporated under the laws of the BVI, it may be more difficult for our shareholders to protect their rights than it would
be for a shareholder of a corporation incorporated in another jurisdiction.
Our
corporate affairs are governed by our memorandum and articles of Association and by the BVI Companies Act, 2004 (as amended) of
the BVI. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of management
and the rights of our shareholders differ from those that would apply if we were incorporated in the United States or another
jurisdiction. The rights of shareholders under BVI law are not as clearly established as are the rights of shareholders
in many other jurisdictions. Under the laws of most jurisdictions in the United States, majority and controlling shareholders
generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith,
and actions by controlling shareholders which are obviously unreasonable may be declared null and void. BVI law protecting the
interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in
US jurisdictions. In addition, the circumstances in which a shareholder of a BVI company may sue the company derivatively,
and the procedures and defenses that may be available to the company, may result in the rights of shareholders of a BVI company
being more limited than those of shareholders of a company organized in the US. Furthermore, our directors have the
power to take certain actions without shareholder approval which would require shareholder approval under the laws of most US
jurisdictions. The directors of a BVI corporation, subject in certain cases to court approval but without shareholder
approval, may implement a reorganization, merger or consolidation, the sale of any assets, property, part of the business, or
securities of the corporation. The ability of our board of directors to create new classes or series of shares and
the rights attached by amending our memorandum of association and articles of association without shareholder approval could have
the effect of delaying, deterring or preventing a change in our control without any further action by the shareholders, including
a tender offer to purchase our ordinary shares at a premium over then current market prices. Thus, our shareholders may have more
difficulty protecting their interests in the face of actions by our board of directors or our controlling shareholders than they
would have as shareholders of a corporation incorporated in another jurisdiction.
|
ITEM 4.
|
INFORMATION ON THE COMPANY
|
A.
History and Development of the Company
We
were incorporated in Delaware on August 16, 2006 as Alyst Acquisition Corp. in order to serve as a vehicle for the acquisition
of an operating business in any industry, with a focus on the telecommunications industry, through a merger, capital stock exchange,
asset acquisition or other similar business combination. Our initial shareholders purchased 1,750,000 shares of common
stock, par value $0.0001 per share in a private placement. On July 5, 2007, Alyst consummated its initial public offering,
or IPO, of 8,044,400 of its units, or Units. Each Unit consisted of one share of Common Stock and one warrant to purchase
one share of Common Stock at an exercise price of $5.00 per share. Simultaneously with the consummation of the IPO,
Alyst (i) consummated a private placement of 1,820,000 warrants to the original sponsors, officers and directors, and certain
of their affiliates of Alyst, each warrant entitled upon exercise to one share of Common Stock at an exercise price of $5.00 per
share, and (ii) issued to the representatives of the underwriters in the IPO an option to purchase 300,000 of its units, or the
UPO, at an exercise price of $10.00 per unit. The units issuable upon exercise of the UPO were identical to the Units,
except that the exercise price of the underlying warrants is $7.50 per share.
On
June 25, 2009, we completed a business combination pursuant to which Alyst merged with and into CNIH, its wholly-owned subsidiary,
to effect its redomestication to the British Virgin Islands. On June 26, 2009, China Networks Merger Co., Ltd., our
wholly-owned British Virgin Islands subsidiary, merged with and into China Networks, resulting in China Networks becoming our
wholly-owned subsidiary. We refer to the foregoing transactions herein as the Business Combination, and the merger
agreement pursuant to which the Business Combination was consummated as the Merger Agreement. CNIH and its subsidiary,
China Networks, are the surviving entities of the Business Combination.
Upon
consummation of the Business Combination, CNIH had outstanding 12,927,888 ordinary shares, par value $0.0001 per share, 9,864,400
warrants, and the UPO for 300,000 units, each unit containing one ordinary share and one warrant.
As
of the effective time of the Business Combination, there were 8,044,400 public warrants outstanding. Each warrant entitles
the holder to purchase one ordinary share. In order to obtain the shares, the holders of the warrants must pay an exercise price
of $5.00 per share. We may redeem the warrants at a price of $0.01 per warrant upon a minimum of 30 days’ prior
written notice of redemption if, and only if, the last sale price of our ordinary shares equals or exceeds $11.50 per share for
any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption.
The
1,820,000 insider warrants outstanding at the effective time of the Business Combination became exercisable into ordinary shares
after September 27, 2009, the date that was 90 days after consummation of the Business Combination. The insider warrants
have terms and provisions that are identical to the public warrants, except that they may be exercised on a cashless basis if
the warrants are redeemed at our option under the same conditions applicable to the public warrant holders and, at such time,
are held by the initial holders.
In
connection with the consummation of the Business Combination: (i) the former class A preferred shareholders of China Networks
received one ordinary share of CNIH for each class A preferred share of China Networks for an aggregate of 980,000 ordinary shares;
and (ii) the representatives of the underwriters in Alyst’s IPO received an aggregate of 253,488 ordinary shares in lieu
of payment of certain fees. The 1,750,000 ordinary shares held by the former Alyst insiders are subject to a stock
escrow agreement entered into at the time of issuance in 2006 and, unless such restrictions are modified or waived, such shares
are not transferrable until the earlier or June 19, 2010, the date that is 12 months following the consummation of the Business
Combination, or the consummation of a merger, business combination, liquidation or similar transaction (subsequent to the Business
Combination) which results in all of our shareholders having the right to exchange their ordinary shares for cash, securities
or other property.
Following
the Business Combination we, through our subsidiaries and variable interest entities, provided broadcast television advertising
services in the PRC and operated joint-venture partnerships with PRC televisions stations in regional areas of the country. We
managed these regional businesses through a series of joint ventures and contractual arrangements to sell broadcast television
advertising time slots and so-called “soft” advertising opportunities to local advertisers directly and through advertising
agencies and brokers, and also assisted the PRC television stations in selling advertising time slots and “soft” advertising
opportunities to national advertisers, specifically by offering multi-region campaigns to maximize value and cut costs these national
advertisers would otherwise face when dealing with individual stations on a station-by-station basis.
In
September 2010, we entered into an equity transfer agreement whereby ANT sold all of its equity ownership in Kunming Taishi Information
Cartoon Co., Ltd., a PRC company, or Kunming JV, to Kunming TV Station our 50% joint venture partner, upon approval of the Chinese
authorities. This discussion was initiated due to the recent restructuring of Kunming TV station, and the PRC government’s
intent to integrate its television advertising assets. As a result of the agreement, the total transfer price for the
equity stake exchange was RMB 150,000,000 with the first installment of RMB 75,000,000 paid by Kunming TV in January 2011. The
Company gave notice in January 2011 of the redemption of its convertible debentures issued in April 13, 2010. The aggregate amount
of the Debentures being redeemed represented the entire outstanding principal of the Debentures. In addition, the Company
gave notice to pay all outstanding interest owed on the debentures in ordinary shares of the Company. In May 2011, the remaining
funds from the first installment were utilized for the redemption of an aggregate of 4,028,690 of the Company’s Preferred
Shares. Upon receipt of the second installment of RMB 30,000,000 paid by Kunming TV, the Company redeemed an aggregate
of 4,706,807 of its Preferred Shares on November 31, 2011, and upon receipt of the third installment of RMB 30,000,000 paid by
Kunming TV in April 2012, the Company redeemed an aggregate of 1,575,000 of its Preferred Shares. The fourth installment of RMB
10,000,000 was paid by Kunming TV in March, 2012. The remaining RMB 5,000,000 due from Kunming TV was received by the Company
in June 2012, and the funds will be partially used to redeem all remaining outstanding Preferred Shares.
In
January 2011, China Yellow River Television Station, the Company’s joint venture partner in Shanxi Yellow River and Advertising
Networks Cartoon Technology Co., Ltd., or Yellow River JV, was consolidated by merger into Shanxi Radio and TV Station, or Shanxi
TV, a PRC state-owned entity, and Shanxi TV was the successor to all of China Yellow River Television Station’s obligations
under the joint venture agreements. Upon consummation of the merger, Shanxi TV immediately and unilaterally terminated the cooperation
agreement that established the Yellow River JV and transferred the advertising business of the Yellow River JV to its own internal
advertising department. The Company believes that Shanxi TV’s actions constituted a direct violation of the cooperation
agreement which granted to the Yellow River JV the exclusive and irrevocable right to operate China Yellow River Television Station’s
advertising business.
In
connection with the termination of the cooperation agreement and the transfer of the advertising business, Shanxi TV has also
taken, as its own, the RMB 45,000,000 of registered capital contributed by the Company to the Yellow River JV. While
the Company acknowledges the right of the PRC government to change policies and rules with respect to agreements with state-owned
entities, such as Shanxi TV, however the Company believes that the RMB 45,000,000 contributed to the Yellow River JV by the Company
must be returned to the Company.
In
addition to attempts at negotiations directly with Shanxi TV, Yellow River JV filed an application for arbitration with the China
International Economic Trade Arbitration Commission, or CIETAC, in October 2011. Shanxi TV filed its response in January
2012, and has since challenged CIETAC’s jurisdiction over the dispute, though in March 2012, subsequently withdrew the application.
Since the submission of the application for arbitration, two hearings have been held, and CEITAC initially indicated that it would
render a decision by August 21, 2102. However, this deadline has been extended on three separate occasions. For strategic
purposes, Yellow River JV submitted a withdrawal application to CERTAC on February 17, 2013 and CEITAC rendered a withdrawal decision
on March 18, 2013. On January 20, 2014, Yellow River JV filed two applications for arbitration with CIETAC in an attempt
to resolve the aforementioned disputes.
On
March 15, 2016, CIETAC issued two final arbitral awards with the amount of 90 million in total. Among others, the arbitral
tribunal found that because Shanxi TV unilaterally terminated the cooperation agreement, it must pay RMB 45 million for damages
as claimed by Yellow River JV. In addition, Shanxi TV’s termination of the cooperation agreement essentially resulted
in its material breach of the asset transfer agreement with Yellow River JV and as a result, Shanxi TV is responsible to return
RMB 45 million to Yellow River JV that it paid to Shanxi TV. CIETAC further ruled that Shanxi TV shall bear the RMB 0.8
million attorney fee and RMB115,084.3 arbitration fee. The payment of the above fees was to be made by Shanxi TV within
30 days after the issuance of the arbitral awards. Shanxi TV did not make such payment, and enforcement actions were filed with
a local Shanxi court in May 2016. Shanxi TV subsequently applied to the court to withdraw the arbitral awards, but the court rejected
such applications in August 2016. In September 2016, Yellow River JV applied to continue the enforcement procedure. Such enforcement
actions are still pending. We intend to make every effort to collect the awards.
If
the Company is successful in enforcing the arbitral awards and receiving all of the RMB 90 million from Shanxi TV, a portion of
the funds will be used to redeem all or a portion of the Class A Preferred Shares that remain outstanding at such time. However
there is no guarantee that we will be able to secure the payment of part or all of the RMB 90 million by Shanxi TV.
B.
Business Overview
We
are currently a shell company in the British Virgin Islands with non-operating subsidiaries ANT, a Hong Kong company, WFOE, a
PRC company, and Hetong, a PRC company and a variable interest entity. At present, in addition to pursuing a remedy to the dispute
with Shanxi TV as described above, the Company is exploring options with respect to future business operations. The Company may
decide to seek a potential business combination with one or more yet to be identified privately held companies, or may determine
that it is in the best interests of the Company and its shareholders to attempt to engage in another business through its subsidiaries
and variable interest entities in China.
If
management determines that it is in the best interests of the Company and its shareholders to enter into a business combination,
we will not be restricted in our search for business combination candidates to any particular geographical area, industry or industry
segment, and may enter into a combination with a private business engaged in any line of business. Management's discretion is,
as a practical matter, unlimited in the selection of a combination candidate.
If
we effect a business combination with any entity unaffiliated with our current management, our current officers and directors
probably will resign their directorship and officer positions with us in connection with our consummation of a business combination.
In such an instance, our current management will not have any control over the conduct of our business following the completion
of a business combination.
It
is anticipated that prospective business opportunities will come to our attention from various sources, including our management,
our other stockholders, professional advisors such as attorneys and accountants, securities broker-dealers, venture capitalists,
members of the financial community, and others who may present unsolicited proposals. We do not have any plans, understandings,
agreements, or commitments with any individual or entity to act as a finder of or as a business consultant in regard to any business
opportunities for us. There are no plans to use advertisements, notices or any general solicitation in the search for combination
candidates.
C.
Organizational Structure
We
do not directly or indirectly have an equity interest in Hetong, however ANT, our wholly owned subsidiary, has entered into a
series of contractual arrangements with Hetong and its shareholders. As a result of the following contractual arrangements, we
control and are considered the primary beneficiary of Hetong. These arrangements include the following:
|
|
●
|
The
shareholders of Hetong have jointly granted ANT an exclusive and irrevocable option to purchase all or part of their equity
interests in Hetong at any time, and this option may only be terminated by mutual consent or at the direction of ANT.
|
|
|
|
|
|
|
●
|
Without
ANT’s consent, the shareholders of Hetong may not (i) transfer or pledge their equity interests in Hetong, (ii) receive
any dividends, loan interest or other benefits from Hetong, or (iii) make any material adjustment or change to Hetong’s
business or operations.
|
|
|
|
|
|
|
●
|
The
shareholders of Hetong agreed to (i) accept the policies and guidelines furnished by ANT with respect to the hiring and dismissal
of employees, or the operational management and financial system of Hetong, and (ii) appoint the candidates recommended by
ANT as directors of Hetong.
|
|
|
|
|
|
|
●
|
Each
shareholder of Hetong has appointed ANT’s designee as their attorneys-in-fact to exercise all its voting rights as shareholders
of Hetong, until 2037.
|
Each
shareholder of Hetong has pledged all of its respective equity interests in Hetong to WFOE, a wholly-owned subsidiary of ANT in
the PRC, to secure the payment obligations of Hetong under certain contractual arrangements between Hetong and WFOE. This pledge
is effective until the later of the (i) date on which the last surviving of the Exclusive Service Agreements, the Loan Agreement
and the Equity Option Agreement terminates and (ii) date on which all outstanding secured obligations are paid in full or otherwise
satisfied. Each of these agreements are subject to customary termination provisions; however, the WFOE may terminate the Exclusive
Services Agreement at any time upon 30 days’ notice to Hetong.
D.
Property, Plants and Equipment
We do
not currently maintain any executive office space. Our registered address is 801, 29F Block C, Central International Trade Center,
6A Jian Guo Men Wai Avenue, Chao Yang District, Beijing, PRC.
|
ITEM 4A.
|
UNRESOLVED STAFF COMMENTS
|
Not
Applicable
|
ITEM 5.
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
consolidated and unconsolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This
discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our
actual results may differ materially from those
anticipated
in these forward-looking statements as a result of various
factors, including those set forth under “Item 3, Key Information — Risk Factors” or in other parts of this
annual report on Form 20-F.
Operating
Results
Overview
and Plan of Operation
Following
our Business Combination with Alyst on June 25, 2009 until January 2011, we, through our subsidiaries and variable interest entities,
provided broadcast television advertising services in the PRC and operated joint-venture partnerships with PRC televisions stations
in regional areas of the country. We managed these regional businesses through a series of joint ventures and contractual arrangements
to sell broadcast television advertising time slots and so-called “soft” advertising opportunities to local advertisers
directly and through advertising agencies and brokers, and also assisted the PRC television stations in selling advertising time
slots and “soft” advertising opportunities to national advertisers, specifically by offering multi-region campaigns
to maximize value and cut costs these national advertisers would otherwise face when dealing with individual stations on a station-by-station
basis.
Since
January 2011, we have been a shell company in the BVI with non-operating subsidiaries ANT, a Hong Kong company, WFOE, a PRC company,
and Hetong, a PRC company and a variable interest entity. At present, in addition to pursuing a remedy to the dispute with Shanxi
TV as discussed elsewhere in this Report, we are exploring options with respect to future business operations. Management may
decide to seek a potential business combination with one or more yet to be identified privately held companies, or may determine
that it is in the best interests of the Company and its shareholders to attempt to engage in another business through its subsidiaries
and variable interest entities in China.
As
discussed above, in October 2011 Yellow River JV filed an application for arbitration with CIETAC. Shanxi TV filed its response
in January 2012, and has since challenged CIETAC’s jurisdiction over the dispute, though in March 2012, subsequently withdrew
the application. Since the submission of the application for arbitration, two hearings have been held, and CEITAC initially indicated
that it would render a decision by August 21, 2102. However, this deadline has been extended on three separate occasions.
For strategic purposes, Yellow River JV submitted a withdrawal application to CERTAC on February 17, 2013 and CEITAC rendered
a withdrawal decision on March 18, 2013. On January 20, 2014, Yellow River JV filed two applications for arbitration with CIETAC
in an attempt to resolve the aforementioned disputes.
On
March 15, 2016, CIETAC issued two final arbitral awards with the amount of 90 million in total. Among others, the arbitral
tribunal found that because Shanxi TV unilaterally terminated the cooperation agreement, it must pay RMB 45 million for damages
as claimed by Yellow River JV. In addition, Shanxi TV’s termination of the cooperation agreement essentially resulted
in its material breach of the asset transfer agreement with Yellow River JV and as a result, Shanxi TV is responsible to return
RMB 45 million to Yellow River JV that it paid to Shanxi TV. CIETAC further ruled that Shanxi TV shall bear the RMB 0.8
million attorney fee and RMB115,084.3 arbitration fee. The payment of the above fees was to be made by Shanxi TV within
30 days after the issuance of the arbitral awards. Shanxi TV did not make such payment, and enforcement actions were filed with
a local Shanxi court in May 2016. Shanxi TV subsequently applied to the court to withdraw the arbitral awards, but the court rejected
such applications in August 2016. In September 2016, Yellow River JV applied to continue the enforcement procedure. Such enforcement
actions are still pending. We intend to make every effort to collect the awards.
Taxation
BVI
CNIH
is incorporated in the BVI. Under the current law of the BVI, CNIH is not subject to income or capital gains tax. In addition,
dividend payments are not subject to withholding tax in the BVI.
Hong
Kong
We
did not have any assessable profits subject to the Hong Kong profits tax from 2008 to 2016. We do not anticipate having any income
subject to income taxes in Hong Kong in the foreseeable future.
PRC
Our
PRC entities are subject to PRC enterprise income tax at the statutory tax rate of 25%. We did not have any assessable profits
subject to the PRC enterprise income tax from our PRC subsidiaries.
Our
future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax
income and non-tax deductible expenses incurred. Our management carefully monitors these legal developments and will timely adjust
our effective income tax rate when necessary.
Results
of Operations
Comparison
of Fiscal Years Ended December 31, 2016 and 2015
The
following table sets forth key components of our results of operations for the periods indicated, in dollars and as a percentage
of revenue.
|
|
|
Year ended December 31,
2016
|
|
|
Year ended December 31,
2015
|
|
|
|
|
Amount
|
|
|
Percentage of Revenue
|
|
|
Amount
|
|
|
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(59,322
|
)
|
|
|
-
|
|
|
|
(107,988
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from operations
|
|
|
(59,322
|
)
|
|
|
-
|
|
|
|
(107,988
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
275
|
|
|
|
-
|
|
|
|
497
|
|
|
|
-
|
|
|
(Loss) before income tax and non-controlling interests
|
|
|
(59,047
|
)
|
|
|
-
|
|
|
|
(107,491
|
)
|
|
|
-
|
|
General
and Administrative Expenses
. General and administrative expenses include salaries and benefits for our employees, as
well as costs and expenses associated with office, utilities, transportation, travel and other costs and expenses related to legal,
accounting and other costs associated with regulatory filings. The general and administrative expense for 2016 was $59,322, a
decrease of $48,666 or 45%, as compared to $107,988 in 2015. The decrease is primarily as a result of no operation in 2016.
Interest
Income
. Interest income in 2016 was $275 compared with $497 in 2015. The decrease in interest income is due to the
lower average daily balance of the bank deposit in 2016.
Comparison
of Fiscal Years Ended December 31, 2015 and 2014
The
following table sets forth key components of our results of operations for the periods indicated, in dollars and as a percentage
of revenue.
|
|
|
Year ended December 31,
2015
|
|
|
Year ended December 31,
2014
|
|
|
|
|
Amount
|
|
|
Percentage of Revenue
|
|
|
Amount
|
|
|
Percentage of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(107,988
|
)
|
|
|
-
|
|
|
|
(285,783
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from operations
|
|
|
(107,988
|
)
|
|
|
-
|
|
|
|
(285,783
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
497
|
|
|
|
-
|
|
|
|
1,110
|
|
|
|
-
|
|
|
(Loss) before income tax and non-controlling interests
|
|
|
(107,491
|
)
|
|
|
-
|
|
|
|
(284,673
|
)
|
|
|
-
|
|
General
and Administrative Expenses
. The general and administrative expense for 2015 was $107,988, a decrease of $177,795
or 62%, as compared to $285,783 in 2014. The decrease is primarily as a result of the reduction of business activities resulted
from the disposal of investment projects and arbitration with venture partner.
Interest
Income
. Interest income in 2015 was $497 compared with $1,110 in 2014. The decrease in interest income is due to
the lower average daily balance of the bank deposit in 2015.
Critical
Accounting Policies
Our
discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation
of these financial statements and related disclosures in conformity with accounting principles generally accepted in the United
States of America requires our management to make judgments, assumptions and estimates that affect the amounts reported in the
consolidated financial statements and accompanying notes. Our management evaluates its estimates on an on-going basis based on
historical experience and on various other assumptions it believes are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources.
We
believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of its
financial statements.
Variable
Interest Entities
– The Company account for entities qualifying as variable interest entities (VIEs) in accordance with
Financial Accounting Standards Boards (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation.
For our consolidated VIE, management has made evaluations of the relationships between our VIE and the economic benefit flow of
contractual arrangement with VIE. In connection with such evaluation, management also took into account the fact that, as a result
of such contractual arrangements, we control the legal shareholders’ voting interests and have power of attorney in the
VIE, and therefore we are able to direct all business activities of the VIE. As a result of such evaluation, management concluded
that we are the primary beneficiary of our consolidated VIE. We have consulted our PRC legal counsel in assessing our ability
to control our PRC VIE. Any changes in PRC laws and regulations that affect our ability to control our PRC VIE may preclude us
from consolidating these companies in the future.
Income
Taxes
– The Company accounts for income taxes in accordance with the asset and liability method. Deferred taxes are
recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and income tax purposes using enacted rates expected to be in effect when such amounts are realized
or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is established, as needed to reduce the amount of deferred tax assets if it is considered more likely
than not that some portion or all of the deferred tax assets will not be realized. The Company recognizes the effect of income
tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured
at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in
the period in which the change in judgment occurs.
Recently
Issued Accounting Standards
There
are no recently issued accounting pronouncements adopted by the Company. Management does not believe that any recently
issued, but not effective, accounting standards, if currently adopted, would have a material effect on the accompanying financial
statements.
The Company
accounts for and discloses events that occur after the balance sheet but before financial statements are issued or are available
to be issued through December 31, 2016.
Liquidity
and Capital Resources
The
Company did not generate any revenue and had net cash used in operating activities, which have had a significant adverse impact
on its business and continue to negatively impact its projected future liquidity. The Company plans to settle the accrued dividend
by issuance of pay-in-kind shares to preferred shareholders. If the Company is successful in enforcing the arbitral awards and
receiving all of the RMB 90 million (approximately $13,859,800) from Shanxi TV, a portion of the funds will be used to redeem
all or a portion of the Class A Preferred Shares that remain outstanding at such time.
In
addition, the Company expects that it will need to raise substantial additional capital to accomplish its business plan over the
next several years. The Company may also wish to selectively pursue possible acquisitions of businesses complementary to those
of the Company in the future in order to expand its presence in the market place and achieve operating efficiencies. The Company
expects to seek to obtain additional funding through a bank credit facility or private equity. There can be no assurance as to
the availability or terms upon which such financing and capital might be available.
As of
December 31, 2016, we had cash and cash equivalents of $123,464. The decrease in cash primarily as a result of the reduction of
business activities resulted from the disposal of investment projects, thus no cash been generated from the business.
The following
table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date,
we have financed our operations primarily through cash flows from operations, augmented by short-term bank borrowings and equity
contributions by our shareholders.
(All
amounts in thousands of U.S. dollars)
|
|
|
Year Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Net cash (used in) operating activities
|
|
$
|
(59,047
|
)
|
|
$
|
(121,515
|
)
|
|
$
|
(366,226
|
)
|
|
Net cash provided by (used in) investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
(882
|
)
|
|
Net cash (used in) financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net Increase (decrease) in Cash and Cash Equivalents
|
|
|
(59,047
|
)
|
|
|
(121,515
|
)
|
|
|
(367,108
|
)
|
|
Effects of Exchange Rate Change in Cash
|
|
|
(586
|
)
|
|
|
(343
|
)
|
|
|
8,985
|
|
|
Cash and Cash Equivalent at Beginning of the Year
|
|
|
183,097
|
|
|
|
304,955
|
|
|
|
663,078
|
|
|
Cash and Cash Equivalent at End of the Year
|
|
|
123,464
|
|
|
|
183,097
|
|
|
|
304,955
|
|
Operating
activities
Net
cash used in operating activities was $59,047 for the year ended December 31, 2016, as compared to $121,515 used in operating
activities during 2015. The amount is insignificant because there were limited operations during the year.
Net
cash used in operating activities was $121,515 for the year ended December 31, 2015, as compared to $366,226 used in operating
activities during 2014. The amount is insignificant because there were limited operations during the year.
Investing
activities
Net
cash provided by investing activities for the year ended December 31, 2016 was $0, as compared to $0 net cash provided by investing
activities in 2015. Due to the disposal of the investment projects and limited operations, there was no investing activities been
carried out during 2016.
Net
cash provided by investing activities for the year ended December 31, 2015 was $0, as compared to $882 net cash provided by investing
activities in 2014. The net cash used in investing activities in 2014 was mainly attributable to the purchase of fixed assets.
Financing
activities
Net cash
used in financing activities for the year ended December 31, 2016 was $0 as compared to $0 net cash used in financing activities
in 2015. There was no redemption of preferred stock in 2015 and 2016.
Net cash
used in financing activities for the year ended December 31, 2015 was $0 as compared to $0 net cash used in financing activities
in 2014. There was no redemption of preferred stock in 2014.
Research
and Development, Patents and Licenses, Etc.
We
do not engage in any significant research and development activities, nor do we own any intellectual property.
Trend
Information
Other
than as disclosed in the foregoing disclosures and elsewhere in this annual report, we are not aware of any trends, uncertainties,
demands, commitments or events during the period from January 1, 2016 to December 31, 2016 that are reasonably likely to have
a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause our
disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
Off-Balance
Sheet Arrangements
We
have not entered into, nor do we expect to enter into, any off-balance sheet arrangements. We also have not entered into any financial
guarantees or other commitments to guarantee the payment obligations of third parties. In addition, we have not entered into any
derivative contracts that are indexed to our equity interests and classified as shareholders’ equity. Furthermore, we do
not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
Tabular
Disclosure of Contractual Obligations
The following
table sets forth our contractual obligations in respect of operating leases as of December 31, 2016.
|
|
|
Payments
Due By Period
|
|
|
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than
5
years
|
|
|
Operating
Lease Obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Safe
Harbor
See the
section headed “Forward-Looking Information.”
|
ITEM
6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
Directors
and Senior Management
The following
table sets forth certain information regarding our directors and senior management as of the date of this annual report.
|
NAME
|
|
AGE
|
|
POSITION
|
|
Li
Shuangqing
|
|
63
|
|
Chief
Executive Officer, Acting Chief Financial Officer and Chairman
|
|
Jian
Ping Huang
|
|
57
|
|
Director
|
|
May
Huang
|
|
49
|
|
Director
|
|
Kerry
Propper
|
|
43
|
|
Director
|
|
George
Kaufman
|
|
42
|
|
Director
|
Li
Shuangqing
. Mr. Li Shuangqing has been our chairman and chief executive officer and director since our merger with China
Networks. Prior to the merger, Mr. Li had served as the chairman and chief executive officer and a director of China Networks
since May 2008. From 2006 to 2007, Mr. Li was the chairman of Shandong Huashi Media & Technology, a leading Electronic Program
Guide provider in China. Prior to that, he was from 2001 to 2006 the general manager of Huicong Advertising, a leading
Chinese internet and TV advertising company and director of advertising department of Qilu TV Station from 1997 to 2001. Mr. Li
had various management and TV production roles with Shandong and Qilu TV Stations from 1980 to 1997. Mr. Li completed EMBA course
from Guanghua School of Management, Peking University.
Jian
Ping Huang
. Dr. Jian Ping Huang has been our director since our merger with China Networks. He is the Chairman Emeritus
and Chief Strategic Adviser of Jpigroup Inc., a company he founded in 1988. Under Dr. Huang’s advisory guidance, Jpigroup
has become one of China's major private investment and development companies that has invested and advised in the areas of manufacturing,
human capital development, technologies and financial services. From 1985 and prior to founding Jpigroup, Dr. Huang worked for
the Government of China in the former Ministry of Foreign Economic Relations and Trade and during this time, he was very active
and instrumental in helping formulate some of China's first open door strategies and reform plans, especially in the area of international
investment and trade. Dr. Huang is also a director of China Gerui Advanced Materials Group Limited, and a member of that company’s
audit committee. Dr. Huang holds a Ph.D. in economics from the University of International Business and Economics in Beijing,
where he now concurrently holds a Professorship in Finance.
May
Huang
. Ms. May Huang has been our director since our merger with China Networks. Ms. Huang has been the Chief Operating
Officer of Jpigroup Inc. since 2006. She is responsible for coordinating the business activities and objectives of Jpigroup’s
two major divisions: investment banking services and principal investments. Jpigroup is one of China’s major private investment
and development companies that has invested and advised in the areas of manufacturing, human capital development, technologies
and financial services. Before 2006, Ms. Huang was Jpigroup’s Chief Financial Officer. Ms. Huang holds a Bachelor’s
degree in economics from Sun Yatsen University at Zhongshan. Ms. Huang is the sister of Dr. Huang.
Kerry
Propper
. Mr. Kerry Propper has been our director since our merger with China Networks and a director of China Networks
Media since May 2008. Mr. Propper has been the owner and chief executive officer of Chardan Capital Markets LLC, a New York based
broker/dealer, since July 2003. He has also been a managing director of SUJG, Inc., an investment company, since April 2005. From
its inception in December 2003 until November 2005, Mr. Propper served as a member of the board of directors of each of Chardan
China Acquisition Corp., Chardan North China Acquisition Corporation and Chardan South China Acquisition Corporation, each an
OTC Bulletin Board listed blank check company. In November 2005, Chardan China Acquisition Corp. completed its business combination
with State Harvest Holdings Ltd. and changed its name to Origin Agritech Ltd., in September 2007, Chardan North completed its
business combination with Gifted Time Holdings, Limited and changed its name to HLS Systems International, Ltd. and in January
2008 Chardan South completed its business combination with Head Dragon Holdings, Limited and changed its name to A-Power Energy
Generation Systems, Ltd. Mr. Propper has continued to serve as a member of the board of directors of Origin Agritech and HLS Systems
International Ltd. since their mergers. Mr. Propper also sits on the board of directors of China Cablecom Holdings, Ltd., a joint-venture
provider of cable TV services in China. Mr. Propper was a founder, and from February 1999 to July 2003 owner and managing director
of Windsor Capital Advisors, a full service brokerage firm also based in New York. Mr. Propper was also a founder of The Private
Capital Group LLC, a small private investment firm specializing in hard money loans and convertible preferred debt and equity
offerings for small companies, in May 2000 and was affiliated with it until December 2003. From July 1997 until February 1999,
Mr. Propper worked at Aegis Capital Corp., a broker dealer and member firm of FINRA. Mr. Propper received his B.A. (with honors)
in Economics and International Studies from Colby College and studied at the London School of Economics.
George
B. Kaufman
. Mr. George B. Kaufman has been our director since our merger with China Networks. Mr. Kaufman has served as
the Vice President of Investment Banking for Chardan Capital Markets LLC, a New York based broker/dealer, since January 2006 and
served as an Investment Banking Associate for Chardan from November 2004, when he joined the firm, to December 2005. As one of
the seven original members of Chardan, Mr. Kaufman established the investment banking, brokerage and marketing protocols and standards.
He has extensive experience with operating and development stage companies, particularly those in the China and Greater Asian
region, having lead and/or managed over 30 public and private transactions. In addition, Mr. Kaufman founded Detroit Coffee Company,
a national roaster, wholesaler and retail distributor of high-end specialty coffees, in January 2002 and currently serves as its
chief executive officer. Mr. Kaufman received a Bachelor of Arts degree in Economics from the University of Vermont in 1999.
Other
than described above, no family relationship exists between any of our directors and executive officers. There are no arrangements
or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was selected
as a director or member of senior management.
Compensation
In
2016, we paid an aggregate of $0 in salary to our directors and senior management as a group. None of our directors or senior
management received any equity awards, including options, restricted stock or other equity incentives in 2016. We do not set aside
or accrue any amounts for pension, retirement or other benefits for our directors and senior management. However, we reimburse
our directors for out-of-pocket expenses incurred in connection with their services in such capacity.
Our
board of directors conducts reviews informally, and compensation is not being typically changed on a regimented time-frame. Our
board of directors bases the salaries of our executive officers on the amounts similarly-situated companies pay their executive
officers for similar performance. In general, if an executive performs exceptionally well, the performance and, if applicable,
the increase in responsibilities would also merit a salary increase.
Board
Practices
Independence
of Directors
We
have elected to follow the rules of NYSE MKT to determine whether a director is independent. Our board will also consult with
counsel to ensure that our board’s determinations are consistent with those rules and all relevant securities and other
laws and regulations regarding the independence of directors. Consistent with these considerations, our board has affirmatively
determined that Dr. J.P. Huang, Ms. Huang and Mr. Kaufman are our independent directors.
Board
Committees
Audit
Committee
We
established an audit committee of the board of directors, which consists of Dr. J.P. Huang (Chairman) and Ms. Huang. We have determined
that each of these individuals is an independent director under the NYSE MKT listing standards. Our board has also determined
that Ms. Huang possesses the accounting or related financial management experience that qualifies her as financially sophisticated
within the meaning of the NYSE MKT listing standards and that he is an “audit committee financial expert” as defined
by the rules and regulations of the SEC.
The audit
committee is mainly responsible for, among other things:
|
|
●
|
reviewing
and discussing with management and the independent auditor the annual audited financial statements;
|
|
|
●
|
discussing
with management and the independent auditor significant financial reporting issues and judgments made in connection with the
preparation of financial statements;
|
|
|
●
|
discussing
with management major risk assessment and risk management policies;
|
|
|
●
|
monitoring
the independence of the independent auditor;
|
|
|
●
|
verifying
the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner
responsible for reviewing the audit as required by law;
|
|
|
●
|
reviewing
and approving all related-party transactions;
|
|
|
●
|
inquiring
and discussing with management compliance with applicable laws and regulations;
|
|
|
●
|
pre-approving
all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and
terms of the services to be performed;
|
|
|
●
|
appointing
or replacing the independent auditor;
|
|
|
●
|
determining
the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management
and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related
work; and
|
|
|
●
|
establishing
procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting
controls or reports which raise material issues regarding our financial statements or accounting policies.
|
Compensation
Committee
We
established a compensation committee of the board of directors, which consists of Mr. Kaufman (Chairman) and Dr. J.P. Huang, each
of whom is an independent director under the NYSE MKT’s listing standards. Our compensation committee is responsible for
reviewing and approving corporate goals and objectives relevant to the compensation for executive officers, evaluating the performance
of executive officers in light of those goals and objectives, and determining and approving the compensation level of executive
officers based on this evaluation. In addition, our compensation committee is responsible for administering our incentive-compensation
plans and equity-based plans, including our 2008 Omnibus Securities and Incentive Plan, and for making recommendations to the
board of directors with respect to the adoption, amendment, termination or replacement of such plans.
Nominating
and Corporate Governance Committee
We
established a nominating and corporate governance committee of the board of directors, which currently consists solely of
Dr. J.P. Huang, who is an independent director under the NYSE MKT’s listing standards. The nominating and corporate governance
committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors.
The
nominating and corporate governance committee will consider a number of qualifications relating to management and leadership experience,
background and integrity and professionalism in evaluating a person’s candidacy for membership on the board of directors.
The nominating and corporate governance committee may require certain skills or attributes, such as financial or accounting experience,
to meet specific board needs that arise from time to time. The nominating and corporate governance committee does not distinguish
among nominees recommended by shareholders and other persons and will consider persons identified by its members, management,
shareholders, investment bankers and others. We do not have any restrictions on shareholder nominations under our amended
and restated memorandum and articles of association. The only restrictions are those applicable generally under British Virgin
Islands law and the federal proxy rules, if applicable. Currently, we will consider suggestions from individual shareholders,
subject to evaluation of the person’s merits. Shareholders may communicate nominee suggestions directly to the board, accompanied
by biographical details and a statement of support for the nominees, subject to certain timing restrictions in connection with
our annual meetings. The suggested nominee must also provide a statement of consent to being considered for nomination. Although
there are no formal criteria for nominees, our board of directors believes that persons should be actively engaged in business
endeavors, have a financial background, and be familiar with acquisition strategies and money management.
Employees
As
of December 31, 2016, we had no employee. As required by PRC regulations, we participate in various employee benefit plans that
are organized by municipal and provincial governments, including housing, pension, medical and unemployment benefit plans. We
are required under PRC law to make contributions to the employee benefit plans at specified percentages of the salaries, bonuses
and certain allowances of employees, up to a maximum amount specified by the local government from time to time. Members of the
retirement plan are entitled to a pension equal to a fixed proportion of the salary prevailing at the member’s retirement
date. In the past, we entered into a standard employment agreement and a confidentiality agreement with our employees and we believe
our relationship with our employees was good. Our employee is not represented by any collective bargaining agreements or labor
unions.
Share
Ownership
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information with respect to the beneficial ownership of our ordinary shares as of April 24, 2017, by
(i) each person who is known by us to beneficially own more than 5% of our ordinary shares; (ii) by each of our officers and directors;
and (iii) by all of our officers and directors as a group. The address of each of the persons set forth below is in
care of the Company, 9 Dong San Huan Zhong Lu, Suite 1101, Chaoyang District, Beijing, 100020, People’s Republic of China.
|
Name and Address of Beneficial Owner
|
|
Office, if any
|
|
Title of Class
|
|
Amount and Nature of Beneficial Ownership(1)
|
|
|
% of Class(2)
|
|
|
Officers and Directors
|
|
Li Shuangqing
|
|
Chief Executive Officer, Acting Chief Financial Officer and Chairman
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
|
Jian Ping Huang
|
|
Director
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
|
May Huang
|
|
Director
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
|
Kerry Propper (3)
|
|
Director
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
3,606,942
|
|
|
|
4.3
|
%
|
|
George Kaufman
|
|
Director
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
-
|
|
|
|
-
|
|
|
All officers and directors as a group (5 persons named above)
|
|
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
3,606,942
|
|
|
|
4.3
|
%
|
|
5% Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platinum Partners Value
152 W 57th St 54th Floor
New York, NY 10019 (4)
|
|
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
7,618,954
|
|
|
|
9.2
|
%
|
South Ferry #2 LP
One State Street
New York, NY 10004 (5)
|
|
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
11,119,969
|
|
|
|
13.4
|
%
|
Atlas Master Fund
135 E 57th Street
New York, NY 10022 (6)
|
|
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
4,571,382
|
|
|
|
5.5
|
%
|
AQR Capital Management LLC
233 E 69th Street #6J(7)
New York, NY 10021
|
|
|
|
Ordinary Shares,
$0.0001 par value
|
|
|
6,099,409
|
|
|
|
7.3
|
%
|
* Less
than 1%.
|
(1)
|
Beneficial
Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting
or investment power with respect to securities. Except as otherwise indicated, each of the beneficial owners listed
above has direct ownership of and sole voting power and investment power with respect to our ordinary shares.
|
|
(2)
|
As
of April 24, 2017, a total of 83,158,778 of our ordinary shares are outstanding pursuant to SEC Rule 13d-3(d)(1). Ordinary
shares that may be acquired by an individual or group within 60 days, pursuant to the exercise of warrants or options, are
deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed
to be outstanding for the purpose of computing the percentage ownership of any other person shown in the above table.
|
|
(3)
|
Includes
3,186,007 Ordinary Shares held by Chardan Capital Markets LLC. Mr. Propper is the CEO of Chardan Capital Markets
LLC and holds voting and dispositive over such Ordinary Shares.
|
|
|
|
|
(4)
|
Not
includes 919,510 Ordinary Shares underlying Preferred Shares held by Platinum Partners Value.
|
|
|
|
|
(5)
|
Not
includes 928,705 Ordinary Shares underlying Preferred Shares held by South Ferry #2 LP.
|
|
|
|
|
(6)
|
Not
includes 551,706 Ordinary Shares underlying Preferred Shares held by Atlas Master Fund.
|
|
|
|
|
(7)
|
Based
on a Schedule 13G/A filed on February 13, 2017, by AQR Capital Management, LLC, AQR Capital Management Hold ings, LLC and
CNH Partners, LLC, in which the reporting persons disclosed that AQR Capital Management, LLC is a wholly owned subsidiary
of AQR Capital Management Holdings, LLC. CNH Partners is deemed to be controlled by AQR Capital Management, LLC.
|
None of
our major shareholders have different voting rights from other shareholders. We are not aware of any arrangement that
may, at a subsequent date, result in a change of control of our company.
2008
Omnibus Securities and Incentive Plan
We
adopted the 2008 Omnibus Securities and Incentive Plan, or the Share Incentive Plan, in connection with the Business Combination.
The Share Incentive Plan provides for the grant of distribution equivalent rights, incentive share options, non-qualified share
options, performance share awards, performance unit awards, restricted share awards, share appreciation rights, tandem share appreciation
rights and unrestricted share awards for an aggregate of not more than 2,500,000 shares of our ordinary shares, to directors,
officers, employees and consultants of the Company or its affiliates. If any award expires, is cancelled, or terminates unexercised
or is forfeited, the number of shares subject thereto, if any, is again available for grant under the Share Incentive Plan. The
number of ordinary shares with respect to which share options or share appreciation rights may be granted to an employee under
the Share Incentive Plan in any calendar year cannot exceed 500,000.
The following
description of the Share Incentive Plan is a summary of the material terms of the Share Incentive Plan.
Plan
Administration
The
Share Incentive Plan is administered by our compensation committee, or the Committee. Among other things, the Committee has complete
discretion, subject to the express limits of the Share Incentive Plan, to determine the employees, directors and consultants to
be granted awards, the types of awards to be granted, the number of our ordinary shares to be subject to each award, if any, the
exercise price under each option, the base price of each share appreciation right, the term of each award, the vesting schedule
and/or performance goals for each award that utilizes such a schedule or provides for performance goals, whether to accelerate
vesting, the value of the ordinary shares, and any required withholdings. Either our board of directors or the Committee may amend,
modify or terminate any outstanding award, provided that the participant’s consent to such action is required if the action
would materially and adversely affect the participant. The Committee is also authorized to construe the award agreements and may
prescribe rules relating to the operation of the Share Incentive Plan.
Share
Options
The
Share Incentive Plan provides for the grant of share options, which may be either “incentive share options” (ISOs),
which are intended to meet the requirements for special U.S. federal income tax treatment under the Code, or “nonqualified
share options” (NQSOs). Options may be granted on such terms and conditions as the Committee may determine; provided, however,
that the per share exercise price under an option may not be less than the fair market value of an underlying ordinary share on
the date of grant, and the term of an ISO may not exceed ten years (110% of such value and five years in the case of an ISO granted
to an employee who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of our capital or
a parent or subsidiary). ISOs may only be granted to employees. In addition, the aggregate fair market value of the ordinary shares
underlying one or more ISOs (determined at the time of grant) which are exercisable for the first time by any one employee during
any calendar year may not exceed $100,000.
Share
Awards
A
restricted share award under the Share Incentive Plan is a grant or sale of our ordinary shares to the participant, subject to
such transfer, forfeiture and/or other restrictions specified by the Committee in the award. Dividends, if any, declared
by us will be paid on the shares, even during the period of restriction.
An
unrestricted share award under the Share Incentive Plan is a grant or sale of our ordinary shares to the participant that is not
subject to transfer, forfeiture or other restrictions, in consideration for past services rendered thereby to us or an affiliate
or for other valid consideration.
Performance
Awards
Performance
unit awards under the Share Incentive Plan entitle the participant to receive a specified payment in cash upon the attainment
of specified individual or company performance goals.
Performance
share awards under the Share Incentive Plan entitle the participant to receive a specified number of our ordinary shares upon
the attainment of specified individual or company performance goals.
Share
Appreciation Rights
The
award of a share appreciation right, or SAR, under the Share Incentive Plan entitles the participant, upon exercise, to receive
an amount in cash, our ordinary shares or a combination thereof, equal to the increase in the fair market value of the underlying
ordinary shares between the date of grant and the date of exercise. SARs may be granted in tandem with, or independently of, options
granted under the Share Incentive Plan. A SAR granted in tandem with an option under the Share Incentive Plan is granted at the
same time as the related option and is exercisable only at such times, and to the extent, that the related option is
exercisable and expires upon termination or exercise of the related option. In addition, the related option may
be exercised only when the value of our ordinary shares subject to the option exceeds the exercise price under the option. A SAR
that is not granted in tandem with an option is exercisable at such times as the Committee may specify.
Distribution
Equivalent Rights
A
distribution equivalent right award under the Share Incentive Plan entitles the participant to receive bookkeeping credits, cash
payments and/or our ordinary share distributions equal in amount to the distributions that would have been made to the participant
had the participant held a specified number of our ordinary shares during the period the participant held the distribution equivalent
right. A distribution equivalent right may be awarded under the Share Incentive Plan as a component of another award, where, if
so awarded, such distribution equivalent right will expire, terminate or be forfeited by the participant under the same conditions
as under such other award.
Other
Terms
The
Share Incentive Plan prohibits the issuance of an award with terms and conditions that would cause the award to be considered
nonqualified deferred compensation under Section 409A of the Internal Revenue Code. Except as provided in the Share Incentive
Plan, awards granted under the Share Incentive Plan are not transferable and may be exercised only by the participant or by the
participant’s guardian or legal representative. Each award agreement will specify, among other things, the effect on an
award of the disability, death, retirement, authorized leave of absence or other termination of employment of the participant.
We may require a participant to pay us the amount of any required withholding in connection with the grant, vesting, exercise
or disposition of an award. A participant is not considered a shareholder with respect to our ordinary shares underlying an award
until the shares are issued to the participant.
Our
board of directors may at any time terminate the Share Incentive Plan with respect to any awards that have not theretofore been
granted, provided that no such termination may be effected if it would materially and adversely affect the rights of a participant
with respect to any award theretofore granted without the participant’s consent. Our board of directors may at any time
amend or alter the Share Incentive Plan, provided that no change in any award theretofore granted may be made which would materially
and adversely impair the rights of a participant with respect to such award without that participant’s consent
|
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Major
Shareholders
Please
refer to Item 6, “Directors, Senior Management and Employees — Share Ownership.”
Related
Party Transactions
A
related party transaction is any transaction between the Company and (a) enterprises that directly or indirectly through one or
more intermediaries, control or are controlled by, or are under common control with, the Company; (b) associates; (c) individuals
owning, directly or indirectly, an interest in the voting power of the Company that gives them significant influence over the
Company, and close members of any such individual’s family; (d) key management personnel, that is, those persons having
authority and responsibility for planning, directing and controlling the activities of the Company, including directors and senior
management and close members of such individuals’ families; and (e) enterprises in which a substantial interest in the voting
power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise
significant influence.
There
were no such related party transactions throughout the fiscal year 2016, and until the date of this annual report, except for
the following:
Amounts
due to related parties consist of advances made to the Company or payments made behalf on the Company to finance development stage
activities and other costs. The amounts due to related parties for such advances were non-interest bearing and had no stated repayment
terms. Amounts due to related parties for such advances totaled $59,750 as of December 31, 2016 and 2015.
Interests
of Experts and Counsel
Not
applicable.
|
ITEM 8.
|
FINANCIAL INFORMATION
|
Consolidated
Statements and Other Financial Information
Financial
Statements
We
have appended consolidated financial statements filed as part of this annual report. See Item 18, “Financial Statements.”
Legal
Proceedings
We
may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time.
Other than as set forth below, we are currently not a party to any litigation or other legal proceedings brought against us and
we are also not aware of any legal proceeding, investigation or claim, or other legal exposure that has a more than remote possibility
of having a material adverse effect on our business, financial condition or results of operations:
In
January 2011, China Yellow River Television Station, the Company’s joint venture partner in Shanxi Yellow River and Advertising
Networks Cartoon Technology Co., Ltd., or Yellow River JV, was consolidated by merger into Shanxi Radio and TV Station, or Shanxi
TV, a PRC state-owned entity, and Shanxi TV was the successor to all of China Yellow River Television Station’s obligations
under the joint venture agreements. Upon consummation of the merger, Shanxi TV immediately and unilaterally terminated the
cooperation agreement that established the Yellow River JV and transferred the advertising business of the Yellow River JV to
its own internal advertising department. The Company believes that Shanxi’s actions constituted a direct violation
of the cooperation agreement which granted to the Yellow River JV the exclusive and irrevocable right to operate China Yellow
River Television Station’s advertising business.
In
connection with the termination of the cooperation agreement and the transfer of the advertising business, Shanxi TV has also
taken, as its own, the RMB 45,000,000 of registered capital contributed by the Company to the Yellow River JV. While the
Company acknowledges the right of the PRC government to change policies and rules with respect to agreements with state-owned
entities, such as Shanxi TV, however the Company believes that the RMB 45,000,000 contributed to the Yellow River JV by the Company
must be returned to the Company. The Company has attempted, in good faith, to negotiate a settlement with respect to the
funds, however, to date Shanxi TV has refused to return the funds to the Company or enter into any settlement agreement.
In
addition to attempts at negotiations directly with Shanxi TV, Yellow River JV filed an application for arbitration with CIETAC
in October 2011. Shanxi TV filed its response in January 2012, and has since challenged CIETAC’s jurisdiction over
the dispute, though in March 2012, subsequently withdrew the application. Since the submission of the application for arbitration,
two hearings have been held, and CEITAC initially indicated that it would render a decision by August 21, 2102. However,
this deadline has been extended on three separate occasions. For strategic purposes, Yellow River JV submitted a withdrawal
application to CERTAC on February 17, 2013 and CEITAC rendered a withdrawal decision on March 18, 2013. On January 20, 2014,
Yellow River JV filed two applications for arbitration with CIETAC in an attempt to resolve the aforementioned disputes.
On
March 15, 2016, CIETAC issued two final arbitral awards with the amount of 90 million in total. Among others, the arbitral
tribunal found that because Shanxi TV unilaterally terminated the cooperation agreement, it must pay RMB 45 million for damages
as claimed by Yellow River JV. In addition, Shanxi TV’s termination of the cooperation agreement essentially resulted
in its material breach of the asset transfer agreement with Yellow River JV and as a result, Shanxi TV is responsible to return
RMB 45 million to Yellow River JV that it paid to Shanxi TV. CIETAC further ruled that Shanxi TV shall bear the RMB 0.8
million attorney fee and RMB115,084.3 arbitration fee. The payment of the above fees was to be made by Shanxi TV within
30 days after the issuance of the arbitral awards. Shanxi TV did not make such payment, and enforcement actions were filed with
a local Shanxi court in May 2016. Shanxi TV subsequently applied to the court to withdraw the arbitral awards, but the court rejected
such applications in August 2016. In September 2016, Yellow River JV applied to continue the enforcement procedure. Such enforcement
actions are still pending. We intend to make every effort to collect the awards.
If
the Company is successful in enforcing the arbitral awards and receiving all of the RMB 90 million from Shanxi TV, a portion of
the funds will be used to redeem all or a portion of the Class A Preferred Shares that remain outstanding at such time. However
there is no guarantee that we will be able to secure the payment of part or all of the RMB 90 million by Shanxi TV.
Dividend
Policy
We
have never declared or paid any cash dividends on our ordinary shares. We currently intend to retain all future earnings, if any,
for use in the operations and expansion of our business. As a result, we do not anticipate paying cash dividends in the foreseeable
future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of
directors and will depend on factors our directors deem relevant, including among others, our results of operations, financial
condition and cash requirements, business prospects, and the terms of our credit facilities, if any, and any other financing arrangements.
Accordingly, realization of a gain on our investments will depend on the appreciation of the price of our ordinary shares. There
is no guarantee that our ordinary shares will appreciate in value.
Significant
Changes
No
significant change has occurred since the date of our consolidated financial statements filed as part of this annual report.
|
ITEM
9.
|
THE OFFER AND LISTING
|
Offer
and Listing Details
On
July 24, 2009, our ordinary shares and warrants began trading on the OTC Bulletin Board under the symbols “CNWHF”
and “CHNWF,” respectively.
Our
ordinary shares and warrants traded on the NYSE Amex until July 17, 2009, when the trading of such securities was suspended pending
our ability to meet the Exchange’s listing requirements following our business combination with China Networks. We were
delisted from the NYSE Amex in September 2009 for failure to meet such listing requirements.
The
following table provides the high and low closing bid prices for our ordinary shares and warrants for the periods indicated below,
as reported by www.quotemedia.com. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily reflect actual transactions.
|
|
|
Ordinary Shares
|
|
|
Warrants
|
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
Annual Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
0.25
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
2012
|
|
|
0.07
|
|
|
|
0.02
|
|
|
|
-
|
|
|
|
-
|
|
|
2013
|
|
|
0.05
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
2014
|
|
|
0.32
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
2015
|
|
|
0.12
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
2016
|
|
|
0.05
|
|
|
|
0.025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Market Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter 2015
|
|
|
0.05
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
2nd Quarter 2015
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
-
|
|
|
|
-
|
|
|
3rd Quarter 2015
|
|
|
0.02
|
|
|
|
0.02
|
|
|
|
-
|
|
|
|
-
|
|
|
4th Quarter 2015
|
|
|
0.12
|
|
|
|
0.01
|
|
|
|
-
|
|
|
|
-
|
|
|
1st Quarter 2016
|
|
|
0.05
|
|
|
|
0.04
|
|
|
|
-
|
|
|
|
-
|
|
|
2nd Quarter 2016
|
|
|
0.04
|
|
|
|
0.0346
|
|
|
|
-
|
|
|
|
-
|
|
|
3rd Quarter 2016
|
|
|
0.0346
|
|
|
|
0.0346
|
|
|
|
-
|
|
|
|
-
|
|
|
4th Quarter 2016
|
|
|
0.0346
|
|
|
|
0.025
|
|
|
|
-
|
|
|
|
-
|
|
|
1st Quarter 2017
|
|
|
0.0365
|
|
|
|
0.025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly Market Prices
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
November 2016
|
|
|
0.03
|
|
|
|
0.03
|
|
|
|
-
|
|
|
|
-
|
|
|
December 2016
|
|
|
0.03
|
|
|
|
0.025
|
|
|
|
-
|
|
|
|
-
|
|
|
January 2017
|
|
|
0.025
|
|
|
|
0.025
|
|
|
|
-
|
|
|
|
-
|
|
|
February 2017
|
|
|
0.025
|
|
|
|
0.025
|
|
|
|
-
|
|
|
|
-
|
|
|
March 2017
|
|
|
0.0365
|
|
|
|
0.025
|
|
|
|
-
|
|
|
|
-
|
|
|
April 2017 (through April 24, 2017)
|
|
|
0.0365
|
|
|
|
0.0365
|
|
|
|
-
|
|
|
|
-
|
|
Plan
of Distribution
Not applicable.
Markets
See our
disclosures above under “Offer and Listing Details.”
Selling
Shareholders
Not applicable.
Dilution
Not applicable.
Expenses
of the Issue
Not applicable.
|
ITEM
10.
|
ADDITIONAL INFORMATION
|
Share
Capital
Not
applicable.
Memorandum
and Articles of Association
The
following represents a summary of certain key provisions of the Company’s amended and restated memorandum and articles of
association. The summary does not purport to be a summary of all of the provisions of our memorandum and articles of
association and of all relevant provisions of BVI law governing the management and regulation of BVI companies.
Register
We
were incorporated in the BVI on April 17, 2008 under the BVI Business Companies Act, 2004, or the Act. Our amended
and restated memorandum of association authorizes the issuance of a maximum of 550,000,000 shares with a par value of US$0.0001
each divided into the following classes of shares: (a) 500,000,000 ordinary shares of US$0.0001 par value each (the "Ordinary
Shares"); and (b) 50,000,000 preferred shares of US$0.0001 par value each, of which 16,000,000 (the "Class A Preferred
Shares") shall be designated as Class A Preferred Shares of US$0.0001 par value each. Our board of directors or shareholders
may from time to time by the consent of the majority of our board of directors or the consent of the majority of our shareholders
increase the maximum number of shares we are authorized to issue, by amendment to our amended and restated memorandum and articles
of association.
Objects
and Purposes
Clause
5 of our amended and restated memorandum of association sets forth the objects and powers of our company. Section 5.1 provides
that, subject to certain provisions set forth in our amended and restated memorandum of association, the objects for which we
are established are unrestricted and we shall have the full power and authority to carry out any object not prohibited by the
Act or any other law of the British Virgin Islands. Notwithstanding the foregoing, Section 5.2 provides that we have no
power to: (i) carry on banking or trust business, unless licensed to do so under the Banks and Trust Companies Act, 1990; (ii)
carry on business as an insurance or as a reinsurance company, insurance agent or insurance broker, unless licensed or authorized
to do so under the Insurance Act, 1994; (iii) carry on the business of company management unless licensed to do so under the Companies
Management Act, 1990; (iv) carry on the business of providing the registered office or the registered agent for companies incorporated
in the British Virgin Islands unless licensed to do so under the Banks and Trust Companies Act, 1990; and (v) carry on the business
as a mutual fund, mutual fund manager or mutual fund administrator unless licensed to do so under the Mutual Funds Act, 1996.
Directors
BVI
law requires that the board of directors of a company consist of one or more members and that the number of directors shall be
fixed by the company’s articles of association. Our amended and restated articles of association provide for no maximum
number of directors, subject to any subsequent amendment to change the number of directors. The power to determine the number
of directors is vested in the board of directors and the shareholders. The power to fill vacancies, whether occurring by reason
of an increase in the number of directors or by resignation, is vested in the board of directors in the interim period between
annual or special meetings of members called for the election of directors and/or the removal of one or more directors and the
filling of any vacancy in that connection. Directors may be removed by the members for cause or without cause on a vote of a majority
of the shareholders passed at a meeting called for the purpose of removing the director or by written resolution or with cause
by a resolution of directors passed at a meeting or by written resolution.
Under
BVI law, there is no cumulative voting by shareholders for the election of the directors. The absence of cumulative voting rights
effectively means that the holders of a majority of the shares voted at a shareholders meeting may, if they so choose, elect all
of our directors, thus precluding a small group of shareholders from controlling the election of one or more representatives to
the board of directors
Our
amended and restated articles of association provide that a director who is interested in a transaction entered into or to be
entered into by us may: (i) vote on a matter relating to the transaction; attend a meeting of directors at which a matter relating
to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and (iii) sign
a document on our behalf, or do any other thing in his capacity as a director, that relates to the transaction. Additionally,
our amended and restated articles of association provide that no director shall be disqualified by his office from contracting
with us either as a buyer, seller or otherwise, nor shall any such contract or arrangement entered into by or on our behalf in
which any director shall be in any way interested be voided, nor shall any director so contracting or being so interested be liable
to account to us for any profit realized by any such contract or arrangement, by reason of such director holding that office or
by reason of the fiduciary relationship thereby established, provided such director shall, immediately after becoming aware of
the fact that he is interested in a transaction entered into or to be entered into by us, disclose such interest to our board
of directors. For the purposes of the articles of association:
|
|
(a).
|
A
director is not required to make such a disclosure if: (i) the transaction or proposed
transaction is between us and the director, and (ii) the transaction or proposed transaction
is or is to be entered into in the ordinary course of our business and on usual terms
and conditions.
|
|
|
(b).
|
A
disclosure to our board of directors to the effect that a director is a member, director,
officer or trustee of another named company or other person and is to be regarded as
interested in any transaction which may, after the date of the entry or disclosure, be
entered into with that company or person, is a sufficient disclosure of interest in relation
to that transaction. Such a disclosure is not made to our board of directors unless
it is made or brought to the attention of every director on the board.
|
|
|
(c).
|
Subject
to Section 125(1) of the Act, the failure by a director to comply with this provision
does not affect the validity of a transaction entered into by the director or the Company.
|
Pursuant
to our amended and restated articles of association, a director shall not require a share qualification, but nevertheless shall
be entitled to attend and speak at any meeting of the directors and meeting of the members and at any separate meeting of the
holders of any class of our shares. In addition, the remuneration of directors (whether by way of salary, commission, participation
in profits or otherwise) in respect of services rendered or to be rendered in any capacity to us (including to any company in
which we may be interested) shall be fixed by Resolution of Directors or Resolution of Members. The directors may also be
paid such travelling, hotel and other expenses properly incurred by them in attending and returning from meetings of the directors,
or any committee of the directors or meetings of the members, or in connection with our business as shall be approved by Resolution
of Directors or Resolution of Members.
Rights
and Obligations of Shareholders
Dividends
Subject
to the Act, the directors may, by resolution of directors, authorize a distribution (including a dividend) by us to members at
such time and of such an amount as they think fit if they are satisfied, on reasonable grounds, that immediately after the distribution,
the value of our assets exceeds our liabilities and we are able to pay our debts as they fall due. Any distribution
payable in respect of a share which has remained unclaimed for three years from the date when it became due for payment shall,
if the board of the directors so resolves, be forfeited and cease to remain owing by us. The directors may, before
authorizing any distribution, set aside out of our profits such sum as they think proper as a reserve fund, and may invest the
sum so set apart as a reserve fund upon such securities as they may select.
The holder
of each share has the right to an equal share in any distribution paid by us.
We do
not intend to pay any dividends to our shareholders in the foreseeable future.
Voting
Rights
Each share
confers on the shareholder the right to one vote at a meeting of the members or on any resolution of members on all matters before
our shareholders.
Rights
in the event of winding up
The holder
of each share is entitled to an equal share in the distribution of the surplus assets of us on a winding up.
Redemption
The
directors may, on behalf of the Company, purchase, redeem or otherwise acquire and hold our own shares for such consideration
as the directors consider fit, and either cancel or hold such shares as treasury shares. We may only offer to acquire
shares if at the relevant time the directors determine by resolution of directors that immediately after the acquisition the value
of our assets exceeds our liabilities and we are able to pay our debts as they fall due.
Changes
in the rights of shareholders
If
at any time the Company is authorized to issue shares of more than one class the rights attached to any class (unless otherwise
provided by the terms of issue of the shares of that class) may, whether or not the Company is being wound up, be varied only
with the consent in writing of the holders of not less than three-fourths of the issued shares of that class and the holders of
not less than three-fourths of the issued shares of any other class of shares which may be affected by such variation.
Meetings
Under
the Act, there is no requirement for an annual meeting of shareholders. Under our amended and restated memorandum and articles
of association, an annual meeting of members must be held each year at such date and time as may be determined by the directors. The
directors shall call a meeting of the members if requested in writing to do so by members entitled to exercise at least 30% of
the voting rights in respect of the matter for which the meeting is being held. No less than ten days and not more
than sixty days notice of meetings are required to be given to members.
No
business will be transacted at any meeting of members unless a quorum of members is present at the time when the meeting proceeds
to business. A quorum consists of the holder or holders present in person or by proxy entitled to exercise at least
50 percent of the voting rights of the shares of each class or series of shares entitled to vote as a class or series thereon
and the same proportion of the votes of the remaining shares entitled to vote thereon.
A member
of the Company shall be deemed to be present at a meeting of members if:
|
|
●
|
he
or his proxy participates by telephone or other electronic means; and
|
|
|
●
|
all
members and proxies participating in the meeting are able to hear each other.
|
The
inadvertent failure of the directors to give notice of a meeting to a member or the fact that a member has not received a notice
that has been properly given, shall not invalidate the meeting.
Limitations
on Ownership of Securities
There
are no limitations on the right of non-residents or foreign persons to own our securities imposed by BVI law or by our amended
and restated memorandum and articles of association.
Change
in Control of Company
The
board of directors is empowered to issue preferred shares with such rights attaching to them as they decide and such power could
be used in a manner that would delay, defer or prevent a change of control of our company.
Ownership
Threshold
There
are no provisions governing the ownership threshold above which shareholder ownership must be disclosed imposed by BVI law or
by our amended and restated memorandum and articles of association.
Differences
in Corporate Law
BVI
law differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant
differences between the provisions of BVI law applicable to us and the laws applicable to companies incorporated in the United
States and their shareholders.
Protection
for Minority Shareholders
Under
the laws of most U.S. jurisdictions, majority and controlling shareholders of a company generally have certain “fiduciary”
responsibilities to the minority shareholders. Corporate actions taken by majority and controlling shareholders which are unreasonable
and materially detrimental to the interests of minority shareholders may be declared null and void. Minority shareholders may
have less protection for their rights under BVI law than they would have under U.S. law.
Powers
of Directors
Unlike
most U.S. jurisdictions, the directors of a BVI company, subject in certain cases to court approval but without shareholders’
approval, may implement the sale, transfer, exchange or disposition of any Company asset, property, part of the business, or securities,
with the exception that shareholder approval is required for the disposition of over 50% in the value of our total assets.
Conflict
of Interests
Similar
to the laws of most U.S. jurisdictions, when a director becomes aware of the fact that he has an interest in a transaction which
we are to enter into, he must disclose it to our Board. However, with sufficient disclosure of interest in relation to that transaction,
the director who is interested in a transaction entered into or to be entered into by us may (i) vote on a matter relating to
the transaction; (ii) attend a meeting of directors at which a matter relating to the transaction arises and be included in the
quorum; and (iii) sign a document on behalf of us, or do any other thing in his capacity as a director, that relates to the transaction.
Written
Consent and Cumulative Voting
Similar
to the laws of most U.S. jurisdictions, under BVI law, shareholders are permitted to approve matters by way of written resolution
in place of a formal meeting. BVI law does not make a specific reference to cumulative voting, and our current articles of association
have no provisions authorizing cumulative voting.
Takeover
Provisions
Some
provisions of our amended and restated memorandum and articles of association may discourage, delay or prevent a change in control
of our company or management that shareholders may consider favorable. For instance, our directors are empowered to
amend the relevant provisions of the memorandum of association for the purposes of creating new classes or series of shares and
the rights attached thereto and may amend the articles of association to take into account any ancillary changes required, provided
that the directors do not, however, have the power to amend the memorandum and articles of Association to (a) restrict the rights
or powers of the members to amend the memorandum or articles of association, (b) to change the percentage of members required
to pass a resolution to amend the memorandum and articles of association, or (c) in circumstances where the memorandum or articles
of association cannot be amended by the members.
Shareholder’s
Access to Corporate Records
Under
the Act, a member of a business company may, on giving written notice to a company, inspect the company’s memorandum and
articles, the register of shareholders, the register of directors and the minutes of meetings and resolutions of shareholders
and of those classes of shareholders of which he is a member.
The
directors may, if they are satisfied that it would be contrary to our interests to allow a member to inspect any document listed
above (or any part thereof), deny or limit the inspection of the document.
Indemnification
BVI
law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and
directors, except to the extent any such provision may be held by the BVI courts to be contrary to public policy, such as to provide
indemnification against civil fraud or the consequences of committing a crime.
We
shall indemnify against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and
reasonably incurred in connection with legal, administrative or investigative proceedings any person who (i) is or was a party
or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative
or investigative, by reason of the fact that the person is or was a director, an officer or a liquidator of us; or (ii) is or
was, at our request, serving as a director, officer or liquidator of, or in any other capacity is or was acting for, another body
corporate or a partnership, joint venture, trust or other enterprise. To be entitled to indemnification, these persons
must have acted honestly and in good faith and in what they believe to be our best interest, and in the case of criminal proceedings,
they must have had no reasonable cause to believe their conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling
us under the foregoing provisions, we have been advised that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Mergers
and Similar Arrangements
Under
the laws of the BVI, two or more companies may merge or consolidate in accordance with Section 170 of the Act. A merger means
the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting
of two or more constituent companies into a new company. In order to merge or consolidate, the directors of each constituent company
must approve a written plan of merger or consolidation which must be authorized by a resolution of shareholders.
While
a director may vote on the plan even if he has a financial interest in the plan, in order for the resolution to be valid, the
material facts of the interest and the director’s relationship to any party to the transaction must be disclosed and the
resolution approved (1) without counting the vote or consent of any interested director, or (2) by the unanimous vote or consent
of all disinterested directors if the votes or consents of all disinterested directors is insufficient to approve a resolution
of directors.
Shareholders
not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation
contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to
vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger
or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve
the plan of merger or consolidation.
The
shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company but may
receive debt obligations or other securities of the surviving or consolidated company, or other assets, or a combination thereof.
Further, some or all of the shares of a class or series may be converted into a kind of asset while the other shares of the same
class or series may receive a different kind of asset. As such, not all the shares of a class or series must receive the same
kind of consideration.
After
the plan of merger or consolidation has been approved by the directors and authorized by a resolution of the shareholders, articles
of merger or consolidation are executed by each company and filed with the Registrar of Corporate Affairs in the BVI.
Dissenter
Rights
A
shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless
the shareholder was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares
after the merger) and a consolidation. A shareholder properly exercising his dissent rights is entitled to payment in cash of
the fair value of his shares.
A
shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by
the shareholders on the merger or consolidation, unless notice of the meeting was not given to the shareholder. If the merger
or consolidation is approved by the shareholders, the company must within 20 days give notice of this fact to each shareholder
who gave written objection, and to each shareholder who did not receive notice of the meeting. Such shareholders then have 20
days to give their written election in the form specified by the Act to dissent from the merger or consolidation, provided that
in the case of a merger, the 20 days starts when the plan of merger is delivered to the shareholder.
Upon
giving notice of his election to dissent, a shareholder ceases to have any rights of a shareholder except the right to be paid
the fair value of his shares. As such, the merger or consolidation may proceed in the ordinary course notwithstanding the dissent.
Within
seven days of the later of the delivery of the notice of election to dissent and the effective date of the merger or consolidation,
the company must make a written offer to each dissenting shareholder to purchase his shares at a specified price that the company
determines to be their fair value. The company and the shareholder then have 30 days to agree upon the price. If the company and
a shareholder fail to agree on the price within the 30 days, then the company and the shareholder shall each designate an appraiser
and these two appraisers shall designate a third appraiser. These three appraisers shall fix the fair value of the shares as of
the close of business on the day before the shareholders approved the transaction without taking into account any change in value
as a result of the transaction.
Under
BVI law, shareholders are not entitled to dissenters’ rights in relation to a liquidation.
Shareholders’
Suits
Similar
to the laws of most U.S. jurisdictions, BVI law permits derivative actions against its directors. However, the circumstances under
which such actions may be brought, and the procedures and defenses available may result in the rights of shareholders of a BVI
company being more limited than those of shareholders of a company incorporated and/or existing in the United States.
The
courts of the BVI may, on the application of a shareholder of a company, grant leave to that shareholder to bring proceedings
in the name and on behalf of that company, or intervene in proceedings to which the company is a party for the purpose of continuing,
defending or discontinuing the proceedings on behalf of the company. In determining whether to grant leave, the courts must take
into account (1) whether the shareholder is acting in good faith; (2) whether the derivative action is in the interests of the
company taking account of the views of the company’s directors on commercial matters; (3) whether the proceedings are likely
to succeed; (4) the costs of the proceedings in relation to the relief likely to be obtained; and (5) whether an alternative remedy
to the derivative claim is available.
Leave
to bring or intervene in proceedings may be granted only if the court is satisfied that (1) the company does not intend to bring,
diligently continue or defend, or discontinue the proceedings, as the case may be; or (2) it is in the interests of the company
that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
Changes
in Capital
Subject
to the provisions of the amended and restated memorandum and articles of association and the Act, our unissued shares shall be
at the disposal of the directors who may, without prejudice to any rights previously conferred on the holders of any existing
shares or class or series of shares, offer, allot, grant options over or otherwise dispose of the shares to such persons, at such
times and upon such terms and conditions as we may by resolution of directors determine.
Subject
to the provisions of the amended and restated memorandum and articles of association relating to changes in the rights of shareholders
and the powers of directors in relation to preferred shareholders, we may, by a resolution of members or a resolution of directors,
amend our amended and restated memorandum and articles of association to increase or decrease the number of ordinary shares authorized
to be issued.
Material
Contracts
We
have not entered into any material contracts other than in the ordinary course of business and other than those described in Item
4, “Information on the Company,” Item 7, “Major Shareholders and Related Party Transactions,” or Item
5, “Operating and Financial Review and Prospects – Contractual Obligations,” or filed (or incorporated by reference)
as exhibits to this annual report or otherwise described or referenced in this annual report.
Exchange
Controls
BVI
Exchange Controls
There
are no material exchange controls restrictions on payment of dividends, interest or other payments to the holders of our ordinary
shares or on the conduct of our operations in the BVI, where we were incorporated. There are no material BVI laws that impose
any material exchange controls on us or that affect the payment of dividends, interest or other payments to nonresident holders
of our ordinary shares. BVI law and our memorandum and articles of association do not impose any material limitations on the right
of non-residents or foreign owners to hold or vote our ordinary shares.
PRC
Exchange Controls
Under
the Foreign Currency Administration Rules promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and
other relevant PRC government authorities, RMB is convertible into other currencies without prior approval from SAFE only to the
extent of current account items, such as trade related receipts and payments, interest and dividends and after complying with
certain procedural requirements. The conversion of RMB into other currencies and remittance of the converted foreign currency
outside PRC for the purpose of capital account items, such as direct equity investments, loans and repatriation of investment,
requires the prior approval from SAFE or its local office. Payments for transactions that take place within China must be made
in RMB. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested
enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its
local office. Unless otherwise approved, domestic enterprises must convert all of their foreign currency proceeds into RMB.
On
October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse
Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which became effective as of November
1, 2005. According to the notice, a special purpose company, or SPV, refers to an offshore company established or indirectly controlled
by PRC residents for the special purpose of carrying out financing of their assets or equity interest in PRC domestic enterprises.
Prior to establishing or assuming control of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas
investment foreign exchange registration procedures with the relevant local SAFE branch. The notice applies retroactively. As
a result, PRC residents who have established or acquired control of these SPVs that previously made onshore investments in China
were required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. These PRC
residents must also amend the registration with the relevant SAFE branch in the following circumstances: (i) the PRC residents
have completed the injection of equity investment or assets of a domestic company into the SPV; (ii) the overseas funding of the
SPV has been completed; (iii) there is a material change in the capital of the SPV. Under the rules, failure to comply with the
foreign exchange registration procedures may result in restrictions being imposed on the foreign exchange activities of the violator,
including restrictions on the payment of dividends and other distributions to its offshore parent company, and may also subject
the violators to penalties under the PRC foreign exchange administration regulations.
On
August 29, 2008, SAFE promulgated Circular 142 which regulates the conversion by a foreign-funded enterprise of foreign currency
into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order
to clarify the application of Circular 142. Under Circular 142 and Circular 45, the RMB capital converted from foreign currency
registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable
government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of
the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use
of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to repay
RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 and Circular 45 could result in severe
penalties, such as heavy fines as set out in the relevant foreign exchange control regulations
SAFE
also promulgated Circular 59 in November 2010, which tightens the regulation over settlement of net proceeds from overseas offerings
and requires, among other things, the authenticity of settlement of net proceeds from offshore offerings to be closely examined
and the net proceeds to be settled in the manner described in the offering documents
In
May, 2013 SAFE promulgated Circular 21 which provides for and simplifies the operational steps and regulations on foreign exchange
matters related to direct investment by foreign investors, including foreign exchange registration, account opening and use, receipt
and payment of funds, and settlement and sales of foreign exchange.
Taxation
The
following is a general summary of certain material BVI and U.S. federal income tax considerations. The discussion is not intended
to be, nor should it be construed as, legal or tax advice to any particular shareholder or prospective shareholder. The discussion
is based on laws and relevant interpretations thereof in effect as of the date hereof, all of which are subject to change or different
interpretations, possibly with retroactive effect.
BVI
Taxation
The
BVI does not impose a withholding tax on dividends paid to holders of our ordinary or preferred shares, nor does the BVI levy
any capital gains or income taxes on us. Further, a holder of our ordinary or preferred shares who is not a resident of the BVI
is exempt from the BVI income tax on dividends paid with respect to the ordinary or preferred shares. Holders of ordinary or preferred
shares are not subject to the BVI income tax on gains realized on the sale or disposition of the ordinary or preferred shares.
Our
ordinary or preferred shares are not subject to transfer taxes, stamp duties or similar charges in the BVI. However, as a company
incorporated under the BVI Act, we are required to pay the BVI government an annual license fee based on the number of shares
we are authorized to issue.
There
is no income tax treaty or convention currently in effect between the United States and the BVI.
Taxation
in China
We
are a holding company incorporated in the BVI, which indirectly holds our equity interests in our PRC operating subsidiaries.
The EIT Law and its implementation rules, both of which became effective as of January 1, 2008, provide that a PRC enterprise
is subject to a standard income tax rate of 25% and China-sourced income of foreign enterprises, such as dividends paid by a PRC
subsidiary to its overseas parent, will normally be subject to PRC withholding tax at a rate of 10%, unless there are applicable
treaties between the overseas parent’s jurisdiction of incorporation and China to reduce such rate.
Under
the Arrangement between the Mainland and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with respect to Taxes on Income, or the Double Taxation Arrangement, effective as of January
1, 2007, such dividend withholding tax rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC company
distributing the dividends. Under the aforesaid arrangement, any dividends that our PRC operating subsidiaries pay to their Hong
Kong holding company may be subject to a withholding tax at the rate of 5% if they are not considered to be a PRC “resident
enterprise” as described below. However, if the Hong Kong holdings company is not considered to be the “beneficial
owner” of such dividends under the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties
promulgated by the State Administration of Taxation on October 27, 2009 (and not a PRC “resident enterprise”), such
dividends would be subject to the withholding tax rate of 10%. The withholding tax rate of 5% or 10% applicable will have a significant
impact on the amount of dividends to be received by us and ultimately by shareholders.
According
to the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, the term “beneficial owner”
refers to a person who has the right to own and dispose of the income and the rights or properties generated from the said income.
The “beneficial owner” may be an individual, a company or any other organization which is usually engaged in substantial
business operations. A conduit company is not a “beneficial owner.” The term “conduit company” refers
to a company which is usually established for purposes of dodging or reducing taxes, and transferring or accumulating profits.
Such a company is only registered in the country of domicile to satisfy the organizational form as required by law, but it does
not engage in such substantial business operations as manufacturing, distribution and management. As our Hong Kong holding company
is a controlling company and is not engaged in substantial business operations, it could be considered as a conduit company by
tax authorities and we do not expect it to be a beneficial owner.
In
addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with “de
facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25%
on its global income. The implementing rules define the term “de facto management bodies” as “an establishment
that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a
Chinese enterprise.”
It
remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC
resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities
determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable
income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on
offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although
under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt
income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange
control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound
remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible
that future guidance issued with respect to the new “resident enterprise” classification could result in a situation
in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by
our non-PRC shareholders from transferring our shares.
Taxation
in Hong Kong
Hong
Kong profits tax is chargeable on income arising in or derived from trade or business carried out in Hong Kong at a rate of 16.5%.
Our Hong Kong subsidiary has not carried out any business operation in Hong Kong and no profits tax is chargeable to our subsidiary.
U.S.
Federal Income Taxation
The
following is a discussion of certain material U.S. federal income tax consequences of the acquisition, ownership and disposition
of our ordinary shares. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant
to a particular person’s situation. The discussion applies only to holders that hold their ordinary shares as capital assets
(generally property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended,
or the Code. This discussion is based on the Code, income tax regulations promulgated thereunder, judicial positions, published
positions of the Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect as of the date hereof
and all of which are subject to change, possibly with retroactive effect. This discussion is general in nature and is not exhaustive
of all possible tax considerations, nor does the discussion address any state, local or foreign tax considerations or any U.S.
tax considerations (e.g., estate or gift tax) other than U.S. federal income tax considerations, that may be applicable to particular
holders.
This
discussion does not address all aspects of U.S. federal income taxation that may be relevant in light of particular circumstances,
nor does it address the U.S. federal income tax consequences to persons who are subject to special rules under U.S. federal income
tax law, including:
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banks, insurance companies or other financial institutions;
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persons subject to the alternative minimum tax;
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tax-exempt organizations;
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controlled foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid United States federal income tax;
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certain former citizens or long-term residents of the United States;
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dealers in securities or currencies;
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traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;
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persons that own, or are deemed to own, more than five percent of our capital stock;
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holders who acquired our stock as compensation or pursuant to the exercise of a stock option; or
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persons who hold our shares as a position in a hedging transaction, “straddle,” or other risk reduction transaction.
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For
purposes of this discussion, a U.S. holder is (i) an individual who is a citizen or resident of the United States for U.S. federal
income tax purposes; (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created
or organized in or under the laws of the United States (or treated as such under applicable U.S. tax laws), any state thereof,
or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source;
or (iv) a trust if (a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more
U.S. persons have the authority to control all substantial decisions of the trust, or (b) it has a valid election in effect under
applicable law and regulations to be treated as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a holder
that is neither a U.S. holder nor a partnership or other entity classified as a partnership for U.S. federal income tax purposes.
In
the case of a partnership or entity classified as a partnership for U.S. federal income tax purposes, the U.S. federal income
tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. Partners
of partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them of the merger or
of the ownership and disposition of our ordinary shares.
Distributions
We
do not currently anticipate paying distributions on our ordinary shares. In the event that distributions are paid, however, the
gross amount of such distributions will be included in the gross income of the U.S. holder as dividend income on the date of receipt
to the extent that the distribution is paid out of current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. Such dividends will be eligible for the dividends-received deduction allowed to corporations in respect
of dividends received from other U.S. corporations. Dividends received by non-corporate U.S. holders, including individuals, may
be subject to reduced rates of taxation under current law. A U.S. holder may be eligible to claim a foreign tax credit with respect
to any PRC withholding tax imposed on dividends paid by us. However, the foreign tax credit rules are complex, and their application
in connection with Section 7874 of the Code and the Agreement Between the Government of the United States of America and the Government
of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to
Taxes on Income, or the U.S.-PRC Tax Treaty, is not entirely clear at this time. U.S. holders should consult their own tax advisors
with respect to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
To
the extent that dividends paid on our ordinary shares exceed current and accumulated earnings and profits, the distributions will
be treated first as a tax-free return of tax basis on our ordinary shares, and to the extent that the amount of the distribution
exceeds tax basis, the excess will be treated as gain from the disposition of those ordinary shares.
Sale
or Other Disposition
U.S.
holders of our ordinary shares will recognize taxable gain or loss on any sale, exchange, or other taxable disposition of ordinary
shares equal to the difference between the amount realized for the ordinary shares and the U.S. holder’s tax basis in the
ordinary shares. This gain or loss generally will be capital gain or loss. Under current law, non-corporate U.S. holders, including
individuals, are eligible for reduced tax rates if the ordinary shares have been held for more than one year. The deductibility
of capital losses is subject to limitations. A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC
withholding tax imposed on gain from the sale or other disposition of ordinary shares. However, the foreign tax credit rules are
complex, and their application in connection with Section 7874 of the Code and the U.S.-PRC Tax Treaty is not entirely clear at
this time. U.S. holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign
tax credit rules and the U.S.-PRC Tax Treaty.
Unearned
Income Medicare Contribution
Certain
U.S. holders who are individuals, trusts or estates are required to pay an additional 3.8% Medicare tax on, among other things,
dividends on and capital gains from the sale or other disposition of shares of stock for taxable years beginning after December
31, 2012. U.S. holders should consult their own advisors regarding the effect, if any, of this legislation on their ownership
and disposition of our ordinary shares.
Foreign
Account Tax Compliance
The
Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”),
when applicable, will impose a U.S. federal withholding tax of 30% on certain “withholdable payments” (generally certain
U.S.-source income, including dividends, and the gross proceeds from the sale or other disposition of assets producing U.S. source
dividends or interest ) to foreign financial institutions and other non-U.S. entities that fail to comply with certain certification
and information reporting (generally relating to ownership by U.S persons of interests in or accounts with those entities). The
obligation to withhold under FATCA applies to, among other items, (i) U.S.-source dividend income that is paid on or after July
1, 2014 and (ii) to gross proceeds from the disposition of property that can produce U.S.-source dividends paid on or after January
1, 2017. Non-U.S. holders should consult their tax advisors concerning application of FATCA to our ordinary shares in their particular
circumstances.
Information
Reporting and Backup Withholding
Payments
of dividends or of proceeds on the disposition of stock made to a holder of our ordinary shares may be subject to information
reporting and backup withholding at a current rate of 28% unless such holder provides a correct taxpayer identification number
on IRS Form W-9 (or other appropriate withholding form) or establishes an exemption from backup withholding, for example by properly
certifying the holder’s non-U.S. status on a Form W-8BEN, Form W-8BEN-E or another appropriate version of IRS Form W-8.
Payments of dividends to holders must generally be reported annually to the IRS, along with the name and address of the holder
and the amount of tax withheld, if any. A similar report is sent to the holder. Pursuant to applicable income tax treaties or
other agreements, the IRS may make these reports available to tax authorities in the holder’s country of residence.
Backup
withholding is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced
by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained
from the IRS, provided that the required information is furnished to the IRS in a timely manner.
Dividends
and Paying Agents
Not
applicable.
Statement
by Expert
Not
applicable.
Documents
on Display
We
have filed this Annual Report on Form 20-F with the SEC under the Exchange Act. Statements made in this Annual Report
as to the contents of any document referred to are not necessarily complete. With respect to each such document filed
as an exhibit to this Annual Report, reference is made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such reference.
We
are subject to the informational requirements of the Exchange Act as a foreign private issuer and file reports and other information
with the SEC. Reports and other information filed by us with the SEC, including this Annual Report on Form 20-F, may
be inspected and copied at the public reference room of the SEC at 100 F. Street, N.E., Washington D.C. 20549. You
can also obtain copies of this Annual Report on Form 20-F by mail from the Public Reference Section of the SEC, 100 F. Street,
N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from the SEC’s
Internet site at
http://www.sec.gov
. The SEC’s telephone number is 1-800-SEC-0330.
As
a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly
reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing
profit recovery provisions contained in Section 16 of the Exchange Act.
Subsidiary
Information
Not
applicable.
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ITEM
11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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Interest
Rate Risk
We
are not exposed to significant interest rate risk as we do not have any significant bank loans which bear interest at a variable
prime rate.
Foreign
Exchange Risk
While
our reporting currency is the U.S. Dollar, substantially all of our consolidated revenues and consolidated costs and expenses
are denominated in RMB. All of our assets are denominated in RMB except for cash. As a result, we are exposed to foreign exchange
risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB.
If the RMB depreciates against the U.S. Dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. Dollar
financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue
and expenses are translated at the average exchange rates and shareholders’ equity is translated at historical exchange
rates. Any resulting translation adjustments are not included in determining net income but are included in determining other
comprehensive income, a component of shareholders’ equity. We have not entered into any hedging transactions in an effort
to reduce our exposure to foreign exchange risk.
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 in an effort to reduce our exposure to foreign currency exchange risk. 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.
Inflation
Inflationary
factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we
do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate
of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general
and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased
costs.
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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Debt
Securities
Not
applicable.
Warrants
and Rights
Not
applicable.
Other
Securities
Not
applicable.
American
Depositary Shares
The
Company does not have any American Depositary Receipts.
