EVTNF Eviation Aircraft Ltd (GM)

 

A. SELECTED CONSOLIDATED FINANCIAL DATA

 

You should read the following selected consolidated financial data in conjunction with the section of this annual report entitled “Item 5 - Operating and Financial Review and Prospects” and our consolidated financial statements and the notes thereto included elsewhere in this annual report.

 

  

As of December 31, 2015, Eviation Aircraft Ltd., formerly known as R.V.B. Holdings Ltd. was under the management of a temporary liquidator, or the Temporary Liquidator, appointed by the District Court of Tel Aviv in Israel at the request of certain creditors of the Company with a mandate to identify and liquidate the Company’s assets. Effective February 2016, the Company was sold to two of our principal shareholders. The financial information below through December 31, 2015 represents the historical results of the waste-disposal management business in which the Company was engaged prior to the sale of the Company by the Temporary Liquidator, which we have classified as discontinued operations. See Item 4 below.

  

 

 

B. CAPITALIZATION AND INDEBTEDNESS

Not applicable.

 

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

D. RISK FACTORS

 

The risk factors below relate solely to our current business focus in the area of developing and commercializing a light passenger electric operated propulsion aircraft. You should carefully consider the risks described below and in the other sections of, and the documents we have incorporated by reference into this prospectus before making an investment decision. The risks described below and in the documents we have incorporated by reference into this prospectus are not the only ones facing our company. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our ordinary shares could decline due to any of these risks.

 

RISKS RELATED TO OUR BUSINESS AND PRODUCTS

 

We are a start-up company.

 

The Company’s sole business is conducted by our wholly owned subsidiary, Eviation Tech Ltd., an Israeli start-up company engaged in designing and developing an electric powered light passenger aircraft. We have not generated any revenue since the commencement of our current operation in May 2016. We are currently in the proof of concept stage and intend to test all the components of the enabling core technologies (airframe design, electric drive, battery technology and autonomous flight and sensing systems). Testing will take place on scaled models that are currently undergoing flight tests and on the full-scale prototype, Eviation Alice, currently under construction. We expect to incur significant operating losses for the foreseeable future, and there can be no assurance that we will be able to validate and market products in the future that will generate revenues, or that any revenues generated will be sufficient for us to become profitable or thereafter maintain profitability. While we believe that our available cash resources including proceeds from prior equity investments, equity investments expected to be completed during 2018 and grants from  the Office of the Chief Scientist of the Ministry of National Infrastructures, Energy, Water and Resources of Israel (or the “OCS”) are sufficient to meet our operating requirements in the foreseeable future, the likelihood of success of our business plan must be considered in light of the challenges, substantial expenses, difficulties, complications and delays frequently encountered in connection with developing and expanding early-stage businesses and the regulatory and competitive environment in which we operate. Startup product development is a highly speculative undertaking, involves a substantial degree of risk, and is a capital-intensive business. If we cannot successfully execute our plan to develop the aviation aircraft, our business may not succeed.

We have a limited operating history upon which to evaluate our business.

 

We commenced our current business operations in February 2016. As such, we have a limited history of operations in our industry. Accordingly, it is more difficult to accurately assess growth rate and earnings potential. Our business is dependent upon the implementation of our business plan. Our limited operating history makes it difficult for prospective investors to evaluate our business. Therefore, our operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the early stages of any new business, as well as those risks that are specific to a newly emerging and untried field within the aviation industry, an electric powered light aviation aircraft. Investors should evaluate us in light of the problems and uncertainties frequently encountered by early stage companies attempting, like ours, to develop markets for new products, services, and technologies, such as unforeseen capital requirements, failure of market acceptance, failure to establish business relationships, and competitive disadvantages as against larger and more established companies. If we are unable to successfully address these difficulties as they arise, our future growth and earnings will be negatively affected.

 

We may be unable to obtain additional capital that we will require to implement our business plan, which could restrict our ability to develop an electric powered light passenger aircraft and implement our business plan.

 

We have, to date, received a number of equity investments and loans from our controlling shareholders and their affiliates. In addition, an amount of $2 million was advanced to the Company by an investor, pursuant to a Binding Memorandum of Understanding entered into as of February 18, 2018.

However, we will require additional capital to develop an electric powered light passenger aircraft and implement our business plan beyond the development phase. We plan to partner with an established airframe manufacturer to support and fund the process of commercialization of the design of our aircraft. We may not succeed in securing such partnerships. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:

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Investors’ perception of an aviation company, and demand for its securities;

                          

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conditions of the U.S. and other capital markets in which we may seek to raise funds;

                          

Financing may not be available in amounts or on terms acceptable to us, if at all. In addition, our administrative requirements (such as salaries, insurance, expenses and general overhead expenses, as well as legal compliance costs and accounting expenses) may require a substantial amount of additional capital and cash flow.

 

We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes, which may adversely impact our financial condition. Our ability to obtain needed financing may be further impaired by such factors as the state of the capital markets, our status as a new enterprise without a significant demonstrated operating history or the loss of key management. The failure to maintain, extend, renew or replace any new sources of financing with a comparable arrangement or arrangements that provide similar amounts of liquidity for the Company would have a material negative impact on our overall liquidity, financial and operating results, and we may be required to cease our operations.

 

A default by us under the secured financing arrangement with our shareholders would enable them to take control of our assets.

 

We have outstanding debts to our controlling shareholders. We incurred such debt pursuant to two loan agreements, or the Loan Agreements, entered separately, between our controlling shareholders, and each of the Company and the Subsidiary. Pursuant to the terms of the Loan Agreements, we have granted to Mr. Tzidon and Magic Stones a security interest on all of the assets of the Subsidiary, including its intellectual property as well as the shareholdings of the Subsidiary. A default by us under these Loan Agreements would enable the holders to foreclose on our assets, including our intellectual property. Any foreclosure could force us to substantially curtail or cease our operations.

 

Our lack of diversification will increase the risk of an investment in the Company, and our financial condition and results of operation may deteriorate if we fail to diversify.

 

Our business is focused on the regional transportation (or aviation) industry. Larger companies have the ability to manage their risk by diversification. However, we lack and expect to continue to lack diversification, in terms of both the nature and geographic scope of our business. As a result, the impact of factors affecting our industry or the regions in which we operate would likely affect us more than they would were our business more diversified, enhancing our risk profile. If we cannot diversify or expand our operations, our financial condition and results of operations could deteriorate rapidly in the face of such factors.

 

The success of our business depends upon the continuing contributions of our Chief Executive Officer and other key personnel and our ability to attract highly qualified personnel to expand our business.

 

 

 

We may not be able to compete successfully against current and future competitors.

 

We expect to compete in our proposed businesses with other companies including major companies in the aviation industry, most, if not all of which, have far greater marketing and financial resources and experience than we do. A number of our competitors have long operating histories, large customer bases, substantial financial, technical, sales, marketing and other resources, and strong name recognition. Current and potential competitors have established, and may establish in the future, cooperative relationships among themselves or with third parties. A number of companies may develop and offer products that provide the same or greater functionality than our product. To be competitive, we must respond promptly and effectively to the challenges of technological change, evolving standards and competitors’ innovations. We may not be able to maintain our competitive position against current or potential competitors, especially those in the general aviation market with significantly greater financial, marketing, service, support, technical and other competitive resources. Competitors with greater resources may be able to undertake more extensive marketing campaigns, adopt more aggressive name recognition and pricing policies and make more attractive offers to potential employees, distributors, resellers or other strategic partners. We expect additional competition from other established and emerging companies as the market for light aircrafts continues to develop.

Effective competition could result in price reductions, decreased margins or have other negative implications, any of which could adversely affect our business and chances for success. Our positioning in the marketplace may place a significant strain on our management, operational and financial resources, and increase demand on our systems and controls. Competition is likely to increase significantly as new companies enter the market and current competitors expand their services. Many of these potential competitors are likely to enjoy substantial competitive advantages, including larger technical staffs, greater name recognition, larger customer bases and substantially greater financial, marketing, technical and other resources. Any pricing pressures, reduced margins or loss of market share resulting from increased competition or our failure to compete effectively could seriously damage our business and chances for success. As we attempt to compete, we may encounter delays or cost overruns or suffer other adverse consequences in implementing new systems when required.

 

We may be forced to abandon development of the Eviation Alice, which will significantly impair our ability to generate revenues.

 

We are currently in the proof of concept stage and intend to test all the components of the Eviation Alice enabling core technologies (airframe design, electric drive, battery technology and autonomous flight and sensing systems). Testing will take place on scaled models and on the Eviation Alice prototype that are currently under construction. The results of such testing may not support the claims sought by us. Further, success in the proof of concept stage does not ensure that the later stages of development would be successful, and the results of later testing may not meet our expectation or the results of the proof of concept stage. Any such failure may cause us to abandon the development of the Eviation Alice.

 

Our future growth is dependent upon consumers’ willingness to adopt light electric aircraft.

 

  

Other factors that may influence the adoption of alternative fuel aircraft, and specifically electric aircraft, include:

 

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perceptions about electric aircraft quality, safety (in particular with respect to lithium-ion battery packs), design, performance and cost, especially if adverse events or accidents occur that are linked to the quality or safety of electric aircraft;

                          

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perceptions about airplane safety in general, in particular safety issues that may be attributed to the use of advanced technology;

                          

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the limited range over which electric aircraft may fly on a single battery charge and the effects of weather on this range;

                          

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the decline of an electric aircraft’s range resulting from deterioration over time in the battery’s ability to hold a charge;

                          

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the availability of service for an electric aircraft;

                          

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concerns about electric grid capacity and reliability, which could derail our present efforts to promote the electric aircraft as a practical solution to an aircraft which require gasoline;

                          

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consumers’ desire and ability to use an electric aircraft in regional trips instead of other alternatives such as trains, buses and cars;

                          

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government regulations and economic incentives promoting fuel efficiency and alternate forms of energy as well as tax and other governmental incentives to purchase and use electric aircraft;

 

Our business is subject to extensive and costly government regulation.

 

When completed, Eviation Alice would be subject to extensive regulation and we may never obtain the certification required for its operation. In the United States, the Eviation Alice must comply with Federal Aviation Administration, or the FAA, regulations governing production and quality systems, airworthiness and installation approvals, repair procedures and continuing operational safety before it can be certified. The FAA and other foreign regulatory authorities have full discretion over this approval process. We will need to perform significant testing of the Eviation Alice and its systems before we could file an application for certification. We may encounter delays or rejections based upon the FAA regulations, which may delay the commercialization of our product. Failure to obtain FAA certification of the Eviation Alice in a timely manner or at all will severely undermine our business by delaying or halting commercialization of our product, imposing costly procedures and diminishing competitive advantage, and we may be required to cease our operations.

 

Our business is also subject to various federal, state, and local laws and regulations relating to environmental footprint in emissions, noise and treatment of hazardous materials. The costs incurred to ensure continued environmental compliance with existing or new standards could have a material impact on our results of operations, financial condition or cash flows.

Obtaining and maintaining regulatory approval of our product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other jurisdiction, but a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in others. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from those in the United States.

Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our product in certain countries. If we fail to comply with the regulatory requirements in international markets or to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product will be harmed.

Disruptions to our IT systems due to system failures or cybersecurity attacks may impact our operations, result in sensitive customer information being compromised, which would negatively materially affect our reputation and materially harm our business.

 

Our servers and equipment may be subject to computer viruses, break-ins, and similar disruptions from unauthorized tampering with computer systems. Our systems have been, and are expected to continue to be, the target of malware and other cyber-attacks. Although we have invested in measures to reduce these risks, there can be no assurance that our current information technology (IT) systems are fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. A cyber-attack that bypasses our IT security systems causing an IT security breach may lead to a material disruption of our IT business systems and/or the loss of business information. A cyber-attack on our systems or networks that impairs our IT systems could disrupt our business operations and our ability to sell our products. Any such event could have a material adverse effect on our business. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or shipment of our products, or in theft, destruction, loss, misappropriation or release of our confidential information or our intellectual property, our business, financial condition, results of operations and prospects could be materially adversely affected. 

We may be subject to legal proceedings and to product liability lawsuits.

 

Our business exposes us to potential product liability and aerial accidents risks, which are inherent in the testing, manufacturing, and marketing aviation products and services. We could incur substantial costs in connection with product liability or other tortious claims relating to the Eviation Alice or any other of our future products. The Eviation Alice may be involved in aerial accidents, which may cause death, bodily injury and other damages. These accidents may expose us to product liability or other type of tortious lawsuits. If product liability or tortious lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit or to halt the operation of the Eviation Alice, which may result in substantial losses. In addition, such accidents would deter consumers from using our product, which could have a material impact on our results of operations, financial condition or cash flow and may cause us to cease operations. Product liability and aerial accidents insurance are costly, subject to deductibles and coverage limitations, and may not be available in the amounts that we desire for a price we are willing to pay or at all. If, at any time, we are unable to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability or tortious claims, we may be unable to test, market or commercialize our products. In such case or even if we are able to obtain sufficient insurance coverage on reasonable terms, a successful product liability claim or tort claim brought against us in excess of our insurance coverage may cause us to incur substantial liabilities, and, as a result, our business, liquidity and results of operations would be materially adversely affected. In addition, the existence of a product liability claim or tortious claim could affect the market price of our securities.

 

In addition, we may be unable to maintain sufficient insurance as a public company to cover liability claims made against our officers and directors. If we are unable to adequately insure our officers and directors, we may not be able to retain or recruit qualified officers and directors to manage the Company.

 

We may be obligated to indemnify our directors and officers .

There can be no assurance that we will not be classified as a passive foreign investment company.

We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our Ordinary Shares.

RISK FACTORS RELATED TO THE INTELLECTUAL PROPERTY UTILIZED IN OUR BUSINESS

 

If we fail to adequately protect, enforce or secure rights to the patents which we own or that were licensed to us or any patents we may own in the future, the value of our intellectual property would diminish and our business and competitive position would suffer.

 

Our success, competitive position and future revenues, if any, depend in part on our ability to obtain and successfully leverage intellectual property covering the Eviation Alice, know-how, methods, processes and other technologies, to protect our trade secrets, to prevent others from using our intellectual property and to operate without infringing the intellectual property rights of third parties.

 

 If patent rights covering our product and methods are not sufficiently broad, they may not provide us with any protection against competitors with similar products and technologies. Furthermore, if the United States Patent and Trademark Office, or the USPTO, or any foreign patent office issue patents to us or our licensors, others may challenge the patents or design around the patents, or the patent office or the courts may invalidate the patents. Thus, any patents we own or license from or to third parties may not provide any protection against our competitors.

 

We cannot be certain that patents will be issued as a result of any pending applications, and we cannot be certain that any of our issued patents or patents licensed from a third-party will give us adequate protection from competing products. For example, issued patents, including the patents licensed by us, may be circumvented or challenged, declared invalid or unenforceable, or narrowed in scope.

 

In addition, since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make our inventions or to file patent applications covering those inventions.

 

It is also possible that others may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that we have licensed, our rights depend on maintaining our obligations to the licensor under the applicable license agreement, and we may be unable to do so. The loss of, or our inability to obtain or maintain, any of these technology licenses could delay the introduction of new products or services until equivalent technology, if available, is identified, licensed and integrated. This could harm our business.

 

In addition to patents and patent applications, we depend upon proprietary know-how to protect our proprietary technology. We require our employees, consultants, advisors and collaborators to enter into confidentiality agreements that limit the disclosure of confidential information to any other parties. We also require our employees and consultants to disclose and assign to us their ideas, developments, discoveries and inventions. These agreements may not, however, provide adequate protection for our know-how or other proprietary information in the event of any unauthorized use or disclosure.

 

Our commercial success will depend in part on the ability of the licensors of our key technologies to maintain protection of their intellectual property.

 

Our success will depend in part on the ability of the licensors of key technologies for use in our business to obtain, maintain and enforce patent and other intellectual property rights for the technology and to preserve trade secrets, and on our ability to operate without infringing upon the proprietary rights of third parties. We cannot be certain that our licensors were the first inventors of inventions covered by their patents and patent applications or that they were the first to file. Accordingly, there can be no assurance that licensed patents and patents application used by the Subsidiary are valid or will afford us protection against competitors with similar technologies. Failure to obtain or maintain patent or other intellectual property protection on licensed technology may have a material adverse effect on our competitive position and business prospects. It is also possible that the technology may infringe on third party patents or other intellectual property rights owned by others. If we are found liable for infringement, we may be liable for significant money damages and may encounter significant delays in bringing products and services to market.

 

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submissions, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these requirements.

 

Periodic maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign governmental patent agencies require compliance with procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application include, but are not limited to, failure to respond to office actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market, which would have a material adverse effect on our business.

 

Costly litigation may be necessary to protect our intellectual property rights and we may be subject to claims alleging the violation of the intellectual property rights of others.

 

We may face significant expense and liability as a result of litigation or other proceedings relating to patents and other intellectual property rights of others. In the event that another party has also filed a patent application or been issued a patent relating to an invention or technology claimed by us in pending applications, we may be required to participate in an interference proceeding declared by the USPTO to determine priority of invention, which could result in substantial uncertainties and costs for us, even if the eventual outcome is favorable to us. We, or our licensors, also could be required to participate in interference proceedings involving issued patents and pending applications of another entity. An adverse outcome in an interference proceeding could require us to cease using the technology or to license rights from prevailing third parties.

 

 

Moreover, there is no guarantee that any prevailing patent owner would offer us a license so that we could continue to engage in activities claimed by the patent, or that such a license, if made available to us, could be acquired on commercially acceptable terms. In addition, third parties may, in the future, assert other intellectual property infringement claims against us with respect to our product candidate, technologies or other matters. Any claims of infringement asserted against us, whether or not successful, may have a material adverse effect on us.

 

We rely on confidentiality agreements that could be breached and may be difficult to enforce, which could result in third parties using our intellectual property to compete against us.

 

Although we believe that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the non-disclosure of confidential information to third parties, as well as agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we employ them, the agreements can be difficult and costly to enforce. Although we seek to enter into these types of agreements with our contractors, consultants, advisors and research collaborators, to the extent that employees and consultants utilize or independently develop intellectual property in connection with any of our projects, disputes may arise as to the intellectual property rights associated with the Eviation Alice or any future product. If a dispute arises, a court may determine that the right belongs to a third party. In addition, enforcement of our rights can be costly and unpredictable. We also rely on trade secrets and proprietary know-how that we seek to protect in part by confidentiality agreements with our employees, contractors, consultants, advisors or others. Despite the protective measures we employ, we still face the risk that:

 

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these agreements may be breached;

                          

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these agreements may not provide adequate remedies for the applicable type of breach;

                          

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our proprietary know-how will otherwise become known; or

                          

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our competitors will independently develop similar technology or proprietary information.

 

International patent protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have to expend substantial sums and management resources.

 

Patent law outside the United States may be different than in the United States. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States, if at all. A failure to obtain sufficient intellectual property protection in any foreign country could materially and adversely affect our business, results of operations and future prospects. Moreover, we may participate in opposition proceedings to determine the validity of our foreign patents or our competitors’ foreign patents, which could result in substantial costs and divert management’s resources and attention.

 

Intellectual property rights do not necessarily address all potential threats to our business competitive advantage.

 

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to acquire or maintain a competitive advantage.

  

RISKS RELATED TO OUR ISRAELI OPERATIONS

 

Political, economic, and security conditions in Israel affect our operations and may limit our ability to produce and sell products or provide our services.

The anti-takeover effects of Israeli laws may delay or deter a change of control of the Company.

Your rights and responsibilities as our shareholder will be governed by Israeli law, which differs in some respects from the rights and responsibilities of shareholders of United States corporations.

If we were to lose our foreign private issuer status under the U.S. federal securities laws, we would incur additional expenses associated with compliance with the U.S. securities laws applicable to U.S. domestic issuers.

RISKS RELATING TO OWNERSHIP OF OUR ORDINARY SHARES

  

Two shareholders control more than 80% of the share capital of the Company.

Each of Mr. Tzidon and Michael Ilan currently beneficially own (excluding warrants) respectively 41.78% and 41.78% of the Company’s outstanding share capital. Accordingly, they alone can make determinations on any matter requiring shareholder approval other than those decisions that require special approval. This concentration of ownership and control can have an adverse effect on our share price. See Item 10, “Memorandum and Articles of Association – Special approval.”

We are unlikely to pay dividends in the foreseeable future and any return on investments may be limited to the value of our Ordinary Shares.

 

Under the Companies Law, dividends may only be paid out of profits legally available for distribution and provided that there is no reasonable concern that such payment will prevent us from satisfying our existing and foreseeable obligations as they become due. In addition, a competent court may approve, as per a motion to be filed by a company in accordance with the Companies Law requirements, a payment which does not meet the profits test, provided that the court was convinced that there is no reasonable concern that such payment will prevent the company from satisfying its existing and foreseeable obligations as they become due. We do not expect to declare or pay cash dividends in the foreseeable future and intend to retain future earnings, if any, to finance the growth and development of our business. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if our share price appreciates. If we issue additional shares in the future, it will result in the dilution of our existing shareholders.

 

We are authorized to issue up to 700,000,000 Ordinary Shares. Our Board of Directors may choose to issue some or all of such shares to acquire one or more companies or products and to fund our overhead and general operating requirements. The issuance of any such shares will reduce the book value per share and may contribute to a reduction in the market price of our outstanding ordinary shares. If we issue any such additional shares, such issuance will reduce the proportionate ownership and voting power of all current shareholders.

 

Trading of our ordinary shares is restricted by the SEC’s penny stock regulations, which may limit a shareholder’s ability to buy and sell our ordinary shares.

 

The SEC has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5 million or individuals with a net worth in excess of $1 million or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our ordinary shares.

 

FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our shares.

 

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority, or FINRA, has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our ordinary shares, which may limit your ability to buy and sell our shares and have an adverse effect on the market for our shares.

 

The market for our ordinary shares is illiquid and the price of our ordinary shares may be negatively impacted by factors that are unrelated to our operations.

 

Although our ordinary shares are currently listed for quotation on the OTC Pink - Current, or OTCPK, there is no market for our ordinary shares. Even when a market is established and trading begins, trading through the OTCPK is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our shares, in which case it could be difficult for shareholders to sell their shares. The market price of our ordinary shares could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our ordinary shares, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our ordinary shares.

Financing transactions resulting in a large number of newly issued shares that become readily tradable, or other events that cause current shareholders to sell shares, could place further downward pressure on the trading price of our stock. In addition, the lack of a robust resale market may require a shareholder who desires to sell a large number of shares to sell the shares in increments over time to mitigate any adverse impact of the sales on the market price of our stock.

 

We will likely issue additional capital shares in the future, which would dilute our existing shareholders.