Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 000-55576
YANGTZE RIVER PORT AND LOGISTICS LIMITED
(Exact name of registrant as specified in its charter)
| Nevada | 27-1636887 | |
| State or other jurisdiction of incorporation or organization |
(I.R.S. Employer Identification No.) | |
| 41 John Street, Suite 2A, New York, NY | 100038 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (646) 861-3315
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Name of each exchange on which registered: | |
| Common Stock, par value $0.001 per share | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer,” “large accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer | ☒ | Accelerated Filer | ☐ | |||
| Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | |||
| Emerging Growth Company | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter:
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2017, the last business day of the registrant’s last completed second quarter, based upon the closing price of the common stock of $13.4540 on such date , is $1,034,739,686.
Number of the issuer’s common stock outstanding as of March 8, 2018: 172,344,446.
Documents incorporate by reference: None.
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. These forward-looking statements are found at various places throughout this Report and include information concerning possible or assumed future results of our operations; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future operations, future cash needs, business plans and future financial results, and any other statements that are not historical facts.
From time to time, forward-looking statements also are included in our other periodic reports on Forms 10-Q and 8-K, in our press releases, in our presentations, on our website and in other materials released to the public. Any or all of the forward-looking statements included in this Report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. All subsequent written and oral forward-looking statements concerning other matters addressed in this Report and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Report.
Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.
USE OF CERTAIN DEFINED TERMS
In this Report, unless otherwise noted or as the context otherwise requires, “Yangtze River”, the “Company,” “YRIV,” “we,” “us,” and “our” refers to the combined business of Yangtze River Port and Logistics Limited, a corporation formed under the laws of the State of Nevada, Energetic Mind Limited (“Energetic Mind”), which is our wholly-owned subsidiary formed under the laws of the British Virgin Islands (“BVI”), Energetic Mind’s wholly-owned subsidiary, Ricofeliz Capital (HK) Ltd (“Ricofeliz Capital”), a company formed under the laws of Hong Kong, and Ricofeliz Capital’s wholly-owned subsidiary, Wuhan Yangtze River Newport Logistics Co., Ltd (“Wuhan Newport”), a wholly foreign-owned enterprise formed under the laws of the People’s Republic of China (“China” or the “PRC”). The aforementioned terms also include our wholly-owned subsidiary, Avenal River Limited (in the process of changing its name to Yangtze River Blockchain Logistics Limited), a corporation formed under the laws of British Virgin Islands, its wholly-owned subsidiary, Ricofeliz Investment (China) Limited, a company formed under the laws of Hong Kong, and Wuhan Yangtze River Newport Trading Limited, a company formed under the laws of China and the wholly-owned subsidiary of Ricofeliz Investment (China) Limited.
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Overview
Yangtze River Port and Logistics Limited is a Nevada holding corporation. We operate through our wholly-owned subsidiary, Energetic Mind Limited (“Energetic Mind”), a British Virgin Islands corporation, which in turn operates through its wholly-owned subsidiary, Ricofeliz Capital (HK) Limited (“Ricofeliz Capital”), a Hong Kong corporation. Ricofeliz Capital which operates through its wholly-owned subsidiary, Wuhan Yangtze River Newport Logistics Co., Ltd (“Wuhan Newport”), a wholly foreign-owned enterprise incorporated in the People’s Republic of China that primarily engages in the business of real estate and infrastructural development and operating a port logistics center (“Logistics Center”) located in Wuhan, Hubei Province in the People’s Republic of China (“PRC”).
Situated in the middle reaches of the Yangtze River, Wuhan Newport is a large infrastructure development project implemented under China’s latest “One Belt One Road” initiative. We believe that it is strategically positioned in the anticipated “Pilot Free Trade Zone” of the Wuhan Port, an important trading locale for the PRC, the Middle East and Europe. To be fully developed upon completion, the Logistics Center will comprise six operating zones: port operation area, warehouse and distribution area, cold chain logistics area, rail cargo loading area, exhibition area and business related area. The Logistics Center is also expected to provide a number of shipping berths for cargo ships of various sizes. Wuhan Newport expects to provide domestic and foreign businesses direct access to the anticipated Pilot Free Trade Zone in Wuhan. The project will include commercial buildings, professional logistic supply chain centers, direct access to the Yangtze River, Wuhan-Xinjiang-Europe Railway and ground transportation, storage and processing centers, and IT supporting services, among others.
We anticipate that income generated from the use of the warehouses, cargo loading and unloading, railway and highway transportation and logistics services and other logistics supporting services will comprise the main source of our income. It is also expected that income from real estate sales and leasing will be a relatively minor portion of our expected income since we are planning to sell or lease only a small portion of our real estate properties such as office spaces. We will begin construction on the Logistics Center once we are able to raise funds for it.
In the meantime, we have been developing a commercial building project called the Wuhan Centre China Grand Steel Market (Phase 1) Commercial Building (“Phase 1 Project”) located in the south of Hans Road, Wuhan Yangluo Economic Development Zone which covers an approximate construction area of 222,496.6 square meters. We have been financing the Phase 1 Project with bank loans and shareholder advances. The Phase 1 Project comprises 7 buildings, four of which covering 35,350,4 square meters have been completed and three of which covering an approximate area of 57,450.4 square meters are still under construction as of December 31, 2017. We have sold approximately 22,780 square meters of commercial building space.
We plan to use the majority of our real estate properties for the development of our Logistics Center, from which our main source of expected income will be derived.
Wuhan Yangtze River Newport Logistics Center
The Logistics Center will be an extensive complex located in Wuhan Newport Yangluo Port. Wuhan, the capital of the Hubei Province in the People’s Republic of China is a major transportation hub city with access to numerous railways, roads and expressways passing through the city and connecting to major cities in China, as well as other international centers of commerce and business.
The Logistics Center will be on the upper stream of the Yangtze River, and close to the northern base of Wuhan Iron and Steel, China’s first mega-sized iron and steel production complex. The Logistics Center is expected to include a port terminal that will be located approximately 26.5km from the Wuhan Guan and 5.5km from the Yangluo Yangtze River Bridge. The operation area of the port is expected to consist of a riverbank of 1,039 meters with eight 5,000-to-10,000-ton berths, two of which are multi-purpose berths and the other six are general cargo berths. It is designed to be able to handle up to 5,000,000 tons of cargo annually, including up to 100,000 TEU for annual container throughput (including 20,000 TEU in freezer areas), 1,000,000 tons of iron and steel and 3,000,000 tons of general cargo.
Within the Logistics Center, functional areas will be divided into six operating zones: a port operation area, a warehouse and distribution area, a cold chain supply logistics area, a rail cargo loading area, an exhibition area and a business related area. The Logistics Center will also be complemented with container storage areas, multi-functional areas, general storage areas, a multi-functional warehouse and infrastructural development, including new roads, gas stations, parking areas, gas and water pipes, electricity lines and all other facilities and equipment to operate the Logistics Center.
Aside from being situated in the Wuhan Yangluo Comprehensive Bonded Zone, the Yangluo development area is among the third group of China’s Pilot Free Trade Zone (“FTZ”) applicants to submit FTZ applications to the State Council. As of the date hereof, approvals have been granted to Shanghai, Tianjin, Guangdong and Fujian. Corporations within the approved free-trade zones are typically entitled to a series of favorable regulations and policies that could help the businesses grow and succeed.
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The Logistics Center is expected to occupy approximately 1,918,000 square meters, for which the construction and development are expected to be completed in three phases in three years and reach its target maximum annual profit by the end of 2022 assuming the entire funding required for construction of the Logistics Center of $1.03 billion is in place by 2021 and the Logistics Center is in operation per our business plan. We have updated our original time-frame and the following table illustrates the anticipated timeframe of our investment and construction progress.
| Time | Phase of Investment/Construction | Percentage of Total Anticipated Investment/ Construction (1) | Production Capacity (2) | |||||||
| 1st Year (2018) | 1st Phase | 40 | % | 30 | % | |||||
| 2nd Year (2019) | 2nd Phase | 70 | % | 40 | % | |||||
| 3rd Year (2020) | 3rd Phase | 100 | % | 60 | % | |||||
| 4th Year (2021) | Completed | 100 | % | 75 | % | |||||
| 5th Year (2022) | Completed | 100 | % | 100 | % | |||||
| (1) | The percentage of construction in a certain phase reflects the anticipated contribution of the investment in such particular phase. For example, contribution of 40% of the total investment in Phase 1 will lead to construction of 40% of total value of the Logistics Center. |
| (2) | The percentage of Production Capacity shows the fraction of the target maximum annual profit to be earned when the Wuhan Project is fully operational. We target to reach its maximum annual profit by the end of 2021 assuming the entire funding required for construction of the Logistics Center of $1.03 billion is in place by 2020 and the Logistics Center is in operation according to our business plan. |
Wuhan Newport has signed a twenty-year lease agreement effective April 27, 2015, the maximum number of years permitted by the applicable PRC laws, with rights to renew, at its sole discretion, for another twenty-years, to lease approximately 1,200,000 square meters of land for building logistics warehouses in support of the Logistics Center. The warehouses are expected to be comprised port terminal zones, warehouse logistics zones, cold chain supply zones and railroad loading and unloading zones. The warehouses, once constructed, will connect the port terminal along the Yangtze River and the railway leading to Europe, satisfying the requirement of China’s latest “One Belt, One Road” initiative. It will also be able to support large logistics companies in Wuhan and other nearby provinces which will rent the warehouses, terminals and offices within the Logistics Center.
Logistics Center Highlights:
| ● | The shipping center will be implemented under China’s latest “One Belt, One Road” initiative to promote the “Yangtze River Economic Belt”; |
| ● | Wuhan Newport is part of the Yangluo port, which is part of the area that is currently seeking approval for status as a “Free-Trade Zone”; |
| ● | Wuhan Newport is part of the “Yangluo Comprehensive Bonded Zone”, which allows the enterprises in the zone to receive certain favorable tax treatments such as export tax rebates and less or free of value-added tax and consumption tax. |
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Wuhan Economic Development Port Limited
On December 26, 2017,we entered into a purchase agreement (the “Purchase Agreement”) with the shareholders (the “Wuhan Port Shareholders”) of Wuhan Economic Development Port Limited (the “Wuhan Port”) to acquire all the equity interests of Wuhan Port (the “Wuhan Port Acquisition”). In exchange, the Wuhan Shareholders will acquire all the ordinary shares of Energetic Mind and in turn, Ricofeliz Capital, Wuhan Newport and the abovementioned plans for the Logistics Center.
The closing of the transaction, which shall be no later than March 31, 2018 and is conditioned upon satisfactory due diligence, the completion of auditing of the financial statements of Wuhan Port, and the approval of relevant regulatory agencies.
In addition to the exchange of Energetic Mind for Wuhan Port, we will also have to pay RMB 600 million (approximately, US$91 million) to the Wuhan Port Shareholders (“Additional Consideration”). The Additional Consideration is to be paid as follows: (i) a refundable deposit of RMB 30 million upon the issuance of an initial due diligence report and audit and (ii) the remaining RMB 570 million on closing in cash or in the form of a 7% convertible note. Our Board of Directors and majority shareholders have approved this transaction.
Wuhan Port owns all the equity interests in Hubei Taiding Container Port Limited (“Hubei Taiding”) and Wuhan Economic Development Port Logistics Limited (“Wuhan Economic Development”). It has the following major operations: (i) its owns 7,060 meters of the Yangtze River shoreline located in the Hannan District Port, Wuhan City. Currently three berths along the 330 meters of the coastline has been completed and in operation. Additional six berths have been approved by the local government and waiting to be built. Also, more than ten berths are pending approval by the local government; (ii) its owns a total of 1,371,960 square meters of industrial land near the Hannan District Port for the construction of logistics warehouses and supporting office buildings. A warehouse totaling 11,340 square meters has been built and is in operation; (iii) its owns an office building comprising 4,575.7 square meters if office space; and (iv) it has received a registration certificate issued by China Wuhan Customs. The total value of its fixed assets plus intangible assets as of December 31, 2017 was RMB 3 billion, or approximately USD$454M, based on an assessment report issued by a local appraisal company.
If the Wuhan Port Acquisition were to be consummated, we would be divested of our interests in Energetic Mind and correspondingly, our interests in Wuhan Newport and the Logistics Center and will assume the business of Wuhan Port. Conversely, if the Wuhan Port Acquisition were to fail to be consummated, then we shall continue our plans to develop the Logistics Center.
The “One Belt, One Road” Initiative.
According to the Vision and Actions on Jointly Building Belt and Road issued by the National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People’s Republic of China, with State Council authorization in March 2015, “One Belt, One Road” (the “Initiative”) is a infrastructural development concept initiated by the leaders of the Chinese government in 2013. It refers to the New Silk Road Economic Belt, which will link China with Europe through Central and Western Asia, and the 21st Century Maritime Silk Road, which will connect China with Southeast Asian countries, Africa and Europe through the Pacific and Indian Ocean. Neither the belt, nor the road, follows a designated route, but serves as a conceptual roadmap for China’s plan to expand its presence commercially to the regions outside of the country and strengthen its economic relationships with the nations in these regions.
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The “Belt” and the “Road” run through the continents of Asia, Europe and Africa, connecting the vibrant East Asian economic circle on one end and developed European economic circle on the other, and encompassing countries with huge potential for economic development. The Silk Road Economic Belt focuses on bringing together China, Central Asia, Russia and Europe (the Baltic), linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and West Asia, and connecting China with Southeast Asia, South Asia and the countries along the Indian Ocean. The 21st-Century Maritime Silk Road is designed to go from China’s coast to Europe through the South China Sea and the Indian Ocean in one route, and from China’s coast through the South China Sea to the South Pacific in the other.
On land, the Initiative is expected to focus on jointly building a new Eurasian Land Bridge and developing China-Mongolia-Russia, China-Central Asia-West Asia and China-Indochina Peninsula economic corridors by taking advantage of international transport routes, relying on core cities along the Belt and Road and using key economic industrial parks as cooperation platforms. At sea, the Initiative is expected to focus on jointly building smooth, secure and efficient transportation routes connecting major sea ports along the Belt and the Road. The China-Pakistan Economic Corridor and the Bangladesh-China-India-Myanmar Economic Corridor are closely related to the Belt and Road Initiative, and therefore require closer cooperation and greater progress. (Source: http://en.ndrc.gov.cn/newsrelease/201503/t20150330_669367.html; National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People’s Republic of China, with State Council authorization).
Corporate History
On December 23, 2009, we were incorporated under the laws of the State of Nevada under the name of “Ciglarette International, Inc.”.
On March 1, 2011, we completed a reverse acquisition transaction through a share exchange with Kirin China Holding, a British Virgin Islands company (“Kirin China”), whereby acquired all of the issued and outstanding shares of Kirin China in exchange for 18,547,297 shares of common stock, which represented approximately 98.4% of the total shares outstanding immediately following the closing of this share exchange (the “First Share Exchange”). Upon consummation of the First Share Exchange, we changed our name to “Kirin International Holding, Inc.” and traded under the symbol “KIRI” on OTC Markets. As a result of the First Share Exchange, Kirin China became a wholly-owned subsidiary. We ceased the smokeless cigarette business and became a holding company, through various controlled entities in the China, engaged in the development and operation of real estate in China. Through Kirin China, we engaged in private real estate development focusing on residential and commercial real estate development in “tier-three” cities in China. Tier-three cities are provincial capital cities with ordinary economic development and prefecture cities with relatively strong economic development.
On December 19, 2015, we entered into certain share exchange agreements with Energetic Mind and all the shareholders of Energetic Mind whereby the Company acquired 100% of the issued and outstanding ordinary shares of Energetic Mind (the “Second Share Exchange”). Pursuant to the terms of the agreements for the Second Share Exchange, in exchange for 100% of the issued and outstanding ordinary shares of Energetic Mind, we agreed to issue to (i) the shareholders of Energetic Mind an aggregate of one hundred fifty-one million (151,000,000) shares of Company’s common stock and (2) a certain related party an additional 8% convertible promissory note in the principal amount of one hundred fifty million dollars ($150,000,000), with a conversion price of $10.00 per share.
On December 31, 2015, we disposed all of our interests in i) Brookhollow Lake, LLC, ii) Newport Property Holding, LLC, iii) Kirin China, iv) Kirin Hopkins Real Estate Group LLC, v) Archway Development Group LLC, vi) Specturm International Enterprise, LLC and vii) wholly-owned subsidiary HHC-6055 Centre Drive LLC. The sale of Kirin China also effectively terminated Company’s contractual relationship with Hebei Zhongding Real Estate Development Co. Ltd and Xingtai Zhongding Jiye Real Estate Development Co., Ltd, both of which are companies formed under the laws of the People’s Republic of China and were deemed Company’s variable interest entities prior to this sale (“Subsidiaries Sale”).
As a result of the Second Share Exchange and the Subsidiaries Sale, the Company currently operates its business solely through its wholly-owned subsidiary Energetic Mind, which is the sole shareholder of Ricofeliz, which engages its business through its wholly-owned subsidiary, Wuhan Newport.
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On January 13, 2016, we filed a Certificate of Amendment to our Articles of Incorporation (the “Amendment”) with the Secretary of the State of the State of Nevada, to change our name from “Kirin International Holding, Inc.” to “Yangtze River Development Limited”. Effective January 22, 2016, Company changed its stock symbol from “KIRI” to “YERR”.
The Company, by and among Armada Enterprises GP (“Armada”) and Wight International Construction, LLC (“Wight”), entered into (i) a Contribution, Conveyance and Assumption Agreement (“Contribution Agreement”) dated October 3, 2016, first and second addendums, dated October 3, 2016 and November 30, 2016, respectively, and (ii) an Amended and Restated Limited Liability Company Agreement dated November 16, 2016 (collectively with the Contribution Agreement, the “Agreement”), whereby the Company acquired 100 million preferred B membership units of Wight, which would ultimately convert into 100 million LP units in Armada Enterprises LP. In exchange, the Company issued a $500 million convertible promissory note (“Note”) and 50,000,000 shares of the Company’s common stock to Wight. As a result of the Agreement and the conversion of the Note on November 17, 2016, Wight owned 100,000,000 shares of the Company’s common stock representing 36.73% of the Company’s voting power and the Company owned 100 million preferred B membership units in Wight representing a 62.5% non-voting equity interest in Wight.
Under the terms of the Agreement, at the first closing, Wight was required to provide an aggregate total of $200 million, including $50 million in working capital and $150 million in construction funding (the “Funding”) to the Company, by January 18, 2017. Wight did not provide the Funding on January 18, 2017 and the Company provided to Wight a “Notice of Default and Request for Cure”. Wight proposed to provide $50 million in working capital funding on or before February 15, 2017 and secure $150 million in construction funding on or before March 15, 2017. Wight failed to provide the $50 million in working capital funding as proposed by February 15, 2017. Therefore, the Company, on February 24, 2017 decided to terminate the Agreement for non-performance by Wight. Pursuant to the Agreement, the termination thereof calls for the immediate return of the 100,000,000 shares of common stock issued by the Company to Wight.
On February 27, 2017, the Company issued a “Termination and Demand” letter to Wight which terminated the Agreement with Wight and Armada and demanded the return of the 100,000,000 shares of common stock.
On March 1, 2017, the 100,000,000 shares of the Company’s common stock were canceled and returned by Wight, and were subsequently returned to the Company’s treasury.
The Company reserves the right to pursue any further legal action with respect to Armada’s and Wight’s default under the Agreement.
On April 19, 2017, our common stock commenced trading on the NASDAQ Capital Market under the symbol of “YERR”. On August 18, 2017, our common stock started trading on the NASDAQ Global Select Market under the same symbol.
On February 8, 2018, we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada, to change our name from “Yangtze River Development Limited” to “Yangtze River Port and Logistics Limited” (the “Name Change”). In connection with the Name Change, our trading symbol was changed from “YERR” to “YRIV”.
Organization & Subsidiaries
Upon completion of the Second Share Exchange and Subsidiaries Sale described above in “Corporate History”, we hold 100% of the ordinary shares of our wholly owned subsidiary, Energetic Mind. Energetic Mind in turn operates through its wholly-owned subsidiary, Ricofeliz Capital and Ricofeliz Capital operates through its wholly-owned subsidiary, Wuhan Newport. Wuhan Newport primarily engages in the business of real estate and infrastructural development and operating the Logistics Center.
On January 30, 2018, we incorporated Avenal River Limited in the British Virgin Islands. Avenal River Limited owns all of the shares of Ricofeliz Investment (China) Limited, a Hong Kong company, which in turn owns 100% of the equity interest of Wuhan Yangtze River Newport Trading Limited, a PRC company.
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The following diagram illustrates our current corporate structure:
However, if the Wuhan Port Acquisition were to be consummated and Energetic Mind divested to the Wuhan Port Shareholders, our corporate structure will be altered as follows:
Office Complex Project
Taking into consideration the Comprehensive Bonded Zone and Free Trade Zone status of the Logistic Center, Wuhan Newport has obtained the land use rights to own approximately 500,000 square meters of commercial lands on which Wuhan Newport will build a mixed residential and office complex of approximately 700,000 square meters. As of the date of this Annual Report, mixed-use complex totaling approximately 100,000 square meters have been completed and there are outstanding 600,000 square meters to be constructed in three phases within the next five (5) years.
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To support the office complex, a light railway from downtown Wuhan to the complex is undergoing construction, for which the complex will be accessible by two stations along the light railway line. In addition, an expressway along the north shore of the Yangtze River in Wuhan is currently under construction; the completion of the highway is also expected to provide direct ground access between Wuhan city center and the Logistics Center and cut down the commute time to only 20 minutes.
Upon completion of the construction of the office buildings, Wuhan Newport plans to sell half of the complex while leasing out the remaining half for long-term income. It is Company’s goal to recover the initial investment costs through sale of half of the complex and generate a stable return based on rent of the other half complex upon completion of the project.
Transportation and Logistics Services
Taking the regional advantage of the highways, railways and waterways in Yangluo area, We plan to develop a shipping hub with access to all types of cargo transportation and offer complementary services to businesses within this logistics center. We intend to create an efficient, reliable and comprehensive logistics service system by utilizing the third-party service providers with offices within the Logistics Center to provide professional logistics services.
We are currently constructing the port terminal which will be the focal point of the Yangtze River Economic Belt. The Yangtze River riverbank within our properties measures 1,039 meters, where we plan to complete eight cargo berths handling ships ranging from 5,000 to 10,000 tons.
A cargo transportation railway invested by the government has been built next to the Logistic Center. The railway is known as the Wuhan-Xinjiang-Europe (“WXE”) Railway in the Silk Road Economic Zone as it is in the “One Belt, One Road” initiative introduced by the Chinese government. The WXE Freight Train sets out from Wuhan to Xinjiang and finally ends in Mainland Europe. Wuhan Newport’s terminal is therefore an important component of the “Silk Road Economic Belt” under the “One Belt, One Road” framework.
The customs facility at the Yangluo Comprehensive Bonded Area allows cargo vessels ranging from 5,000 to 10,000 tons to set out from Shanghai downstream via the Yangtze River in order to transport “Made in China” commodities to the Pacific Ocean and further to any other ports across the Indian Ocean. In return, transporting commodities from other countries will be shipped directly back to Wuhan and then distributed throughout rest of the Mainland China. Aside from being situated in the Wuhan Yangluo Comprehensive Bonded Zone, the Yangluo development area is amongst the third group of China’s Free-Trade Zone applicants to submit FTZ applications to the State Council through the Wuhan municipal government for approval. Approvals have so far been granted to Shanghai, Tianjin, Guangdong and Fujian. Enterprises within the approved free-trade zones are typically entitled to a series of favorable regulations and policies that could help the businesses grow and succeed.
Cold Chain Logistics Services
A cold chain is a temperature-controlled supply chain. An unbroken cold chain is an uninterrupted series of storage and distribution activities which maintain a given temperature range. It is used to help extend and ensure the shelf life of products such as fresh agricultural produce, seafood and frozen food.
Within the Logistics Center, we will be able to provide extensive storage and processing services to its customers. Meanwhile, a cold chain logistics service system will be established to better help our clients’ processing needs for their frozen foods, meats and other products that need special processing and handling. In addition, we will offer professional services with temperature control, sorting, processing, packaging and delivery to ensure the reliability and safety of the logistics process.
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Information Platform
To adapt to the needs of modern logistics service and meet the standards of the industry worldwide, we will establish comprehensive automated management systems, as well as develop an operation system, enquiry system and decision-making systems for all types of business information such as warehouse, storage, trade, distribution and transportation, movable assets supervision and freight forwarding. We plan to launch an integrated and information-sharing platform geared towards the demand of its targeted markets and potential clients.
We will establish a uniform information platform including an internet-based logistics information portal and an e-commerce platform to provide our clients with services such as logistics services tracking, service rating, online operation, electronic transaction, etc. We expect this information portal to be equally reliable for both service providers and their respective clients.
We will also establish an e-commerce system based on the logistics information portal and we will provide clients with many updated services such as online transactions, online payments, online inquiries and business information communication. This will create a comprehensive service system and a business model with high integration of information flow, capital flow, trade flow and goods flow.
Portside Service
We also plan to provide incentives for companies that specialize in IT, production of new material and high-end equipment and manufacturing companies to station nearby the Logistics Center so that these companies can grow with the Logistics Center, leveraging each other’s specialization to serve each other’s business needs.
Logistics Financing
Logistics financing is mainly based on using supplies as collateral to obtain financing for supply chains to improve its overall economic efficiency. Developing an innovative logistics financing is significant because traditionally mortgages or loans are concentrated in real estate and logistics financing provides a lower systematic risk for lenders.
Compared to developed countries, we believe that logistics financing is a rather new field in China. The driving force for logistics financial service in western countries is mainly attributable to financial institutions as opposed to third-party private logistics companies in China who would occasionally provide financing options.
Logistics financial services became a popular investment vehicle among these third-party lenders. However, the business of logistics financing has become more complex for these private lenders to handle as they will need professionals to guide them through the process and thus safeguard their investments.
Even though the history of logistics financing has been relatively short in China, the appetite for this is expected to grow as the Free Trade Zones in Shanghai, Tianjin and soon-to-be Wuhan will likely attract more business and international financial institutions. Logistics financing not only provides businesses with a new alternative to meet their capital needs, but also opens a new channel for commercial banks to reach small and mid-size businesses. While interest income generated from logistics financing transaction is often an important source of income for many multinational logistics companies, companies who are able to provide financing are often the industry leaders. Because logistics financing can be an effective channel for the Company to reach its targeted market, we plan to capture this first-mover advantage when logistics financing is still in its development stage in China.
In light of this market opportunity, we plan to establish and utilize e-commerce platforms to offer online booking, online dealing and online exhibiting services to provide professional transaction services for electronic products, commodity, foods and metals. We also plan to provide comprehensive support services to complement logistics financing. Maritime insurance and training services will be offered within the Logistic Center. We plan to help our clients to raise construction capital through Build-Transfer (“BT”), Build-Operate-Transfer (“BOT”), corporate debt and equity financing. Finally, we plan to collaborate and develop strategic alliances with other logistics or cargo shipping centers around the world.
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Sales and Marketing
We plan to sell our properties by forming strategic alliances with CMST Development (Hankou) Co. Ltd. (“CMST-Hankou”), the Shanxi Chamber of Commerce in Hubei (“SCCH”) and the Wuhan Coal Business Association (“WCBA”).
Partnership with CMST
CMST-Hankou is a regional subsidiary of the CMST Development Co. Ltd, which is a state-owned enterprise that principally engages in the logistics and import & export businesses. CMST-Hankou’s core business includes warehouse storage, sale and distribution of commodities, and freight forwarding. Pursuant to the Memorandum of Understanding executed with CMST-Hankou on August 20, 2015, CMST-Hankou has agreed to transfer all of its warehouse storage and processing division, distribution service division and other existing businesses to the premises of the Logistics Center. In addition, CMST-Hankou has agreed to move its warehouse for steel trading business with the Shanghai Future Exchange to the Logistics Center. In consideration, we have agreed to offer CMST-Hankou a 5% discount on all services provided within the Logistics Center, including those within the warehouses, port terminal, and railway operating zones. In addition, CMST-Hankou has agreed to assist the Company with the establishment of an online commodity exchange platform to provide a comprehensive support system through the supply chain and provide necessary personnel to help with the management of the warehouse operations within the Logistics Center. Though at a slight discount, the Company is expected to receive fees based on CMST-Hankou’s large volume of commodities that need to be stored and use of complementary services at the warehouse facilities and operating areas, as well as rental income and/or property sales generated from the office complex. However, the partnership is subject to the terms and conditions of a definitive agreement between CMST-Hankou and the Company. No assurances can be provided at this point that such a definitive agreement will be executed.
Partnership with SCCH
SCCH is a non-profit business coalition with 252 businesses across various industries as members. Pursuant to the Memorandum of Understanding executed with SCCH on July 27, 2015, SCCH has agreed to move its headquarters to the office complex within the Logistics Center by purchasing or leasing certain units. In consideration of a 7% discount to the purchase price of $2,729 per square meter of our properties, approximately 50 businesses within the organization plan to open offices in the Logistics Center and purchase at least 100,000 square meters of space within the office complex. SCCH, on behalf of 50 businesses, also executed a letter of intent to purchase approximately 100,000 square meters of storefront. In addition, because we expect the 50 businesses to have a total annual turnover of commodities of more than 5,000,000 tons, we have agreed to offer members of SCCH a 5% discount on all services provided within the Logistics Center, including those within the warehouses, port terminal, and railway operating zones. However, the partnership is subject to the terms and conditions of a definitive agreement between SCCH and the Company. No assurances can be provided at this point that such a definitive agreement will be executed.
Partnership with WCBA
WCBA is a non-profit business coalition with more than 300 businesses within the coal mining industry as members. Pursuant to the Memorandum of Understanding executed with WCBA on September 17, 2015, WCBA has agreed to move its headquarters to the office complex within the Logistics Center by purchasing or leasing certain units. We have agreed to offer WCBA member businesses a 5% discount to the purchase price of $2,729 per square meter of our properties. In addition, because we expect WCBA members to have a total annual turnover of coal-related commodities of more than 20,000,000 tons and will use the Company’s warehouse storage for at least 3,000,000 tons, we have agreed to offer members of WCBA a 5% discount on all services provided within the Logistics Center, including those within the warehouses, port terminal, and railway operating zones. However, the partnership is subject to the terms and conditions of a definitive agreement between WCBA and the Company. No assurances can be provided at this point that such a definitive agreement will be executed.
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Market Opportunity for Logistics Finance
Logistics financing provides financial services such as financing, clearance and insurance to support the logistics industry. It evolves as the logistics industry develops. Not only can logistics financing services improve the service capability and increase the profitability of third party logistics companies; it can also expand financing channels, decrease financing cost and increase the capital efficiency.
The major target clients for logistics finance services are small and medium sized companies, which are an important sector of China’s economy and have great weight in the market. One of the biggest hurdles in the life cycle of these small and medium sized companies is lack of cash flow, which can become the “bottle neck” of their development and prevent progress. The need for logistics financing results from the lack of available credit financing facilities and the difficulty of obtaining financing on the capital markets. Therefore, logistics financing services protect against the financing problems by allowing these small and medium companies to use their raw materials and commodities as collateral to borrow money. Logistics financing increases the liquidity of cash flow, lowers the clearance risks and improves the efficiency of the economic operation. Upon completion of the Logistics Center, we expect to house many small and mid-size logistics companies. The offering of logistics financing will therefore become an important component of the business, as these businesses are expected to have financing needs as they grow their businesses.
Market Overview of Wuhan
Located in the middle reaches of the Yangtze River, Wuhan has been regarded as the gateway to nine provinces nearby. Beijing-Guangzhou Railway and the Yangtze River converge in Wuhan and also Beijing-Jiulong Railway and Beijing-Guangzhou Railway intersect in it, thus forming a railway network linking North China, Southwest China, Central South China and East China. Moreover, Beijing-Zhuhai Expressway and Shanghai-Chengdu Expressway converge in Wuhan and a high-speed railway along the Yangtze River will be completed here soon. Therefore, a “flexible multimodal transportation system” combining expressways, high-speed railways and water transportation on the Yangtze River will give greater prominence to Wuhan’s position of strategic importance as a junction of water and land transportation in China (Source: http://www.maxxelli-blog.com/introduction-to-wuhan/).
Wuhan is the largest inland logistics and cargo distribution center in China, with its service covering approximately a 400 million population in the five neighboring provinces including Hunan, Jiangxi, Anhui, Henan and Sichuan. At present, there are over 10,000 commercial organizations, 105,000 commodity networks, four commercial listed enterprises as well as eight comprehensive shopping centers on the list of China Top 100 Retail Shopping Centers (Source: http://www.maxxelli-blog.com/introduction-to-wuhan/).
China is thoroughly implementing the strategy of coordinated regional development, expanding domestic demand, innovation-driven development and new urbanization, and building a new economic support belt relying on the Yangtze River. As a central city in the central region and the middle reach of the Yangtze River, and the country’s major transportation hub and science and technology base, Wuhan faces multiple overlapping strategic opportunities. Location, transportation, science, education, market and other advantages will be further enhanced and fully released and more quickly transformed into development and competitive advantage (Source: http://www.maxxelli-blog.com/introduction-to-wuhan/).
Wuhan is a major transportation hub of China situated at the midstream of the Yangtze River. Going west alongside the Yangtze, upstream are the cities in Chongqing, Sichuan, Yunnan and Qinghai. Going east downstream are provinces of Hunan, Anhui and Jiangsu, as well as the cities of Nanjing and Shanghai, until finally arriving at the sea. The railway runs north bound to Harbin, westbound to Urumqi, east bound to Shanghai and south bound to the Shenzhen Highway and expressways that stretch in all directions ensuring easy and convenient transportation to all provinces in China. Likewise, Wuhan is largest economic city in central China with an annual GDP beyond 1,000 billion RMB. In 2015, the China State Council introduced and implemented the Midstream Yangtze River City Group Development Plan headed by Wuhan. In fact, the city was once called “The Oriental Chicago” by the US Harper’s Magazine back in 1918.
With the rapid development of inland water shipping in China, logistics and port management industry has grown significantly. Wuhan is one of the major inland water ports in China. In 2014, Wuhan government released an Opinion On Accelerating The Establishment Of Shipping Center In The Middle Reach Of Yangtze River, and indicated that the government will help the Wuhan shipping center to be a well-equipped, surrounding industry developed internationally with a scaled and intelligent inland water shipping center with highly concentrated port and shipping resources . In the Development Plan On Wuhan Logistics Space (2012-2020), Wuhan is strategically positioned as the critical joint of the global supply chain and the logistics transportation hub and information center of China.
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However, in Wuhan, logistics for domestic trade operate separately from that for international trade and all resources are scattered and not concentrated enough to form a well-organized and well-managed international supply chain. It is very difficult for Wuhan to realize the synergy of business, logistics, money and information. In addition, a majority of the current logistics companies in Wuhan focus on traditional cargo transportation and storage services. Therefore, there exists an opportunity for an efficient, comprehensive and modern logistics service center to facilitate the channel of both regional and global logistics.
Competitive Advantages
The following factors reflect our advantages over our competitors:
| ● | Experienced Logistics Management Team. We have a professional team with significant experience in logistics management. Members of the Company’s team have had work experience with well-known logistics management companies in different cities. In addition, the management members are well educated with degrees from top universities such as Huazhong University of Science and Technology, Wuhan University, University of British Columbia and the Chinese Academy of Social Sciences. |
| ● | Encouraging Policy Environment. Under China’s latest “One Belt, One Road” initiative, we are strategically positioned in the anticipated “Pilot Free Trade Zone” of the Wuhan Port, a crucial trading window between China, the Middle East and Europe. In May 2015, the China State Council approved the nation’s economic strategic plan, the Vigorous Development Plan of Yangtze River Economic Belt. The Yangtze River Economic Belt has sharpened the focus on the Wuhan New Port Yangluo Terminal, where the port project that we are currently developing is located. |
| ● | Unique Transportation Network. Wuhan is located in the middle reaches of the Yangtze River, east facing south-eastern coastal economic developed area and west linking north-western raw material base. The distance to metropolitan cities, such as Beijing, Shanghai, Hong Kong and Chongqing are within 1,200 kilometers. As a central city in mainland China, Wuhan is capable of reaching over 30 provinces like Yunnan Province, Henan Province, Sichuan Province, Shanxi Province, Jiangxi Province and Hunan Province and 600 cities and counties in China. |
| ● | Highway: The Logistics Center is in close proximity to the Beijing-Zhuhai expressway, the Shanghai-Chengdu Expressway, and the Jiangbei Expressway. |
| ● | Waterway: The project adjacent to the Yangluo deep-water port, has eight 5,000-ton berths, directly leading to Jianghai. Yangluo Port is the largest national shipping port in Central China and the largest container port in the upper reaches of the Yangtze River. We will be strategically located for international procurement, distribution and delivery. |
| ● | Railway: The Beijing-Guangzhou, Beijing-Kowloon Railway, the Beijing-Guangzhou railway extension line and special railway lines offer direct access to the Logistics Center. The Logistics Center will, through the Jiangbei railway- Xianglushan station, connect all of the domestic railway freight stations, and through the construction of the “Chinese new Europe” railway, throughout the Continent. |
| ● | Airport: 30 kilometers from the Wuhan Tianhe airport. |
| ● | Light-rail transit: By 2018, two light rail stations are expected to be completed next to the Logistics Center, cutting the commute to downtown Wuhan to only 20 minutes. |
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| ● | Jiangbei Expressway: After the completion of Jiangbei Expressway, commute by car from downtown Wuhan to the Logistics Centers is expected to be only about 20 minutes. |
The following map shows the location of the proposed Logistics Center and surrounding transportation network:
Employees
As of the date of this Report, we have a total of 20 employees, including our executive officers. The following table sets forth the number of our employees by function as of the same date:
| Functional Area | Number of Employees | % of Total | ||||||
| Management | 3 | 15 | % | |||||
| Engineer | 3 | 15 | % | |||||
| Sales | 7 | 35 | % | |||||
| Administrative | 3 | 15 | % | |||||
| Property management | 1 | 5 | % | |||||
| Accounting | 3 | 15 | % | |||||
| Total | 20 | 100 | % | |||||
Our employees are not represented by any collective bargaining agreement and we have never experienced a work stoppage. We believe we have good relations with our employees.
Competition
The real estate and logistics industries in the PRC are both highly competitive. Many of our competitors are well capitalized and have greater financial, marketing, and other resources than we do. Some of our competitors also have larger land banks, greater economies of scale, broader name recognition, a longer track record, and more established relationships in certain markets.
Intellectual Property
Trademark
We are currently applying for trademark protection in China for our Company’s logo and we anticipate that we will be able to obtain the trademark within the next 12 months.
Set forth below is a detailed description of our trademark under application.
| Country | Trademark | Application Number | Classes | Our Ref | Status |
|
Mainland China |
 |
18367978 | 39* |
TMZC18367978ZCSL01 |
In process |
*Class 39
Transport; packaging and storage of goods; travel arrangement.
Domain Names
We have added the domain names i) www.yerr.com.cn; ii) www.cjxgwl.com; and iii) www.cjxgwl.cn to the Internet Content Provider License that we currently hold and we have received the updated ICP License covering the foregoing domain name. The ICP record number is 15016982.
Customers/Suppliers
Until the Logistics Center is built and operational, we do not currently have customers or suppliers.
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Where You Can Find More Information
We are subject to the reporting obligations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These obligations include filing an annual report under cover of Form 10-K, with audited financial statements, unaudited quarterly reports on Form 10-Q and the requisite proxy statements with regard to annual stockholder meetings. The public may read and copy any materials the Company files with the Securities and Exchange Commission (the “SEC”) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Risks Relating to Our Business
MAJORITY OF OUR BUSINESS, ASSETS AND OPERATIONS ARE LOCATED IN THE PEOPLE’S REPUBLIC OF CHINA.
The majority of our business, assets and operations are located in the People’s Republic of China. The economy of the PRC differs from the economies of most developed countries in many respects. The economy of the PRC has been transitioning from a planned economy to a market-oriented economy. Although in recent years the PRC’s government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the PRC’s government. In addition, the PRC’s government continues to play a significant role in regulating industry by imposing industrial policies. The PRC’s government exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Some of these measures benefit the overall economy of the PRC, but may have a negative effect on us.
ACTIONS OF GOVERNMENT OR CHANGE OF POLICIES MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We are at risk from significant and rapid change in the legal systems, regulatory controls, and practices in areas in which we operate. These affect a wide range of areas including the real estate development approval system, employment practices, transportation, cargo storage, logistics, financing and sale of the buildings; our property rights; data protection; environment, health and safety issues; macro-economic policies, central government directions and instructions, China’s Five Year Plan, “One Belt One Road” initiative; and accounting, taxation and stock exchange regulation. Accordingly, changes to, or violation of, these systems, controls or practices could increase costs and have material and adverse impacts on the reputation, performance and financial condition of our development and operation.
IF WE NEED ADDITIONAL CAPITAL TO FUND OUR FUTURE OPERATIONS, WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT CAPITAL AND MAY BE FORCED TO LIMIT THE SCOPE OF OUR OPERATIONS.
If adequate additional financing is not available on reasonable terms, we may not be able to undertake ongoing real estate construction or continue to develop and expand the services of our Logistics Center, which may as a result impact our cash flow and we would have to modify our business plans accordingly. We will not be able to fully implement our business plan unless the $1 billion funding (as described in the prospectus summary) is in place by 2021 and we do not have any definitive agreement nor letter of intent for such financing except for this offering. There is no assurance that additional financing will be available to us.
In connection with our growth strategies, we may experience increased capital needs and accordingly, we may not have sufficient capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the development of competitive projects undertaken by our competition; and (iii) the level of our investment in construction and development. We cannot assure you that we will be able to obtain capital in the future to meet our needs.
If we cannot obtain additional funding, we may be required to: (i) limit our operations and expansion; (ii) limit our marketing efforts; and (iii) decrease or eliminate capital expenditures. Such reductions could have a materially adverse effect on our business and our ability to compete.
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Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving such additional capital that are favorable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new equity or convertible debt securities issued by us to obtain financing could have rights, preferences and privileges senior to the common stock offered hereof. We cannot give you any assurances that any additional financing will be available to us, or if available, will be on terms favorable to us.
WE HAVE SUSTAINED SIGNIFICANT RECURRING OPERATING LOSSES AND EXPERIENCED NEGATIVE CASH FLOW FOR OPERATIONS SINCE INCEPTION.
We have sustained recurring losses and experienced negative cash flow from operations since inception. Since inception, we have focused on developing and implementing our business plan. As of December 31, 2017, we have generated cumulative losses of approximately $41,238,467 since inception, and we expect to continue to incur losses until 2020. We believe that our existing cash resources will not be sufficient to sustain operations during the next twelve months. We need to generate revenue and raise funding in order to sustain our operations and continue to implement our business plan. If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms acceptable to us, we would likely be unable to execute upon the business plan or pay expenses as they are incurred, which would have a material, adverse effect on our business, financial condition and results of operations. The amount of future losses and when, if ever, we will achieve profitability are uncertain.
WE BELIEVE THAT WE WILL DERIVE THE MAJORITY OF OUR REVENUE FROM SALES IN THE PRC AND ANY DOWNTURN IN THE CHINESE ECONOMY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION.
The majority of our revenues are expected to be generated from sales of our properties and services in the PRC and we anticipate that revenue from such sales will continue to represent the substantial portion of our total revenue in the near future. Our sales and earnings can also be affected by changes in the general economy. Our success is influenced by a number of economic factors which affect consumer income, such as employment levels, business conditions, interest rates, oil and gas prices and taxation rates. Adverse changes in these economic factors, among others, may restrict consumer spending, thereby negatively affecting our sales and profitability.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION THAT COULD CAUSE US TO INCUR SIGNIFICANT LIABILITIES OR RESTRICT OUR BUSINESS ACTIVITIES.
Regulatory requirements could cause us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to statutes and rules regulating, among other things, certain developmental matters, building and site design, and matters concerning the protection of health and the environment. Our operating expenses may be increased by governmental regulations, such as building permit allocation ordinances and impact and other fees and taxes that may be imposed to defray the cost of providing certain governmental services and improvements. For example, our proposed Wuhan Port Acquisition will require approvals from local State Administration for Industry and Commerce. Any delay or refusal from government agencies to grant us necessary licenses, permits, and approvals could have an adverse effect on our operations or our ability to implement on business plans.
OUR SALES WILL BE AFFECTED IF MORTGAGE FINANCING BECOMES MORE COSTLY OR OTHERWISE BECOMES LESS ATTRACTIVE.
Certain purchasers of our properties are expected to rely on mortgages to finance their purchases. An increase in interest rates may significantly increase the cost of mortgage financing, thus affecting the affordability of our properties. The PRC’s government and commercial banks may also increase the down payment requirement, impose other conditions or otherwise change the regulatory framework in a manner that would make mortgage financing unavailable or unattractive to potential property purchasers. If the availability or attractiveness of mortgage financing is reduced or limited, many of our prospective customers may not be able to purchase our properties and, as a result, our business, liquidity and results of operations could be adversely affected.
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THE PRACTICE OF PRE-SELLING PROJECTS MAY EXPOSE US TO SUBSTANTIAL LIABILITIES.
It is common practice by property developers in China to pre-sell properties (while still under construction), which involves certain risks. For example, we may fail to complete a property development that may have been fully or partially pre-sold, which would leave us liable to purchasers of pre-sold units for losses suffered by them without adequate resources to pay the liability if funds have been used on the project. In addition, if a pre-sold property development is not completed on time, the purchasers of pre-sold units may be entitled to compensation for late delivery. If the delay extends beyond a certain period, the purchasers may be entitled to terminate the pre-sale agreement and pursue a claim for damages that exceeds the amount paid and our ability to recoup the resulting liability from future sales.
WE ARE DEPENDENT ON THIRD-PARTY SUBCONTRACTORS, MANUFACTURERS, AND DISTRIBUTORS FOR ALL ARCHITECTURE, ENGINEERING AND CONSTRUCTION SERVICES, AND CONSTRUCTION MATERIALS. A DISCONTINUED SUPPLY OF SUCH SERVICES AND MATERIALS WILL ADVERSELY AFFECT OUR PROJECTS.
We are dependent on third-party subcontractors, manufacturers, and distributors for all architecture, engineering and construction services, and construction materials. A discontinued supply of such services and materials will adversely affect our construction projects and the success of the Company.
WE MAY BE ADVERSELY AFFECTED BY FLUCTUATIONS IN THE PRICE OF RAW MATERIALS AND SELLING PRICES OF OUR PROPERTIES.
The land and raw materials that are used in our projects have experienced significant price fluctuations in the past. There is no assurance that they will not be subject to future price fluctuations or pricing control. The land and raw materials that are used in our projects may experience price volatility caused by events such as market fluctuations or changes in governmental programs. The market price of land and raw materials may also experience significant upward adjustment, if, for instance, there is a material under-supply or over-demand in the market. These price changes may ultimately result in increases in the selling prices of our properties, and may, in turn, adversely affect our sales volume, sales, operating income, and net income.
WE FACE INTENSE COMPETITION FROM OTHER REAL ESTATE DEVELOPERS AND/OR LOGISTICS COMPANIES.
The real estate and logistics industries in the PRC are both highly competitive. Many of our competitors are well capitalized and have greater financial, marketing, and other resources than we do. Some of our competitors also have larger land banks, greater economies of scale, broader name recognition, a longer track record, and more established relationships in certain markets. Competition among property developers may result in increased costs for the acquisition of land for development, increased costs for raw materials, shortages of skilled contractors, oversupply of properties, decrease in property prices in certain parts of the PRC, a slowdown in the rate at which new buildings are approved and/or reviewed by the relevant government authorities and an increase in administrative costs for hiring or retaining qualified personnel, any of which may adversely affect our business and financial condition. Furthermore, property developers that are better capitalized than we are may be more competitive in acquiring land through the auction process. If we cannot respond to changes in market conditions as promptly and effectively as our competitors or effectively compete for land acquisition through the auction systems and acquire other factors of production, our business and financial condition will be adversely affected.
OVER-SUPPLY OF REAL ESTATE PROPERTIES COULD HAVE A MATERIAL ADVERSE AFFECT ON OUR RESULTS OF OPERATIONS.
Most of our assets consist of real estate properties within the premise of our Logistics Center. While our business will primarily revolve around the services provided by the Logistics Center, we expect to sell and/or lease properties to other businesses to generate revenue. Although we expect the value of our real estate properties to appreciate upon Yangluo Port’s obtaining the approval of the “Free Trade Zone” status, risk of property over-supply is increasing in parts of China on a macro-level, where property investment, trading and speculation have become overly active. We are exposed to the risk that in the event of actual or perceived over-supply, property prices may fall drastically, and our revenue and profitability will be adversely affected. If we cannot sell or lease our properties at a favorable price, we may not have the necessary capital resources to fully execute our business plan and therefore our results of operations will be adversely affected.
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WE MAY NOT HAVE SUFFICIENT EXPERIENCE AS A COMPANY CONDUCTING STORAGE AND PROCESSING SERVICES, INFORMATION SERVICES AND LOGISTICS FINANCING, OR IN OTHER AREAS REQUIRED FOR THE SUCCESSFUL IMPLEMENTATION OF OUR BUSINESS PLAN.
We may not have sufficient experience as a company in conducting storage and processing services, information services, logistics financing or other areas required for the successful implementation of our business plan. This may result in the Company experiencing difficulty in adequately operating and growing its business. If our operating or management abilities consistently perform below expectations, then our business is unlikely to thrive.
WE ARE HEAVILY DEPENDENT UPON THE SERVICES OF EXPERIENCED PERSONNEL WHO POSSESS SKILLS THAT ARE VALUABLE IN OUR INDUSTRY, AND WE MAY HAVE TO ACTIVELY COMPETE FOR THEIR SERVICES.
We are heavily dependent upon our ability to attract, retain and motivate skilled personnel to serve our customers. Many of our personnel possess skills that would be valuable to all companies engaged in our industry. Consequently, we expect that we will have to actively compete for these employees. Some of our competitors may be able to pay our employees more than we are able to pay to retain them. Our ability to profitably operate is substantially dependent upon our ability to locate, hire, train and retain our personnel. There can be no assurance that we will be able to retain our current personnel, or that we will be able to attract and assimilate other personnel in the future. If we are unable to effectively obtain and maintain skilled personnel, the development and quality of our services could be materially impaired.
DEFAULTING ON BANK LOANS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS
We plan to develop a full-service logistics center using the properties we have obtained land-use rights to. To finance the development, part of Company’s properties held for development and land lots under development have been pledged as collateral for financial institution loans. As of December 31, 2017, we have an outstanding loan payable to China Construction Bank totaling $44,211,399. The loan has a maturity date of May 29, 2020. The loan is a floating rate loan whose rate (2017: 6% per annum and 2016: 6% per annum) is set at 5% above the over 5 years base borrowing rate stipulated by the People’s Bank of China. The secured bank loan with China Construction Bank contains certain protective contractual provisions that limit our activities in order to protect the lender. The risk of default may increase in the event of an economic downturn or due to our failure to successfully execute our business plan. Defaulting on our bank loans could result in loss of our collateralized assets and cause a material adverse effect on our results of operations.
WE HAVE LIMITED INSURANCE COVERAGE AGAINST DAMAGES OR LOSS WE MIGHT SUFFER.
We do not carry business interruption insurance and therefore any business disruption or natural disaster could result in substantial damages or losses to us. In addition, there are certain types of losses (such as losses from forces of nature) that are generally not insured because either they are uninsurable or insurance cannot be obtained on commercially reasonable terms. Should an uninsured loss or a loss in excess of insured limits occur, our business could be materially adversely affected. If we were to suffer any losses or damages to our properties, our business, financial condition and results of operations would be materially and adversely affected.
OUR OPERATING COMPANIES MUST COMPLY WITH ENVIRONMENTAL PROTECTION LAWS THAT COULD ADVERSELY AFFECT OUR PROFITABILITY.
We are required to comply with the environmental protection laws and regulations promulgated by the national and local governments of the PRC. Some of these regulations govern the level of fees payable to government entities providing environmental protection services and the prescribed standards relating to construction. Although construction technologies allow us to efficiently control the level of pollution resulting from our construction process, due to the nature of our business, wastes are unavoidably generated in the process. If we fail to comply with any of the environmental laws and regulations of the PRC, depending on the type and severity of the violation, we may be subject to, among other things, warnings from relevant authorities, imposition of fines, specific performance and/or criminal liability, forfeiture of profits made, or an order to close down our business operations and suspension of relevant permits.
THE OPERATING HISTORIES OF OUR OPERATING COMPANIES MAY NOT SERVE AS ADEQUATE BASES TO JUDGE OUR FUTURE PROSPECTS AND RESULTS OF OPERATIONS.
The operating history of Wuhan Newport may not provide a meaningful basis for evaluating our business following consummation of the Second Share Exchange. We cannot guarantee that we can achieve profitability or that we will have net profit in the future. We will encounter risks and difficulties that companies at a similar stage of development frequently experience, including the potential failure to:
| ● | obtain sufficient working capital to support our development and construction; |
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| ● | manage our expanding operations and continue to meet customers’ demands; | |
| ● | maintain adequate control of our expenses allowing us to realize anticipated income growth; | |
| ● | implement, adapt and modify our property development, sales, and business strategies as needed; | |
| ● | successfully integrate any future acquisitions; and | |
| ● |
anticipate and adapt to changing conditions in the real estate industry resulting from changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics. |
If we are not successful in addressing any or all of the foregoing risks, our business may be materially and adversely affected.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXECUTE OUR BUSINESS STRATEGY, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Since China is a large and diverse market, consumer trends and demands can vary significantly by region and Wuhan Newport’s experience in the markets in which it currently operates may not be applicable in other parts of China. As a result, we may not be able to leverage Wuhan Newport’s experience to fully execute our business strategy and plan. When we enter new markets, we may face intense competition from companies with greater experience or a more established presence in the targeted geographical areas or from other companies with similar business strategies. Therefore, we may not be able to adequately grow our sales due to intense competitive pressures and/or the substantial costs involved.
OUR FAILURE TO EFFECTIVELY MANAGE GROWTH MAY CAUSE A DISRUPTION OF OUR OPERATIONS RESULTING IN THE FAILURE TO GENERATE REVENUE AT THE LEVELS WE EXPECT.
In order to maximize potential growth in Wuhan Newport’s current and potential markets, we believe that we must be able to sell our properties and obtain clients to use the services provided by our Logistics Center to ensure the sustainable development capability of the Company and to maintain our operations. This strategy may place a significant strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve our financial controls, operating procedures, and management information systems. We will also need to effectively train, motivate, and manage our employees. Our failure to effectively manage our operations could prevent us from generating the revenues we expect and therefore have a material adverse effect on the results of our operations.
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WE MAY NEED ADDITIONAL EMPLOYEES TO MEET OUR OPERATIONAL NEEDS.
Our future success also depends upon our ability to attract and retain highly qualified personnel. We may need to hire additional managers and employees with industry experience from time to time, and our success will be highly dependent on our ability to attract and retain skilled management personnel and other employees. There can be no assurance that we will be able to attract or retain highly qualified personnel. Competition for skilled personnel in the real estate and logistics industries is significant. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees.
WE WILL INCUR SIGNIFICANT COSTS TO ENSURE COMPLIANCE WITH UNITED STATES CORPORATE GOVERNANCE AND ACCOUNTING REQUIREMENTS.
We will incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract or retain qualified individuals to serve on our board of directors or as executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
WE HAVE IDENTIFIED MATERIAL WEAKNESSES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING WHICH HAVE RESULTED IN MATERIAL MISSTATEMENTS IN OUR PREVIOUSLY ISSUED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015 AND 2016.
We have concluded that there are material weaknesses in our internal control over financial reporting for the fiscal year ended December 31, 2015, as we did not maintain effective controls over the selection and application of GAAP related to classification of capital transactions. Specifically, the members of our management team with the requisite level of accounting knowledge, experience and training commensurate with our financial reporting requirements did not analyze certain accounting issues at the level of detail required to ensure the proper application of GAAP in certain circumstances. These material weaknesses resulted in the restatement of our financial statements for the year ended December 31, 2015. Our management concluded that the Company’s previously issued financial statements for the year ended December 31, 2015 should no longer be relied upon. In light of the errors, management re-evaluated its assessment of our disclosure controls and procedures and internal control over financial reporting as of December 31, 2015 and concluded each was ineffective as of December 31, 2015.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
Management identified the following material weaknesses in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2015:
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Lack of adequate policies and procedures in internal audit function, which resulted in: (1) lack of communication between the internal audit department and the Audit Committee and the Board of Directors; (2) insufficient internal audit work to ensure that the Company’s policies and procedures have been carried out as planned; | |
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Lack of sufficient full-time accounting staff in our accounting department that have experience and knowledge in identifying and resolving complex accounting issues under U.S. Generally Accepted Accounting Principles (“GAAP”); and | |
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Lack of sufficient accounting personnel which would provide segregation of duties within our internal control procedures to support the accurate reporting of our financial results. |
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In addition to the above, management also identified the following material weaknesses in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2016:
| ● | Lack of sufficient full-time accounting staff in our accounting department that have experience and knowledge in identifying and resolving complex accounting issues under U.S. Generally Accepted Accounting Principles (“GAAP”); The weakness resulted in the restatement of consolidated balance sheet and consolidated income statement to treat an extinguishment transaction between related entities as a capital transaction in the Form 10-K for the year ended December 31, 2015, and such weakness had not been fully remediated as of December 31, 2016; |
| ● | Lack of sufficient accounting personnel which would provide segregation of duties within our internal control procedures to support the accurate reporting of our financial results. The weakness resulted in the amendment and additions of the disclosure of real estate properties and land lots under development in the Form 10-K for the year ended December 31, 2015, and such weakness had not been fully remediated as of December 31, 2016. |
Any actions we have taken or may take to address the material weaknesses we had for the fiscal years ended December 31, 2015 and 2016 are subject to continued management review supported by testing, as well as oversight by the Audit Committee of our Board of Directors. Although we believe that the steps we have taken sufficiently remediate the material weaknesses we had for the fiscal years ended December 31, 2015 and 2016, we cannot assure you that these material weaknesses will not occur in the future and that we will be able to remediate such weaknesses in a timely manner, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. If our remedial measures are again insufficient to address the material weaknesses, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to further restate our financial results. In addition, if we are unable to successfully remediate the material weaknesses in our internal controls or if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements.
OUR CERTIFICATES, PERMITS, AND LICENSES RELATED TO OUR OPERATIONS ARE SUBJECT TO GOVERNMENTAL CONTROL AND RENEWAL, AND FAILURE TO OBTAIN OR RENEW SUCH CERTIFICATES, PERMITS, AND LICENSES WILL CAUSE ALL OR PART OF OUR OPERATIONS TO BE TERMINATED.
Our operations require licenses, permits and, in some cases, renewals of these licenses and permits from various governmental authorities in the PRC. Our ability to obtain, maintain, or renew such licenses and permits on acceptable terms is subject to change, as are, among other things, the regulations and policies of applicable governmental authorities.
If our land use permits are revoked or suspended or we are unable to renew the permits for any reason, we cannot assure you that our business operations will not be stopped and, accordingly, our financial performance would be adversely affected.
IF THE LEGALITY OR VALIDITY OF OUR LEASE OF THE COLLECTIVE-OWNED LAND USE RIGHTS IS CHALLENGED, THERE MAY BE DISRUPTION TO THE DEVELOPMENT OF THE LAND AND SUCH DISRUPTION COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
We leased collective-owned land use rights from the Chunfeng Villagers’ Committees. The right to operate and manage such land is vested in the relevant local villagers’ committee or rural collective leadership who are allowed to divide the land into parcels and contracts the rights to operate such parcels of land to individual farmer households or, subject to the approval of local governments and the requisite vote of the farmer households, to any entity or person outside that village or rural collective.
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Any change in law and the administrative system could render our lease unenforceable. According to the PRC Law on Land Administration, all lands in the PRC are either state-owned or collectively owned. Generally, lands in the urban areas of a city or town are state-owned, whereas lands in the rural areas of a city or town and all rural lands are, unless otherwise specified by law, collectively owned. When required, the state has the right to reclaim the collectively owned lands in accordance with law if such reclaim is beneficial to the public.
Additionally, the lease may subject to the preemptive rights of other farmers in the same village or rural collective. If the preemptive rights are not exercised within two months from the date on which we start using the parcels of land, it is very likely that the PRC courts will not enforce such preemptive rights. As of the date of this prospectus, two months or more have passed since we started using the land we leased from Chunfeng villagers’ committee and we have not received any claim from person purporting to assert the pre-emption rights.
If the legality or validity of our leases become subject to disputes or challenges, we may need to suspend at least part of our constructions on the respective land areas. We may incur costs and losses if we are required to remove our improvements, such as buildings and facilities that we have constructed or purchased. We could also lose our rights to use the land and our business, financial condition and results of operations could be materially and adversely affected.
OUR FACILITIES MAY BE AFFECTED BY FIRE OR NATURAL CALAMITIES. OUR OPERATIONS ARE ALSO SUBJECT TO THE RISK OF POWER OUTAGES, EQUIPMENT FAILURES OR LABOR DISTURBANCES AND OTHER BUSINESS INTERRUPTIONS. WE HAVE LIMITED INSURANCE COVERAGE AND DO NOT CARRY ANY BUSINESS INTERRUPTION INSURANCE.
A fire, floods or other natural calamity may result in significant damage to our facilities. Our operations are subject to risks of various business interruptions, including power outages, equipment failures or disturbances from labor unrest. If we are unable to obtain timely replacements of damaged equipment, or if we are unable to find an acceptable general contractor to repair our facilities damaged by a catastrophic event, then major disruptions to our operations would result, which would have significant adverse effect on our operations and financial results. Our property insurance may not be sufficient to cover damages to our facilities, and we do not carry any business interruption insurance covering lost profits as a result of the disruption to our operations.
Risks Relating to Doing Business in China
IF OUR LAND USE RIGHTS ARE REVOKED, WE WOULD HAVE NO OPERATIONAL CAPABILITIES.
Under the PRC law, land is owned by the state or rural collective economic organizations. The state issues to tenants the rights to use property. Use rights can be revoked and the tenants may be forced to vacate at any time when redevelopment of the land is in the public interest. The public interest rationale is interpreted quite broadly and the process of land appropriation may be less than transparent. If this happens, we may be forced to (i) delay the construction of commercial facilities or (ii) curtail or cease construction on that land. We relied on these land use rights as the cornerstone of our operations, and the loss of such rights would have a material adverse effect on our business and results of operation.
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IN THE EVENT THE ACQUISITION OF WUHAN NEWPORT BY RICOFELIZ REQUIRES MOFCOM’S APPROVAL AND WE ARE NOT ABLE TO OBTAIN SUCH APPROVAL, THE ACQUISITION MAY BE UNWOUND.
On August 8, 2006, the PRC Ministry of Commerce (“MOFCOM”), the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and the State Administration of Foreign Exchange jointly promulgated the Provisions on the Acquisition of Domestic Enterprises by Foreign Investors (the “M&A Rules”), as amended by the Ministry of Commerce of the PRC on June 22, 2009. The M&A Rules require that a merger and acquisition of a domestic company with a “related party relationship” by a domestic company, enterprise or natural person in the name of an overseas company legitimately incorporated or controlled by the domestic company, enterprise or natural person shall be subject to examination and approval by MOFCOM. However, there is no definition or explanation of what constitutes a “related party relationship” in the M&A Rules, and, as a result, we are uncertain as to the interpretation of the M&A Rules with regard to the existing relationship between Mr. Xiangyao Liu, Ricofeliz and Wuhan Newport at the moment immediately before the acquisition of Wuhan Newport by Ricofeliz. If such relationship is considered as a “related party relationship”, the acquisition of Wuhan Newport by Ricofeliz, which has been approved by the local Wuhan Bureau of MOFCOM, may be subject to the approval of the national MOFCOM. Although M&A Rules have been effective since September 2006, we are not aware of any precedent for approval by MOFCOM of any related party acquisition conducted by PRC domestic individuals. Since there is no clear guidance under the M&A Rules, it is difficult to determine whether MOFCOM or other PRC regulatory agencies would consider such approval necessary and, if so, whether we would be able to obtain MOFCOM approval, or if we fail to obtain such approval, what would be the consequence of such failure. Failure to obtain MOFCOM’s approval may result in regulatory actions or other sanctions (including administrative order to unwind the acquisition) from MOFCOM or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from our financing, investment, or operating activities into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects.
WE MAY NOT COMPLETE THE ACQUISITION OF WUHAN ECONOMIC DEVELOPMENT PORT LIMITED AS THE CLOSING OF THE ACQUISITION IS SUBJECT TO CLOSING CONDITIONS
On December 26, 2017, the Company entered into an agreement with shareholders holding 100% of the equity interest of Wuhan Economic Development Port Limited (the “Acquiree”). Our future growth is likely to depend to some degree on our ability to successfully acquire the Acquiree. Although we currently expect the acquisition to close before March 31, 2018, subject to customary closing conditions, including satisfaction of due diligence by both parties, the completion of auditing of the financial statements of the Acquiree, and the approval of relevant regulatory agencies, there can be no assurance that the acquisition will be completed in accordance with the anticipating timing or at all. If the acquisition is not completed on a timely basis, or at all, the Company’s business and future growth may be adversely affected.
LABOR LAWS IN THE PRC MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
On June 29, 2007, the PRC’s government promulgated the Labor Contract Law of the PRC, which became effective on January 1, 2008. The Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, the law requires certain terminations be based upon seniority and not merit. In the event that we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.
WE MAY BE EXPOSED TO LIABILITIES UNDER THE FOREIGN CORRUPT PRACTICES ACT AND CHINESE ANTI-CORRUPTION LAW.
We are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are also subject to Chinese anti-corruption laws, which strictly prohibit the payment of bribes to government officials. We have operations, agreements with third parties, and make sales in China, which may experience corruption . Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees or consultants of our Company, because these parties are not always subject to our control. We are in the process of implementing an anticorruption program, which will prohibit the offering or giving of anything of value to foreign officials, directly or indirectly, for the purpose of obtaining or retaining business. The anticorruption program also requires that clauses mandating compliance with our policy be included in all contracts with foreign sales agents, sales consultants and distributors and that they certify their compliance with our policy annually. It further requires that all hospitality involving promotion of sales to foreign governments and government-owned or controlled entities be in accordance with specified guidelines. In the meantime, we believe to date we have complied in all material respects with the provisions of the FCPA and Chinese anti-corruption laws. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants and/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 government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
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UNCERTAINTIES WITH RESPECT TO THE PRC’S LEGAL SYSTEM COULD ADVERSELY AFFECT US.
We conduct a substantial amount of our business through our subsidiary in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiary is generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.
Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because some of these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
GOVERNMENTAL CONTROL OF CURRENCY CONVERSION MAY AFFECT THE VALUE OF YOUR INVESTMENT.
The PRC government imposes controls on the convertibility of the Renminbi, or “RMB” into foreign currencies and, in certain cases, the remittance of currency out of China. We receive some revenue and incur some expenses in U.S. dollars but incur other expenses primarily in RMB. Although our main business is based in mainland China or based in Hong Kong with Chinese operating subsidiaries, some of our business may require us to use U.S. dollars. We choose quotations based on price competitiveness.
Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our security-holders.
WE ARE A HOLDING COMPANY AND WE RELY ON FUNDING FOR DIVIDEND PAYMENTS FROM OUR SUBSIDIARIES, WHICH ARE SUBJECT TO RESTRICTIONS UNDER PRC LAWS.
We are a holding company incorporated in Nevada and we operate our core businesses through our subsidiary in the PRC. Therefore, the availability of funds for us to pay dividends to our shareholders and to service our indebtedness depends upon dividends received from such PRC subsidiary. If our subsidiary incurs debt or losses, its ability to pay dividends or other distributions to us may be impaired. As a result, our ability to pay dividends and to repay our indebtedness will be restricted. PRC laws require that dividends be paid only out of the after-tax profit of our PRC subsidiary calculated according to PRC accounting principles, which differ in many aspects from generally accepted accounting principles in other jurisdictions. PRC laws also require enterprises established in the PRC to set aside part of their after-tax profits as statutory reserves. These statutory reserves are not available for distribution as cash dividends. In addition, restrictive covenants in bank credit facilities or other agreements that we or our subsidiary may enter into in the future may also restrict the ability of our subsidiary to pay dividends to us. These restrictions on the availability of our funding may impact our ability to pay dividends to our shareholders and to service our indebtedness.
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OUR BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED IF OUR PRC SUBSIDIARY DECLARES BANKRUPTCY OR BECOMES SUBJECT TO A DISSOLUTION OR LIQUIDATION PROCEEDING.
The Enterprise Bankruptcy Law of the PRC, or the Bankruptcy Law, came into effect on June 1, 2007. The Bankruptcy Law provides that an enterprise will be liquidated if the enterprise fails to settle its debts as and when they fall due and if the enterprise’s assets are, or are demonstrably, insufficient to clear such debts.
Our PRC subsidiary hold certain assets that are important to our business operations. If our PRC subsidiary undergoes a voluntary or involuntary liquidation proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.
According to the SAFE’s Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct Investment, effective on December 17, 2012, and the Provisions for Administration of Foreign Exchange Relating to Inbound Direct Investment by Foreign Investors, effective May 13, 2013, if our PRC subsidiary undergoes a voluntary or involuntary liquidation proceeding, prior approval from the SAFE for remittance of foreign exchange to our shareholders abroad is no longer required, but we still need to conduct a registration process with the SAFE local branch. It is not clear whether “registration” is a mere formality or involves the kind of substantive review process undertaken by SAFE and its relevant branches in the past.
FLUCTUATIONS IN EXCHANGE RATES COULD ADVERSELY AFFECT OUR BUSINESS AND THE VALUE OF OUR SECURITIES.
Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenue and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from any capital raises into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
Since July 2005, the RMB is no longer pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
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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 OPERATIONSAND OUR REPUTATION AND COULD RESULT IN A LOSS OF YOUR INVESTMENT IN OUR SHARES, ESPECIALLY IF SUCH MATTER CANNOT BE ADDRESSED AND RESOLVED FAVORABLY.
Recently, U.S. public companies that have substantially all of their operations in the PRC, 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, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in some 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 and our business . 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 the Company. This situation may be a major distraction to our management. If such allegations are not proven to be groundless, our Company and business operations will be severely hampered and your investment in our shares could be rendered worthless.
CERTAIN POLITICAL AND ECONOMIC CONSIDERATIONS RELATING TO THE PRC COULD ADVERSELY AFFECT OUR COMPANY.
While the PRC’s government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the PRC’s economy is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC’s government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the PRC’s government are unprecedented or experimental, and are expected to be refined and improved. Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating results may be adversely affected by changes in the PRC’s economic and social conditions as well as by changes in the policies of the PRC government, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of restrictions on currency conversion in addition to those described below.
SINCE MOST OF OUR ASSETS ARE LOCATED IN PRC, ANY DIVIDENDS OF PROCEEDS FROM LIQUIDATION WILL BE SUBJECT TO THE APPROVAL OF THE RELEVANT CHINESE GOVERNMENT AGENCIES.
Our operating assets are located inside the PRC. Under the laws governing Foreign Invested Enterprise (“FIE”) in the PRC, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividends of proceeds from liquidation will be paid through Wuhan Newport, our PRC subsidiary, which is subject to the decision of the Board of Directors and subject to foreign exchange rules governing such repatriation. Any liquidation of a FIE is subject to the relevant commerce authority’s approval, registration in relevant Administration for Industry and Commerce and supervision as well as the foreign exchange control. Though the dividends of proceeds from liquidation can be remitted out of China to the investor after they have been approved by the commerce authority and SAFE, we cannot assure that we can always obtain such approvals. This may generate additional risk for our investors in case of dividend payment and liquidation.
IT MAY BE DIFFICULT TO EFFECT SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL JUDGMENTS UPON OUR COMPANY AND OUR OFFICERS AND DIRECTORS BECAUSE THEY RESIDE OUTSIDE THE UNITED STATES.
As our operations are based in the PRC and a majority of our directors and officers reside in the PRC, service of process on the Company and such foreign directors and officers may be difficult to effect within the United States. Also, our main assets are located in the PRC and any judgment obtained in the United States against us may not be enforceable outside the United States.
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THE CHINESE GOVERNMENT EXERTS SUBSTANTIAL INFLUENCE OVER THE MANNER IN WHICH WE MUST CONDUCT OUR BUSINESS ACTIVITIES.
We are dependent on our relationship with the local government in the provinces in which we operate our business. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in the PRC may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, land use rights, property and other matters. We believe that Wuhan Newport’s operations in the PRC are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
Future inflation in China may inhibit our ability to conduct business in the PRC. In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our properties rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and services.
OUR SALES AND OPERATING REVENUE COULD DECLINE DUE TO MACRO-ECONOMIC AND OTHER FACTORS OUTSIDE OF OUR CONTROL, SUCH AS CHANGES IN CLIENT CONFIDENCE AND DECLINES IN EMPLOYMENT LEVELS.
The real estate and logistics markets in the PRC are susceptible to fluctuations in economic conditions. Our business substantially depends on the prevailing economic conditions in the PRC. Changes in national and regional economic conditions, as well as local economic conditions where we conduct our operations, may result in more caution on the part of market participants and consequently fewer purchases. These economic uncertainties involve, among other things, conditions of supply and demand in local markets and changes in client confidence and income, employment levels, and government regulations. These risks and uncertainties could periodically have an adverse effect on consumer demand for and the pricing of our properties, which could cause our operating revenue to decline. A reduction in our revenue could in turn negatively affect the market price of our securities.
LIMITATIONS ON CHINESE ECONOMIC MARKET REFORMS MAY DISCOURAGE FOREIGN INVESTMENT IN CHINESE BUSINESSES.
The value of investments in Chinese businesses could be adversely affected by political, economic and social uncertainties in China. The economic reforms introduced in China in recent years are regarded by China’s national government as a way to introduce economic market forces into China. Given the overriding desire of the national government leadership to maintain stability in China amid rapid social and economic changes in the country, the economic market reforms of recent years could be slowed, or even reversed.
PRC REGULATIONS RELATING TO THE ESTABLISHMENT OF OFFSHORE SPECIAL PURPOSE COMPANIES BY PRC RESIDENTS MAY SUBJECT OUR PRC RESIDENT SHAREHOLDERS TO PENALTIES AND LIMIT OUR ABILITY TO INJECT CAPITAL INTO OUR PRC SUBSIDIARY, LIMIT OUR PRC SUBSIDIARY’S ABILITY TO DISTRIBUTE PROFITS TO US, OR OTHERWISE ADVERSELY AFFECT US.
The SAFE promulgated the Notice on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or Notice 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to material change of capitalization or structure of the PRC resident itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin off). As of November 21, 2016, Mr. Xiangyao Liu, Mr. Linyu Chen and Mr. Long Zhao who are Chinese residents have completed the registration with SAFE under this Notice.
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FAILURE TO COMPLY WITH THE INDIVIDUAL FOREIGN EXCHANGE RULES RELATING TO THE OVERSEAS DIRECT INVESTMENT OR THE ENGAGEMENT IN THE ISSUANCE OR TRADING OF SECURITIES OVERSEAS BY OUR PRC RESIDENT STOCKHOLDERS MAY SUBJECT SUCH STOCKHOLDERS TO FINES OR OTHER LIABILITIES.
Other than Notice 37, our ability to conduct foreign exchange activities in the PRC may be subject to the interpretation and enforcement of the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January 2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with SAFE provisions. PRC individuals who fail to make such registrations may be subject to warnings, fines or other liabilities.
We may not be fully informed of the identities of all our beneficial owners who are PRC residents. For example, because the investment in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are PRC residents. Furthermore, we have no control over any of our future beneficial owners and we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the Individual Foreign Exchange Rules.
It is uncertain how the Individual Foreign Exchange Rules will be interpreted or enforced and whether such interpretation or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure by any of our PRC resident stockholders to make the required registration will subject our PRC subsidiaries to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of any capital raise into the PRC, restriction on remittance of dividends or other punitive actions that would have a material adverse effect on our business, results of operations and financial condition.
PRC REGULATIONS RELATING TO ACQUISITIONS OF PRC COMPANIES BY FOREIGN ENTITIES MAY LIMIT OUR ABILITY TO ACQUIRE PRC COMPANIES AND ADVERSELY AFFECT THE IMPLEMENTATION OF OUR ACQUISITION STRATEGY AS WELL AS OUR BUSINESS AND PROSPECTS.
The PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in January 2005 concerning foreign exchange regulations on mergers and acquisitions in the PRC. The public notice states that if an offshore company controlled by PRC’s residents intends to acquire a PRC company, such acquisition will be subject to strict examination by the relevant foreign exchange authorities. The public notice also states that the approval of the relevant foreign exchange authorities is required for any sale or transfer by the PRC’s residents of a PRC company’s assets or equity interests to foreign entities, such as us, for equity interests or assets of the foreign entities.
In April 2005, SAFE issued another public notice further explaining the January notice. In accordance with the April notice, if an acquisition of a PRC company by an offshore company controlled by PRC residents has been confirmed by a Foreign Investment Enterprise Certificate prior to the promulgation of the January notice, the PRC residents must each submit a registration form to the local SAFE branch with respect to their respective ownership interests in the offshore company, and must also file an amendment to such registration if the offshore company experiences material events, such as changes in the share capital, share transfer, mergers and acquisitions, spin-off transactions or use of assets in China to guarantee offshore obligations.
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On May 31, 2007, SAFE issued another official notice known as “Circular 106,” which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure to facilitate foreign financing or subsequent acquisitions in China.
If we decide to acquire a company organized under the laws of the PRC, we cannot assure investors that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals, filings and registrations for the acquisition. This may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects.
CAPITAL OUTFLOW POLICIES IN THE PRC MAY HAMPER OUR ABILITY TO REMIT INCOME TO THE UNITED STATES AND RESTRICTIONS ON CURRENCY EXCHANGE MAY LIMIT OUR ABILITY TO UTILIZE OUR REVENUES EFFECTIVELY.
The PRC’s government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive all of our revenue in RMB. Under our current corporate structure, our U.S. holding company may rely on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies to us without prior approval from SAFE by complying with certain procedural requirements. However, approval from or registration with appropriate government authorities is required where RMB is to be converted into a foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. This could affect the ability of our PRC subsidiary to obtain foreign exchange through debt or equity financings, including by means of loans or capital contributions from us. In the future, the PRC government may also, at its discretion, restrict access to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our stockholders.
The majority of our revenue would be and operating expenses are denominated in RMB. The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. Pursuant to the Foreign Currency Administration Rules, promulgated on January 29, 1996 and amended on January 14, 1997, and various regulations issued by SAFE and other relevant PRC government authorities, RMB is freely convertible only to the extent of current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investments, require the prior approval from SAFE or its local branch for conversion of RMB into a foreign currency such as U.S. dollars, and remittance of the foreign currency outside the PRC. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its foreign currency-denominated obligations. Currently, e our PRC subsidiary and its affiliates may purchase foreign exchange for settlement of “current account transactions,” including payment of dividends to us and payment of licensing fees and service fees to foreign licensors and service providers, without the approval of SAFE. However, approval from the SAFE or its local branch is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses, such as the repayment of loans denominated in foreign currencies.
BECAUSE OUR FUNDS ARE HELD IN BANKS THAT DO NOT PROVIDE INSURANCE, THE FAILURE OF ANY BANK IN WHICH WE DEPOSIT OUR FUNDS MAY AFFECT OUR ABILITY TO CONTINUE TO OPERATE.
Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash may impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue to operate.
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IF WE ARE UNABLE TO OBTAIN BUSINESS INSURANCE IN THE PRC, WE MAY NOT BE PROTECTED FROM RISKS THAT ARE CUSTOMARILY COVERED BY INSURANCE IN THE UNITED STATES.
Business insurance is not readily available in the PRC. To the extent that we suffer a loss of a type that would normally be covered by insurance in the United States, such as general liability insurance, we would incur significant expenses in both defending any action and in paying any claims that result from a settlement or judgment. We have not obtained fire, casualty and theft insurance, and there is no insurance coverage for our furniture or buildings in China. Any losses incurred by us will have to be borne by us without any assistance, and we may not have sufficient capital to cover material damage to, or the loss of, our facilities due to fire, severe weather, flood or other causes, and such damage or loss may have a material adverse effect on our financial condition, business and prospects.
UNDER THE NEW ENTERPRISE INCOME TAX LAW, WE MAY BE CLASSIFIED AS A “RESIDENT ENTERPRISE” OF CHINA. SUCH CLASSIFICATION MAY RESULT IN UNFAVORABLE TAX CONSEQUENCES TO US AND OUR NON-PRC SHAREHOLDERS.
China passed a New Enterprise Income Tax Law, or the New EIT Law, which became effective on January 1, 2008. Under the New 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 New 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. In addition, a circular issued by the State Administration of Taxation on April 22, 2009 clarified that dividends and other income paid by such resident enterprises will be considered to be the PRC’s source income and subject to the PRC’s withholding tax. This recent circular also subjects such resident enterprises to various reporting requirements with the PRC’s tax authorities.
Although substantially all of our management is currently located in the PRC, it remains unclear whether the PRC’s 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’s tax authorities determine that we are a resident enterprise for the PRC’s enterprise income tax purposes, a number of unfavorable PRC tax consequences may follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as the PRC’s enterprise income tax reporting obligations. This would also mean that income such as interest on offering proceeds and non-China source income would be subject to the PRC’s enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing rules, dividends paid to us from our PRC subsidiary would qualify as tax-exempt income, we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC authorities responsible for enforcing 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 the PRC’s enterprise income tax purposes. Finally, dividends paid to stockholders with respect to their shares of our common stock or any gains realized from transfer of such shares may generally be subject to the PRC’s withholding taxes on such dividends or gains at a rate of 10% if the shareholders are deemed to be non-resident enterprises or at a rate of 20% if the shareholders are deemed to be non-resident individuals.
PRICE INFLATION IN CHINA COULD AFFECT OUR RESULTS OF OPERATIONS IF WE ARE UNABLE TO PASS ALONG CONSTRUCTION PRICE INCREASES TO OUR CUSTOMERS.
Inflation in China has continued to rise over the last few years. Because our builders will purchase raw materials from suppliers in China, price inflation has caused an increase in the cost of construction. Price inflation may affect the results of our operations if we are unable to pass along the price increases to our customers. Similarly, the purchase and installation of equipment or furniture may increase as a result of these recent inflationary trends, which are expected to continue for the near future. Accordingly, inflation in China may weaken our competitiveness domestically and in international markets.
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WE MAY RELY PRINCIPALLY ON DIVIDENDS AND OTHER DISTRIBUTIONS OF EQUITY PAID BY OUR PRC SUBSIDIARY TO FUND ANY CASH AND FINANCING REQUIREMENTS WE MAY HAVE, AND ANY LIMITATION ON THE ABILITY OF OUR PRC SUBSIDIARY TO PAY DIVIDENDS TO US COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO CONDUCT OUR BUSINESS.
We are a holding company, and we may rely principally on dividends and other distributions of equity paid by our PRC subsidiary for our cash and financing requirements, which include the funds necessary to pay dividends and other cash distributions to our stockholders and to service any debt we may incur. In the future, if our PRC subsidiary incurs debt on its own behalf, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.
Under PRC laws and regulations, our PRC subsidiary, as a foreign-invested enterprise in the PRC, may pay dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such fund reaches 50% of its registered capital. At its discretion, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Any limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
THE PRC GOVERNMENT MAY ISSUE FURTHER RESTRICTIVE MEASURES IN THE FUTURE.
We cannot assure you that the PRC’s government will not issue further restrictive measures in the future. The PRC government’s restrictive regulations and measures could increase our operating costs in adapting to these regulations and measures, limit our access to capital resources or even restrict our business operations, which could further adversely affect our business and prospects.
OUR PRC SUBSIDIARY HAS TAKEN THE POSITION THAT IT IS COMPLIANT WITH THE TAXATION, ENVIRONMENTAL, EMPLOYMENT AND SOCIAL SECURITY RULES OF CHINA, AND IF THAT POSITION TURNS OUT TO BE WRONG, THEY MAY FACE PENALTIES IMPOSED BY THE PRC GOVERNMENT.
While we believe our PRC subsidiary has been in compliance with PRC taxation, environmental, employment and social security rules during their operations in China, we have not obtained letters from the PRC government authorities confirming such compliance. If any PRC government authority takes the position that there is non-compliance with the taxation, environmental protection, employment and/or social security rules by our PRC subsidiary, they may be exposed to penalties from PRC government authorities, in which case the operation of our PRC subsidiary in question may be adversely affected.
IF RELATIONS BETWEEN THE UNITED STATES AND CHINA WORSEN, OUR STOCK PRICE MAY DECREASE AND WE MAY HAVE DIFFICULTY ACCESSING THE U.S. CAPITAL MARKETS.
At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade conflicts between the United States and China could adversely affect the market price of our common stock and our ability to access U.S. capital markets.
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INTERPRETATION OF PRC LAWS AND REGULATIONS INVOLVES UNCERTAINTY.
Our core business is conducted within China and is governed by PRC’s laws and regulations. The PRC’s legal system is based on written statutes, and prior court decisions can only be used as a reference. Since 1979, the PRC’s government has promulgated laws and regulations in relation to economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, with a view to developing a comprehensive system of commercial law, including laws relating to property ownership and development. However, due to the fact that these laws and regulations have not been fully developed, and because of the limited volume of published cases and the non-binding nature of prior court decisions, interpretation of PRC’s laws and regulations involves a degree of uncertainty. Some of these laws may be changed without immediate publication or may be amended with retroactive effect. Depending on the government agency or how an application or case is presented to such agency, we may receive less favorable interpretations of laws and regulations than our competitors, particularly if a competitor has long been established in the locality of, and has developed a relationship with such agency. In addition, any litigation in China may be protracted and result in substantial costs and a diversion of resources and management attention. All of these uncertainties may cause difficulties in the enforcement of our land use rights, entitlements under our permits and other statutory and contractual rights and interests.
Risks Related to Ownership of Our Common stock
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE OR MAY DECLINE REGARDLESS OF OUR OPERATING PERFORMANCE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE OFFERING PRICE.
The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
| ● | actual or anticipated fluctuations in our revenue and other operating results; | |
| ● | the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; | |
| ● | actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; | |
| ● | announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; | |
| ● | price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; | |
| ● | lawsuits threatened or filed against us; and | |
| ● | other events or factors, including those resulting from war or incidents of terrorism, or responses to these events. |
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
WE DO NOT INTEND TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE.
We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK, AS THE FUTURE SALE OF A SUBSTANTIAL AMOUNT OF OUTSTANDING COMMON STOCK IN THE PUBLIC MARKETPLACE COULD REDUCE THE PRICE OF OUR COMMON STOCK.
The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our common stock.
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JASPER LAKE HOLDINGS LIMITED, OUR MAJORITY STOCKHOLDER, MAY HAVE SIGNIFICANT INFLUENCE OVER THE OUTCOME OF MATTERS SUBMITTED TO OUR STOCKHOLDERS FOR APPROVAL, WHICH MAY PREVENT US FROM ENGAGING IN CERTAIN TRANSACTIONS.
As of March 8, 2018 Jasper Lake Holdings Limited beneficially owns 52.94% of our outstanding common stock. Mr. Xiangyao Liu, our CEO and President, has sole voting and dispositive power of Jasper Lake Holdings Limited. As a result, this majority stockholder may exercise significant influence over all matters requiring stockholder approval, including the appointment of our directors and the approval of significant corporate transactions. This ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination that may be in the best interest of the Company.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD.
The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of internal controls over financial reporting.
Our reporting obligations as a public company place a significant strain on our management and operational and financial resources and systems. Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting may result in the loss of investor confidence in the reliability of our financial statements, which in turn may harm our business and negatively impact the trading price of our stock. Furthermore, we anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
THERE IS A LIMITED MARKET FOR OUR COMMON STOCK, WHICH MAY MAKE IT DIFFICULT FOR HOLDERS OF OUR COMMON STOCK TO SELL THEIR STOCK.
“. On August 18, 2017, the Company our common stock started trading on the NASDAQ Global Select Market under the symbol “YRIV”.. There is a limited trading market for our common stock . Accordingly, there can be no assurance as to the liquidity of any markets that may develop for our common stock, the ability of holders of our common stock to sell our common stock, or the prices at which holders may be able to sell our common stock. Further, many brokerage firms will not process transactions involving low price stocks, especially those that come within the definition of a “penny stock.” If we cease to be quoted, holders of our common stock may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of our common stock, and the market value of our common stock would likely decline.
WE MAY BE SUBJECT TO THE PENNY STOCK RULES WHICH WILL MAKE SHARES OF OUR COMMON STOCK MORE DIFFICULT TO SELL.
We may be subject now and in the future to the SEC’s “penny stock” rules if our shares of common stock sell below $5.00 per share. Penny stocks generally are equity securities with a price of less than $5.00. The penny stock rules require broker-dealers to deliver a standardized risk disclosure document 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 must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson, 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 completing 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, 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. The penny stock rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our common stock. As long as our shares of common stock are subject to the penny stock rules, the holders of such shares of common stock may find it more difficult to sell their securities.
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IF A MORE ACTIVE TRADING MARKET FOR OUR COMMON STOCK DEVELOPS, THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO BE HIGHLY VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS, AND HOLDERS OF OUR COMMON STOCK MAY BE UNABLE TO SELL THEIR SHARES AT OR ABOVE THE PRICE AT WHICH THEY WERE ACQUIRED.
The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:
| ● | quarterly variations in our revenues and operating expenses; |
| ● | developments in the financial markets and worldwide economies; |
| ● | announcements of innovations or new products or services by us or our competitors; |
| ● | announcements by the PRC government relating to regulations that govern our industry; |
| ● | significant sales of our common stock or other securities in the open market; |
| ● | variations in interest rates; |
| ● | changes in the market valuations of other comparable companies; and |
| ● | changes in accounting principles. |
In addition, the market for Chinese companies that went public in the U.S. through reverse mergers, such as ours, is currently extremely volatile primarily due to recent allegations and, in some instances, findings of fraud among some of these companies. If a stockholder were to file a class action suit against us following a period of volatility in the price of our securities, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business to responding to such litigation, which may harm our business and reputation.
THE RIGHTS OF THE HOLDERS OF OUR COMMON STOCK MAY BE IMPAIRED BY THE POTENTIAL ISSUANCE OF PREFERRED STOCK.
Our Board of Directors has the right to create a new series of preferred stock. As a result, the Board of Directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights that may adversely affect the voting power and equity interest of the holders of our common stock. Although we have no present intention to issue any additional shares of preferred stock or to create any new series of preferred stock, we may issue such shares in the future.
Item 1B. Unresolved Staff Comments.
None.
Our corporate headquarters is located at 41 John Street, Suite 2A, New York, NY 10038, for which we currently pay a rent of $7,395 per month for our lease. The lease originally terminated on March 31, 2018 and we have extended to March 31, 2019.
As of the date hereof, we have completed the construction of seven commercial office buildings since 2010, occupying 92,755.8 square meters of space, including our sales and welcome center.
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The following chart illustrates the properties we currently have the land use rights to in Wuhan, Hubei Province, China. We do not have ownership over such properties.
Certification Number of Land Use Right | Location | Purpose of Use | Area (㎡) | Termination Date | ||||||
| Wu Xin Guo Yong (2008) Di Zhuan No. 029 | South of Han Shi Road, Wuhan Yangluo Economic Development Zone, Hubei Province, PRC | Commercial | 9,802.67 | August 30, 2048 | ||||||
| Wu Xin Guo Yong (2008) Di Zhuan No. 030 | South of Han Shi Road, Wuhan Yangluo Economic Development Zone, Hubei Province, PRC | Commercial | 59,308.09 | August 30, 2048 | ||||||
| Wu Xin Guo Yong (2008) Di Zhuan No. 031 | South of Han Shi Road, Wuhan Yangluo Economic Development Zone, Hubei Province, PRC | Commercial | 79,178.94 | August 30, 2048 | ||||||
| Wu Xin Guo Yong (2008) Di Zhuan No. 032 | South of Han Shi Road, Wuhan Yangluo Economic Development Zone, Hubei Province, PRC | Commercial | 87,108.30 | August 30, 2048 | ||||||
| Wu Xin Guo Yong (2009) Di Zhuan No. 005 | South of Han Shi Road, Wuhan Yangluo Economic Development Zone, Hubei Province, PRC | Commercial | 176,853.70 | August 30, 2048 | ||||||
| Wu Xin Guo Yong (2009) Di Zhuan No. 006 | South of Han Shi Road, Wuhan Yangluo Economic Development Zone, Hubei Province, PRC | Commercial | 103,304.49 | August 30, 2048 | ||||||
The following chart illustrates the properties we currently lease in Wuhan, Hubei Province, PRC and New York, United States. We do not have ownership over such properties.
| Name of the Property | Location | Purpose of Use | Area (㎡) | Duration Date | ||||||
| Land Lease No. HZ20150427 (1) | Chunfeng Village, Yangluo Neighborhood, Wuhan, Hubei Province, PRC | Commercial | 1,214,654.52 | April 26, 2035 | ||||||
| New York Office Premise | 41 John Street, Suite 2A, New York, NY 10038 | Commercial | Suite 2A | March 31, 2019 | ||||||
| (1) | On October 8, 2016, we entered an amendment to the Land Lease No. HZ20150427 Agreement (“Amendment”) that was executed on April 27, 2015 between the Company and Chunfeng Villagers Committee at the Yangluo Neighborhood Office in Xinzhou District, Wuhan (“CVC”). We agreed to make an advance payment of the first year rent to CVC (“First Year Rent”), upon the earlier of the following date or event to occur: (i) June 3rd, 2017; or (ii) within 5 days after the Company’s port terminal obtains approval from the government. The term of such land lease is 20 years from the date of CVC’s receipt of the First Year Rent. |
We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 4. Mine Safety Disclosures
Not Applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities.
Market Information
On April 19, 2017, our common stock commenced trading on the NASDAQ Capital Market under the symbol of “YERR”. On August 18, 2017, our common stock started trading on the NASDAQ Global Select Market under the same symbol.
On February 8, 2018, we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the State of Nevada, to change our name from “Yangtze River Development Limited” to “Yangtze River Port and Logistics Limited”. In connection with the Name Change, our trading symbol was changed from “YERR” to “YRIV”.
Prior to April 19, 2017, our common stock was quoted on the OTC Markets under the symbol of “YERR”.
Price Range of Common Stock
The following table shows, for the periods indicated, the high and low bid prices per share of our common stock as reported by the OTC Markets’ quotation service and NASDAQ Global Select Market, as applicable.
| Fiscal Year 2017 | ||||||||
| High | Low | |||||||
| First Quarter (January 1 - March 31) | $ | 5.25 | $ | 3.65 | ||||
| Second Quarter (April 1 - June 30) | $ | 16.40 | $ | 4.00 | ||||
| Third Quarter (July 1 - September 30) | $ | 25.47 | $ | 6.40 | ||||
| Fourth Quarter (October 1 - December 31) | $ | 17.40 | $ | 8.32 | ||||
| Fiscal Year 2016 | ||||||||
| High | Low | |||||||
| First Quarter (January 1 - March 31) | $ | 6.15 | $ | 3.70 | ||||
| Second Quarter (April 1 - June 30) | $ | 7.50 | $ | 3.80 | ||||
| Third Quarter (July 1 - September 30) | $ | 5.50 | $ | 3.50 | ||||
| Fourth Quarter (October 1 - December 31) | $ | 6.40 | $ | 3.50 | ||||
Holders
As of March 8, 2018, there were 50 holders of record of our common stock. Because shares of the Company’s common stock are held by depositaries, brokers and other nominees, the number of beneficial holders of the Company’s shares is substantially larger than the number of stockholders of record.
Dividends
We have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our Board of Directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our Board of Directors has complete discretion on whether to pay dividends. Even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant.
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Securities Authorized for Issuance under Equity Compensation Plan
In order to compensate our officers, directors, employees and/or consultants, on February 23, 2016, our Board of Directors approved and stockholders ratified by consent the 2016 Stock Incentive Plan (the “Plan”). The Plan has a total of 10,000,000 shares reserved for issuance.
Under the Plan, an eligible person in the Company’s service may acquire a proprietary interest in the Company in the form of shares or an option to purchase shares of the Company’s common stock.
There were no issuances under the Plan during the year ended December 31, 2017.
Rule 10B-18 Transactions
During the years ended December 31, 2017 and 2016, there were no repurchases of the Company’s common stock by the Company.
Sales of Unregistered Securities
On December 19, 2015, upon completion of the Second Share Exchange describe above in “Item 1. Business – Corporate History”, the Company issued to (i) the Energetic Mind shareholders an aggregate of one hundred fifty-one million (151,000,000) shares of Company’s common stock, and a certain related party an additional 8% convertible promissory note (the “Note”) in the principal amount of one hundred fifty million dollars ($150,000,000). The Note may be converted all or any portion of the then aggregate outstanding principal amount, together with any accrued and unpaid interest, into shares of Company’s common stock at $10.00 per share. The principal amount of the Note was subsequently reduced to $75,000,000 as a result of the Subsidiaries Sale consummated on December 31, 2015. The issuance of the shares and the Note at the closing of the underlying transactions has been determined to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act.
On December 28, 2015, Company issued an aggregate of 657,900 shares of common stock to nine individuals and three entities for services rendered. The issuance of the shares has been determined to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act.
On January 25, 2016, Company issued an aggregate of 15,000 shares of common stock to one individual for services rendered. The issuance of the shares has been determined to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act.
The Company, by and among Armada Enterprises GP (“Armada”) and Wight International Construction, LLC (“Wight”), entered into (i) a Contribution, Conveyance and Assumption Agreement (“Contribution Agreement”) dated October 3, 2016, first and second addendums, dated October 3, 2016 and November 30, 2016, respectively, and (ii) an Amended and Restated Limited Liability Company Agreement dated November 16, 2016 (collectively with the Contribution Agreement, the “Agreement”), whereby the Company acquired 100 million preferred B membership units of Wight, which would ultimately convert into 100 million LP units in Armada Enterprises LP. In exchange, the Company issued a $500 million convertible promissory note (“Note”) and 50,000,000 shares of the Company’s common stock to Wight. As a result of the Agreement and the conversion of the Note on November 17, 2016, Wight owned 100,000,000 shares of the Company’s common stock representing 36.73% of the Company’s voting power and the Company owned 100 million preferred B membership units in Wight representing a 62.5% non-voting equity interest in Wight. The issuance of the shares has been determined to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act.
On February 27, 2017, the Company issued a “Termination and Demand” letter to Wight which terminated the Agreement and demanded the return of the 100,000,000 shares of common stock of the Company. The Company is now in the process of effecting the return and cancellation of the 100,000,000 shares of the Company’s common stock.
On March 1, 2017, the 100,000,000 shares of the Company’s common stock have been canceled and returned by Wight. The 100,000,000 shares were subsequently returned to the Company’s treasury.
Item 6. Selected Financial Data.
The selected consolidated financial data for the years ended December 31, 2017, 2016 and 2015, as well as the consolidated balance sheet data as of December 31, 2017 and 2016, are derived from our audited consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data for years ended December 31, 2014 and 2013 as well as the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. The historical results presented below are not necessarily indicative of results of future operations, and should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Part II, Item 8 to fully understand factors that may affect the comparability of the information presented below.
| As of December 31, | ||||||||||||||||||||
| CONSOLIDATED BALANCE SHEET DATA: | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Cash and cash equivalents | $ | 58,414 | $ | 63,092 | $ | 512,569 | $ | 56,366 | $ | 1,063,733 | ||||||||||
| Real estate property completed | 31,497,258 | 29,507,108 | 31,566,156 | 33,025,319 | 32,929,835 | |||||||||||||||
| Real estate property and land lots under development | 364,774,643 | 341,427,234 | 364,876,105 | 384,610,172 | 380,288,971 | |||||||||||||||
| Total assets | 406,696,070 | 379,711,509 | 406,986,613 | 423,287,326 | 419,339,281 | |||||||||||||||
| Due to related parties | 35,947,504 | 31,870,222 | 32,045,112 | 322,388,060 | 366,755,923 | |||||||||||||||
| Other payables and accrued liabilities | 18,632,545 | 8,985,719 | 560,830 | 264,558 | 193,364 | |||||||||||||||
| Real estate property refund and compensation payables | 28,146,601 | 24,997,563 | 25,274,753 | 25,158,858 | 23,711,473 | |||||||||||||||
| Convertible note | 75,000,000 | 75,000,000 | 75,000,000 | - | - | |||||||||||||||
| Loans payable | 44,221,399 | 41,456,074 | 44,502,981 | 47,185,161 | 490,822 | |||||||||||||||
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| CONSOLIDATED STATEMENTS OF INCOME | Years Ended December 31, | |||||||||||||||||||
| AND COMPREHENSIVE INCOME DATA: | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| REVENUES | $ | - | $ | - | $ | - | $ | 3,458,295.00 | $ | 2,965,818.00 | ||||||||||
| COST OF REVENUES | - | - | - | 3,693,783 | 2,964,038 | |||||||||||||||
| GROSS PROFIT | - | - | - | (235,488 | ) | 1,780 | ||||||||||||||
| Selling, general and administrative | 5,076,347 | 5,448,523 | 4,559,223 | 2,178,365 | 1,876,992 | |||||||||||||||
| INCOME FROM OPERATIONS | (5,076,347 | ) | (5,448,523 | ) | (4,559,223 | ) | (2,413,853 | ) | (1,875,212 | ) | ||||||||||
| Other income | 8,145 | 3,587 | 868 | - | 26,528 | |||||||||||||||
| Other expenses | (861 | ) | (174 | ) | (3,231 | ) | - | - | ||||||||||||
| Interest income | 296 | 229 | 55 | 10,996 | 16,376 | |||||||||||||||
| Interest expenses | (8,221,483 | ) | (8,424,794 | ) | (3,199,031 | ) | (3,256,660 | ) | (27,525 | ) | ||||||||||
| Total other expenses, net | (8,213,903 | ) | (8,421,152 | ) | (3,201,339 | ) | (3,245,664 | ) | 15,379 | |||||||||||
| LOSS BEFORE INCOME TAXES | (13,290,250 | ) | (13,869,675 | ) | (7,760,562 | ) | (5,659,517 | ) | (1,859,833 | ) | ||||||||||
| INCOME TAX BENEFITS | 1,040,873 | 1,143,595 | 1,378,700 | 1,402,421 | 427,378 | |||||||||||||||
| NET LOSS | (12,249,377 | ) | (12,726,080 | ) | (6,381,862 | ) | (4,257,096 | ) | (1,432,455 | ) | ||||||||||
| OTHER COMPREHENSIVE INCOME | ||||||||||||||||||||
| Foreign currency translation | 18,385,359 | (19,227,596 | ) | (6,649,917 | ) | (147,341 | ) | 861,210 | ||||||||||||
| COMPREHENSIVE INCOME (LOSS) | $ | 6,135,982 | $ | (31,953,676 | ) | $ | (13,031,779 | ) | $ | (4,404,437 | ) | $ | (571,245 | ) | ||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING BASIC | 188,465,024 | 177,459,678 | 151,682,554 | 151,000,000 | 151,000,000 | |||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED | 193,745,496 | 177,459,678 | 151,682,554 | 151,000,000 | 151,000,000 | |||||||||||||||
| NET INCOME PER SHARE - BASIC AND DILUTED | $ | (0.06 | ) | $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.01 | ) | |||||
Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
The following discussion and analysis of the results of operations and financial condition should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Forward-Looking Statements.”
Overview
Yangtze River Port & Logistics Limited (formerly known as Yangtze River Development Limited) is a Nevada corporation that operates through its wholly-owned subsidiary Energetic Mind Limited (“Energetic Mind”), a British Virgin Islands company. Energetic Mind holds 100% of the capital stock in Ricofeliz Capital (HK) Ltd (“Ricofeliz Capital), a Hong Kong company which in turns holds 100% of the equity interests in Wuhan Yangtze River Newport Logistics Co., Ltd (Wuhan Newport”), a wholly foreign-owned enterprise formed under the laws of the People’s Republic of China that primarily engages in the business of real estate and infrastructural development with a port logistics center located in Wuhan, Hubei Province of the PRC.
On January 30, 18, we incorporated Avenal River Limited in the British Virgin Islands. Avenal River Limited owns 100% of the equity interest of Ricofeliz Investment (China) Limited, a Hong Kong company, which owns 100% of the equity interest of Wuhan Yangtze River Newport Trading Limited, a PRC company.
Situated in the middle reaches of the Yangtze River, Wuhan Newport is a large infrastructure development project implemented under China’s latest “One Belt One Road” initiative and is believed to be strategically positioned in the anticipated “Pilot Free Trade Zone” of the Wuhan Port, an important trading locale for China, the Middle East and Europe. The Logistics Center, which is being built by Wuhan Newport, will comprise six operating zones: a port operation area, warehouse and distribution area, cold chain logistics area, rail cargo loading area, exhibition area and business related area. The Logistics Center is also expected to provide a number of shipping berths for cargo ships of various sizes. Wuhan Newport is expected to provide domestic and foreign businesses a direct access to the anticipated Free Trade Zone in Wuhan. The project will include commercial buildings, professional logistic supply chain centers, direct access to the Yangtze River, Wuhan-Xinjiang-Europe Railway and ground transportation, storage and processing centers, IT supporting services, among others.
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The Logistics Center is expected to occupy approximately 1,918,000 square meters, for which the construction and development are expected to be completed in five years while the total anticipated investment have been divided into three phases – 40% of the total in the first year and 30% respectively in the second and third year. The following table illustrates the timeframe of our investment and construction progress.
| Time | Phase of Investment | Percentage of Total Anticipated Investment | Percentage of Construction of the Logistics Center | |||||||
| 1st Year | 1st Phase Investment | 40 | % | 30 | % | |||||
| 2nd Year | 2nd Phase Investment | 70 | % | 40 | % | |||||
| 3rd Year | 3rd Phase Investment | 100 | % | 60 | % | |||||
| 4th Year | Investment Completed | 100 | % | 75 | % | |||||
| 5th Year | Investment Completed | 100 | % | 100 | % | |||||
The Logistics Center is located within the Wuhan Newport Yangluo Port, on the upper stream of the Yangtze River, and close to the northern base of Wu Iron and Steel, China’s first mega-sized iron and steel production complex. The Logistics Center is expected to include a port terminal that will be located approximately 26.5km from the Wuhan Guan and 5.5km from the Yangluo Yangtze River Bridge. The operation area of the port is expected to consist of a riverbank of 1,039 meters with eight 5,000-to-10,000-ton berths, two of which are multi-purpose berths and the other six are general cargo berths. It is designed to be able to handle up to 5,000,000 tons of cargo annually, including up to 100,000 TEU for annual container throughput (including 20,000 TEU in freezers areas), 1,000,000 tons of iron and steel and 3,000,000 tons of general cargo.
The Logistics Center will be complemented with container storage areas, multi-functional areas, general storage areas, multi-functional warehouse and infrastructural development, including new roads, gas stations, parking areas, gas and water pipes, electricity lines and all other facilities and equipment to operate the Logistics Center. We will begin construction of the Logistics Center once we raise funds for it.
Aside from being situated in the Wuhan Yangluo Comprehensive Bonded Zone, Yangluo development area is among the third group of China’s Pilot Free Trade Zone applicants to submit FTZ applications to the State Council. Presently, approvals have been granted to Shanghai, Tianjin, Guangdong and Fujian. Enterprises within the approved free-trade zones are typically entitled to a series of favorable regulations and policies that could help the businesses grow and succeed. However, we can provide no assurance at this point that the FTZ application will in fact be approved.
Wuhan Newport has signed a twenty-year lease agreement effective April 27, 2015, the maximum number of years permitted by the applicable PRC laws, with rights to renew at its sole discretion, to lease approximately 1,200,000 square meters of land for building logistics warehouses in support of the Logistics Center. The warehouses are expected to comprise of port terminal zones, warehouse logistics zones, cold chain supply zones and railroad loading and unloading zones. The warehouses will connect the port terminal along the Yangtze River and the railway leading to Europe, satisfying the requirement of China’s latest “One Belt, One Road” initiative. It will also be able to support large logistics companies in Wuhan and other nearby provinces which will rent the warehouses, terminals and offices within the Logistics Center.
In the meantime, we have also been developing a commercial building project called the Wuhan Centre China Grand Steel Market (Phase 1) Commercial Building (“Phase 1 Project”) located in the south of Hans Road, Wuhan Yangluo Economic Development Zone which covers an approximate construction area of 222,496.6 square meters. We have been financing the Phase 1 Project with bank loans and shareholder advances. The Phase 1 Project comprises 7 buildings, four of which covering 35,350,4 square meters have been completed and three of which covering an approximate area of 57,450.4 square meters are still under construction as of December 31, 2017. We have sold approximately 22,780 square meters of commercial building space.
Factors Affecting our Operating Results
Growth of China’s Economy. We operate and derive all of our revenue from operations in China. Economic conditions in China, therefore, affect our operations, including the demand for our properties and services and the availability and prices of land maintenance among other expenses. China has experienced significant economic growth with recorded Gross Domestic Product growth rates at 6.9% in 2015, 6.7% in 2016 and 6.9% in 2017. (Source: https://tradingeconomics.com/china/gdp-growth-annual) China is expected to experience continued growth in all areas of investment and consumption. However, if the Chinese economy were to become significantly affected by a negative stimulus, China’s growth rate would likely to fall and our revenue could correspondingly decline.
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Government Regulations. Our business and results of operations are subject to PRC government policies and regulations regarding the following:
| ● | Land Use Right — According to the Land Administration Law of the PRC and Interim Regulations of the People’s Republic of China Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas, individuals and companies are permitted to acquire rights to use urban land or land use rights for specific purposes, including residential, industrial and commercial purposes. We acquire land use rights from local governments and/or other entities for development of residential and commercial real estate projects. We do not have ownership over these lands. | |
| ● | Land Development — According to the Urban Real Estate Development and Operation Administration Regulation, the Urban Real Estate Development and Operation Administration Rules of Hebei Province promulgated by the government of the Hebei Province, and the Real Estate Development Enterprise Qualification Administration Regulation, a real estate development enterprise shall obtain a Real Estate Development Enterprise Qualification Certificate. We obtained the related certificates and seek to ensure that each phase of our projects complies with our certificates. | |
| ● | Project Financing — According to the Land Administration Law and the Property Law of the PRC, the land use rights, residential housing and other buildings still in process of construction may be pledged and mortgaged. From time to time, we may pledge and mortgage our land use rights and real properties to lenders in order to obtain project financing. |
Interest Rate and Inflation Challenges. We are subject to market risks due to fluctuations in interest rates and refinancing of mid-term debt. Higher interest rates may also affect our revenues, gross profits and our ability to raise and service debt and to finance our developments. Inflation could result in increases in the price of raw materials and labor costs. We do not believe that inflation or deflation has affected our business materially.
Acquisitions of Land Use Rights and Associated Costs. We acquire land use rights for development through the governmental auction process and by obtaining land use rights permits from third parties through negotiation, acquisition of entities, co-development or other joint venture arrangements. Our ability to secure sufficient financing for land use rights acquisitions and property development depends on internal cash flows in addition to lenders’ perceptions of our credit reliability, market conditions in the capital markets, investors’ perception of our securities, the PRC economy and the PRC government regulations that affect the availability and cost of financing real estate companies or property purchasers.
Critical Accounting Estimates
As discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, we consider our estimates on revenue recognition, impairment of long-lived assets, and real estate property refunds and compensation payables to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. There have been no significant changes to these estimates in the year ended December 31, 2017.
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Results of Operations
Comparison of Years Ended December 31, 2017, 2016 and 2015
The following table sets forth the results of our operations for the years indicated in U.S. dollars
| For the Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenue | $ | - | $ | - | $ | - | ||||||
| Costs of revenue | - | - | - | |||||||||
| Gross profit | - | - | - | |||||||||
| Operating expenses | ||||||||||||
| Selling expenses | - | 2,348 | 11,577 | |||||||||
| General and administrative expenses | 5,076,347 | 5,446,175 | 4,547,646 | |||||||||
| Total operating expenses | 5,076,347 | 5,448,523 | 4,559,223 | |||||||||
| Loss from operations | (5,076,347 | ) | (5,448,523 | ) | (4,559,223 | ) | ||||||
| Other income (expenses) | ||||||||||||
| Other income | 8,145 | 3,587 | 868 | |||||||||
| Other expenses | (861 | ) | (174 | ) | (3,231 | ) | ||||||
| Interest income | 296 | 229 | 55 | |||||||||
| Interest expenses | (8,221,483 | ) | (8,424,794 | ) | (3,199,031 | ) | ||||||
| Total other expenses | (8,213,903 | ) | (8,421,152 | ) | (3,201,339 | ) | ||||||
| Loss before income taxes | (13,290,250 | ) | (13,869,675 | ) | (7,760,562 | ) | ||||||
| Income taxes benefits | 1,040,873 | 1,143,595 | 1,378,700 | |||||||||
| Net loss | $ | (12,249,377 | ) | $ | (12,726,080 | ) | $ | (6,381,862 | ) | |||
| Other comprehensive income | ||||||||||||
| Foreign currency translation adjustments | 18,385,359 | (19,227,596 | ) | (6,649,917 | ) | |||||||
| Comprehensive Income (loss) | $ | 6,135,982 | $ | (31,953,676 | ) | $ | (13,031,779 | ) | ||||
| Loss per share - basic and diluted | $ | (0.06 | ) | $ | (0.07 | ) | $ | (0.04 | ) | |||
| Weighted average shares outstanding | ||||||||||||
| Basic | 188,465,024 | 177,459,678 | 151,682,554 | |||||||||
| Diluted | 193,745,496 | 177,459,678 | 151,682,554 | |||||||||
Revenue.
We did not generate any revenue from the sales of real estate property for the years ended December 31, 2017, 2016 and 2015. In addition, since our Logistics Center is still in its development stage and therefore is not yet in operation, we have not started providing any logistics service within our port terminal and have not generated any revenue from providing such services.
Cost of revenue.
During each year ended December 31, 2017, 2016 and 2015, our cost of goods sold was $nil.
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Gross profit.
Our gross margin was $nil for each of year ended December 31, 2017, 2016 and 2015.
Selling expenses.
Selling expenses were $nil for the year ended December 31, 2017, compared to $2,348 for the year ended December 31, 2016, a decrease of $2,348 or 100.0%. Selling expenses decreased by $9,229 for the year ended December 31, 2016 compared to the amount of $11,577 in the year ended December 31, 2015. The decreases were mainly due to the lack of selling activities in 2017 and 2016.
General and administrative expenses.
Our general and administrative expenses consist of salaries, office expenses, utilities, business travel, amortization expenses (including legal expenses, accounting expenses and other professional service expenses) and stock compensation. General and administrative expenses were $5,076,347 for the year ended December 31, 2017, compared to $5,446,175 for the year ended December 31, 2016, a decrease of $369,828 primarily due to a decrease in share-based compensation expenses for professional services. General and administrative expenses increased by $898,529 during 2016 compared to $4,547,646 in 2015, mainly due to an increase in share-based compensation expense for professional services.
Loss from operations.
As a result of the factors described above, operating loss was $5,076,347 for the year ended December 31, 2017, compared to operating loss of $5,448,523 for the year ended December 31, 2016, a decrease of operating loss of $372,176, or approximately 7%. Loss from operations increased by $889,300 during the year ended December 31, 2016 compared to $4,559,223 in the year ended December 31,2015. The increase and decrease of loss from operations for each of these three years are mainly because of expenses related to share-based compensation expense for professional services.
Other expenses.
We had other expenses totaling $8,213,903 for the year ended December 31, 2017, compared to other expense totaling $8,421,152 and $3,201,339 for the years ended December 31, 2016 and 2015, respectively. The other expenses mainly comprise interest expenses. Interest expenses were $8,221,483 for the year ended December 31, 2017, compared to $8,424,794 for the year ended December 31, 2016, a decrease of $203,311 or 2%. Interest expenses increased by $5,225,763 during the year ended December 31, 2016 compared to $3,199,031 in the year ended December 31, 2015, primarily due to increase of interest on a convertible note.
Income tax.
We received an income tax benefit of $1,040,873 for the year ended December 31, 2017, compared to $1,143,595 and $1,378,700 for each of the year ended December 31, 2016 and 2015, respectively.
Net loss.
As a result of the factors described above, our net loss from operations for the year ended December 31, 2017 was $12,249,377, compared to net loss of $12,726,080 for the year ended December 31, 2016, a decrease in loss of $476,703. For the year ended December 31, 2016, net loss increased by $6,344,218 compared to the net loss of $6,381,862 for the year ended December 31, 2015.
Foreign currency translation.
Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the year ended December 31, 2017 was $18,385,359, compared to a foreign currency loss of $19,227,596 for the year ended December 31, 2016. The changes reflect the significant appreciation of RMB to U.S. dollars for the year ended December 31, 2017. Foreign currency translation loss increased by $12,577,679 for the year ended December 31, 2016 compared to loss of $6,649,917 for the year ended December 31, 2015.
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Net loss available to common stockholders.
Net loss available to our common stockholders was $0.06 per share (basic and diluted), for the year ended December 31, 2017, compared to net loss of $0.07 and $0.04 per share (basic and diluted), for the years ended December 31, 2016 and 2015.
Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the three years indicated:
| Three Years Ended December 31 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net Cash Used in Operating Activities | $ | (2,055,351 | ) | $ | (2,135,205 | ) | $ | (4,735,142 | ) | |||
| Net Cash (Used in) Provided by Investing Activities | $ | - | $ | (1,851 | ) | $ | 494,179 | |||||
| Net Cash Provided by Financing Activities | $ | 2,048,507 | $ | 1,688,769 | $ | 4,698,162 | ||||||
We had a balance of cash and cash equivalents of $58,414 as of December 31, 2017. We have historically funded our working capital needs through advance payments from customers, bank borrowings, and capital from stockholders. Our working capital requirements are influenced by the state and level of our operations, and the timing of capital needed for projects.
Operating Activities. Net cash used in operating activities was $2,055,351 for the year ended December 31, 2017, compared to net cash used in operating activities of $2,135,205 for the year ended December 31, 2016, a decrease of $79,854. During 2016, net cash used in operating activities was $2,135,205, compared to net cash used in operating activities of $4,735,142 for the year ended December 31, 2015, a decrease of $2,599,937.
The decrease in net cash used in operating activities was primarily contributed by the following factors:
| ● | Share-based compensation expense contributed $1,785,480 cash inflow for the year ended December 31, 2017. In the same period of 2016, share-based compensation expense contributed $2,014,664 in cash inflow, which led to an increase of $229,184 in net cash outflow. During 2016, share-based compensation expense contributed $2,014,664 in cash. In the same period of 2015, share-based compensation expense contributed $1,808,867 cash inflow, which led to a decrease of $205,797 in net cash outflow. | |
| ● | Changes in real estate properties and land lots under development provided $307,384 cash outflow for the year ended December 31, 2017, compared to changes in real estate properties and land lots under development contributed $367,826 cash outflow in the same period of 2016, which led to an increase of $60,442 in net cash outflow. For the year ended December 31, 2016, changes in real estate properties and land lots under development provided $367,826 cash outflow, compared to changes in real estate properties and land lots under development contributing $778,977 cash outflow in the same period of 2015, which led to a decrease of $411,151 in net cash outflow. |
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| ● | Changes in other payables and accrued liabilities provided $8,388,760 cash inflow for the year ended December 31, 2017, compared to other payables and accrued liabilities contributing $8,559,773 cash inflow for the year ended December 31, 2016, which led to a decrease of $171,013 in net cash inflow. For the year ended December 31, 2016, changes in other payables and accrued liabilities provided $8,559,773 in cash inflow compared with other payables and accrued liabilities contributing $2,257,051 in cash inflow for the year ended December 31, 2015, which led to a decrease of $6,302,722 in net cash outflow. | |
| ● | We have net loss of $12,249,377 for the year ended December 31, 2017, compared to net loss of $12,726,080 for the year ended December 31, 2016, which led to an increase of $476,703 in net cash inflow. We had net loss of $12,726,080 for the year ended December 31, 2016 compared to net loss of $6,381,862 for the year ended December 31, 2015, which led to an increase of $6,344,218 in net cash outflow. |
Investing Activities. Net cash used in investing activities was $nil for the year ended December 31, 2017, compared to $1,851 for the year ended December 31, 2016, representing an increase of $1,851 in cash inflow. Net cash used in investing activities was $1,851 for the year ended December 31, 2016 compared to $494,179 provided by investing activities for the year ended December 31, 2015, representing an increase of $496,030 in cash outflow.
Financing Activities. Net cash provided by financing activities was $2,048,507 for the year ended December 31, 2017, compared to net cash of $1,688,769 provided by financing activities for the year ended December 31, 2016, representing an increase of $359,738 in cash inflow. The increase was primarily because we had repayment to related parties of $21,553 for the year ended December 31, 2017, compared to $361,843 for the year ended December 31, 2016. During 2016, net cash provided by financing activities was $1,688,769, compared to net cash of $4,698,162 provided by financing activities for the year ended December 31, 2015, representing a decrease of $3,009,393 in cash inflow. The decrease was primarily due to advances of $2,201,144 from related parties in the year ended December 31, 2016, compared to $4,874,761 for the year ended December 31, 2015.
Contractual Obligations
Jasper Lake Holdings Limited (“Jasper”), a related party, holds an 8% convertible promissory note in the principal amount of $75,000,000 with a maturity date of December 19, 2018. Upon maturity, Jasper may convert all or any portion of the then aggregate outstanding principal amount, together with any accrued and unpaid interest, into shares of Company’s common stock at $10.00 per share.
Off-Balance Sheet Arrangements
On January 29, 2016, we received an undertaking commitment letter provided by our majority shareholder who was willing to provide sufficient funding on an as-needed basis. We believe that the financial commitment provided by our majority shareholder could provide our Company with sufficient capital resources to meet our capital needs for a reasonable period of time.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements require the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
The methods, estimates, and judgment we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined “critical accounting policies” as those accounting policies that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates relate to the fair value of warrant liabilities, impairment of long-lived assets, commitments and contingencies, and revenue recognition. We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. For additional information see Note 2, “Summary of Significant Accounting Policies” in the notes to our consolidated financial statements appearing elsewhere in this report. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available, and actual results may differ significantly from these estimates.
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Item 7A Quantitative and Qualitative Disclosures about Market Risk.
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates.
Foreign Currency Exchange Risk
The functional currency of our operating subsidiary is RMB, and therefore our operations are exposed to foreign exchange rate fluctuations. Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the RMB to the U.S. dollar.
Effect of Inflation
We believe that inflation has not had a material impact on our consolidated results of operations for the year ended December 31, 2017. There can be no assurance that future inflation will not have an adverse impact on our consolidated results of operations or financial condition.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the financial statements, listed in Item 15, which appear at pages F-1 through F-22 of this Report and which are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017 and concluded that the disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting identified below.
Internal Control over Financial Reporting
Management’s Annual Report on Internal Control Over Financial Reporting.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and Board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting as of December 31, 2017 was not effective.
A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Management identified the following material weaknesses in its assessment of the effectiveness of internal control over financial reporting as of December 31, 2017:
| ● |
Lack of sufficient full-time accounting staff in our accounting department that have experience and knowledge in identifying and resolving complex accounting issues under U.S. Generally Accepted Accounting Principles (“GAAP”); The weakness resulted in the restatement of consolidated balance sheet and consolidated income statement to treat an extinguishment transaction between related entities as a capital transaction in the Form 10-K for the year ended December 31, 2015, and such weakness had not been fully remediated as of December 31, 2017; and | |
| ● |
Lack of sufficient accounting personnel which would provide segregation of duties within our internal control procedures to support the accurate reporting of our financial results. The weakness resulted in the amendment and additions of the disclosure of real estate properties and land lots under development in the Form 10-K for the year ended December 31, 2015, and such weakness had not been fully remediated as of December 31, 2017. |
Remediation Efforts to Address Significant Deficiencies
To remediate the weakness in our internal control, during the second quarter of 2017, the Board has appointed Tsz-Kit Chan as our Chief Financial Officer, who has extensive experience in U.S. GAAP. The Board believed that the new CFO appointment will strengthen our internal control over financial reporting and provide necessary oversight over the internal accounting practice on a daily basis.
We also intend to take the following actions to address the material weaknesses described above:
| · | Our Audit Committee of the Board will provide further necessary oversight on and training for accounting and finance personnel, so that they are well versed in SEC regulations. We expect to provide it to our staff throughout the year of 2018; |
| · | Our Audit Committee as well as the Board will perform a thorough review of the processes and procedures used in the Company’s SEC reporting compliance. The review of the processes and procedures shall be carried out during the year of 2018. |
Any actions we have taken or may take to remediate these material weaknesses are subject to continued management review supported by testing, as well as oversight by the Audit Committee of our Board. We cannot assure you that these material weaknesses will not occur in the future and that we will be able to remediate such weaknesses in a timely manner, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows.
Changes in Internal Controls over Financial Reporting
Other than those described above, there were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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Item 10. Directors, Executive Officers and Corporate Governance.
Our directors, executive officers and key employees as of March 8, 2018 are listed below. The number of directors is determined by our Board of Directors. All directors hold office until the next annual meeting of the Board or until their successors have been duly elected and qualified. Officers are elected by the Board of Directors and their terms of office are, except to the extent governed by employment contract, at the discretion of the Board of Directors.
Directors and Executive Officers
| Name | Age | Position | ||
| Xiangyao Liu | 46 | Chief Executive Officer, President, Secretary and Chairman of the Board | ||
| Tsz-Kit Chan | 41 | Chief Financial Officer | ||
| James Stuart Coleman | 61 | Director | ||
| Zhanhuai Cheng | 70 | Director | ||
| Yanliang Wu | 52 | Director | ||
| Yu Zong | 47 | Director | ||
| Harvey Leibowitz (1) (2) (3) (4) (5) (6) | 83 | Independent Director | ||
| Zhixue Liu (2) (3) (5) | 54 | Independent Director | ||
| Tongming Wang (1) (4) (6) | 58 | Independent Director | ||
| Adam S. Goldberg (1) (2) (3) (4) (5) (6) | 47 | Independent Director | ||
| Daniel W. Heffernan (1) (2) (3) (4) (5) (6) | 68 | Independent Director | ||
| Zhihong Su (1) (2) (3) (4) (5) (6) | 57 | Independent Director |
| (1) | Member of the Audit Committee |
| (2) | Member of the Compensation Committee |
| (3) | Member of the Nomination Committee |
| (4) | Member of the Governance and Human Resources Committee |
| (5) | Member of the Board Oversight Committee |
| (6) | Member of the Social Media Committee |
Xiangyao Liu, President, CEO, Secretary and Chairman of the Board (age 46)
Mr. Xiangyao Liu served in the state-owned Materials Bureau of Hebei Province and was involved in steel and other logistics trading between 1994 and 1996. From 1996 to 2003, he invested and established the Pacific Trade and Logistics in China, served as the General Manager and engaged in the trading and logistics of steel, agricultural products and other commodities. In 2010, Mr. Liu participated in the investment of Wuhan Renhe Group Limited, which held Wuhan Huazhong Steel Trading Center Co., Ltd., at that time, supervising the logistics and trading of steel. He also started to engage in financial and security investments in Hong Kong. From November 2010 to December 2012, Mr. Liu was the deputy general manager of Wuhan Renhe Group Limited. From January 2012 to June 2015, Mr. Liu served as the Deputy General Manager of the Wuhan Huazhong Steel Trading Center Co., Ltd., which later became Wuhan Yangtze River Newport Logistics Co. Ltd. He supervised the transition of the Steel Trading Center to a residential and commercial complex which supports the warehouses and docks, led projects to bring the Steel Trading Center into the Yangluo Comprehensive Bonded Zone and Free Trade Area in Wuhan, supervised the feasibility study of the Wuhan Yangtze River Newport Logistics Center and collaborated with the local government to develop the Yangluo Newport Project Plan, handling corporate structuring, strategic planning and operations management of the company. Mr. Liu was appointed as the CEO and the Chairman of the Board of the Company in July 2015 because of his managerial skills and expertise in the industry.
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Mr. Liu received his Bachelor’s degree in Business Management from the Hebei Institute of Finance in 1994.
Tsz-Kit Chan, Chief Financial Officer (age 41)
On May 5, 2017, the Company’s former Chief Financial Officer, Ms. Xin “Cindy” Zheng, tendered her resignation. On the same day, Mr. Tsz-Kit Chan was nominated by the Company’s Nomination Committee of the Board of Directors, and was approved and appointed by the Board of Directors to serve as the Company’s Chief Financial Officer, effective as of May 10, 2017. Mr. Chan, 41 years of age, is a dedicated professional with a proven track record in corporate governance and the US financial reporting. He was the Chief Financial Officer of QKL Stores Inc, a company listed on the NASDAQ Exchange, during the period from 2010 to 2016. Mr. Chan holds a Master of Business Administration from the Chinese University of Hong Kong. He is a certified public accountant in Hong Kong, and also a member of the American Institute of Certified Public Accountants.
James Stuart Coleman, Director (age 61)
Mr. James Coleman has been the Chief Representative in the United States of Wuhan Yangtze River Newport Logistics Co., Limited since April 2015. Mr. Coleman is also the CEO and CFO of Dream Recovery International, Inc., a drug and alcohol rehabilitation facility from January 2014. Mr. Coleman has been a Partner of the Angel Capital Ltd, an angel capital investor in start-up companies since September 2012. Since April 2006, Mr. Coleman has served as an Associate Broker at Bond New York Properties, LLC, specializing in commercial real estate in New York. We have selected Mr. Coleman as a director because of his experience with the capital markets in the United States.
Mr. Coleman received his Bachelor’s degree in Arts from Allegheny College in 1978. He is also a licensed Associate Broker in the State of New York.
Zhanhuai Cheng, Director (age 62)
Mr. Zhanhuai Cheng has served as the Chief Technology Officer (“CTO”) of Wuhan Huazhong Steel Trading Center since December 2008 and is responsible for the planning and construction of the logistics warehouse, dock berths, and supporting residential and commercial buildings. Since July 2015, after Wuhan Huangzhong Steel Trading Center restructured into Wuhan Newport, Mr. Cheng continued serving as the CTO of Wuhan Newport. Mr. Cheng was appointed as a member of the Board in December in 2015. From 2000 to 2007, Mr. Cheng was employed by the Wuhan City Port Authority Officers and was in charge of port construction planning. During his term with the office, Mr. Cheng worked with the various ports along the Yangtze River and accumulated great experience in port planning, wharf construction, operations and management. He helped various agencies of the Wuhan government to complete the transformation of the water network, port construction, etc., and obtained the title of “Advanced Workers of Wuhan City”. During his service, Mr. Cheng also directed the planning, development and construction of the Qingshan Port, Yangluo Port, Yangsi Port and other terminals in Wuhan.
From 1993 to 2000, Mr. Cheng served as an officer of Wuhan Light Rail Construction and was in charge of resource development, project design, tendering and construction work. During his term of office, Mr. Cheng contributed greatly to metro line planning and rail transit construction in Wuhan. These are recognized by the Wuhan Government with a number of honorary titles issued to him.
Mr. Cheng has also previously worked in the Wuhan Iron and Steel Limited, focusing on the production of railway and other construction, and port transportation projections. Mr. Cheng was also employed by the Ministry of Railways Bridge Engineering Bureau and served as a staff analyst and later on a vice dean of an academic institute, contributing to many projects and achieving great success. We have selected Mr. Cheng as a director because of his expertise in our industry.
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Yanliang Wu, Director (age 52)
Mr. Wu has served as the deputy general manager of Wuhan Huazhong Steel Trading Center since June 2010. Since July 2015, after Wuhan Huangzhong Steel Trading Center re-structured into Wuhan Newport, Mr. Wu continued serving as the deputy general manager of Wuhan Newport. Mr. Wu has been working for Wuhan Yangtze River Newport Logistics Co. Ltd. since 2012, and is in charge of the company’s indoor storage, outdoor yards, approval, planning and construction of warehouses, and operations management. Mr. Wu worked for Alpha Logistics Co, Ltd. in Montreal, Canada from 1997 to 2003, where he served as the Head of Logistics and coordinated the construction of the logistics network of the company in North America and the Pacific Rim. From 2002 to 2012, he was in charge of the company’s business development in the logistics industry in Mainland China, as well as leading the opening of its Shanghai branch. From 1986 to 1996, Mr. Wu worked in the head office of the state-owned Wuhan Metal Materials Corporation, serving as the Minister of Management and General Manager of Commodity Trading. During his employment, he received two accolades for his personal achievement in 1990 and 1992. He was also certified as a senior economist in China in September 1994. We have selected Mr. Wu as a director because of his expertise in our industry.
Mr. Wu received his Bachelor of Sciences degree in Logistics from Huazhong University of Science and Technology in 1986.
Yu Zong, Director (age 47)
Mr. Zong has served as the Deputy General Manager of Wuhan Yangtze River Newport Logistics Co. Ltd. from February 2012 to September 2015, and was in charge of the development, construction and management of the real estate. Mr. Zong became its general manager and legal representative in October 2015. In July 2015, after Wuhan Huangzhong Steel Trading Center re-structured into Wuhan Newport, Mr. Zong was appointed as the deputy general manager of Wuhan Newport. Mr. Zong was appointed as General Manager and Chief Representative of Wuhan Newport in October 2015. From September 2009 to January 2012, he worked in Wuhan Dingxin Real Estate Ltd. as its Deputy General Manager and Chief Engineer, leading the construction and management of the “Mocha Town” Phase II Development Project. From 2007 to 2009, Mr. Zong worked in the China Railway Group Wuhan Properties Limited, as the minister of Engineering Planning Division, and participated in a large real estate project which had a total investment of six (6) billion RMB. From 2003 to 2006, Mr. Zong worked in Hubei Jiuding Ltd., as the Deputy General Manager and Chief Engineer and was responsible for the construction and management of a villa project which occupied an area of 80,000 square meters and a total construction area of 70,000 square meters. During the construction period, his duties included preliminary design, construction report, project quality control, and compliance. From 2000 to 2002, Mr. Zong worked as the Project Manager for Pace Home Development Inc., in Canada, providing consulting services for various types of construction projects. Mr. Zong also previously worked in the Wuhan Institute of Architecture Design Institute. We have selected Mr. Zong as a director because of his expertise in our industry.
Mr. Zong obtained his bachelor’s degree in Civil Engineering in 1993 from Wuhan University. He also obtained his master’ degree in Engineering from the University of British Columbia in 2004.
Harvey Leibowitz, Independent Director, Chair of the Audit and Compensation Committees (age 83)
Mr. Leibowtiz has been a director and Chair of the Audit Committee of ASTA Funding, Inc., a company listed on the NASDAQ since 2000. Mr. Leibowitz graduated from the City University of New York - Baruch College in 1955 with a bachelor’s degree in Accounting. Between 1955 and 1962, he was employed as a staff accountant at various accounting firms working on matters relating to audits, taxes and write-ups. From 1962 to 1979, Mr. Leibowtiz worked at Standard Financial Corporation, which acquired Sterling National Bank in 1965, in capacities including internal auditor and Senior Vice President in charge of commercial financing and factoring. From 1980 to 1994, Mr. Leibowitz worked for companies such as International Paper Company, Century Factors, Inc., and Foothill Financial Advisors, Inc., and was in charged of commercial financing involving secured loan financing. From 1994 to 1999, Mr. Leibowitz worked for Sterling National Bank as an internal auditor and was in charge of the Commercial Finance Department. Based on Mr. Leibowitz’s education and employment background, we have selected Mr. Leibowitz as a director and chairman of the Audit Committee because of his expertise in accounting and finance and the Board believes that Mr. Leibowitz qualifies as a “financial expert” as defined by the SEC rules.
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Zhixue Liu, Independent Director (age 54)
Mr. Liu obtained his Ph.D. in Management and is currently a professor at the School of Management of Huazhong University of Science and Technology. Mr. Liu has been teaching as a professor at the School of Management of the Huazhong University of Science & Technology since January 2011. Mr. Liu was appointed as a member of the Board in December 2015. Also currently the Deputy Director of the Product Operations and Logistics Management Department, Mr. Liu is one of the main drafters of The People’s Republic of China National Standard - Classification and Index of Logistics Enterprises and The People’s Republic of China National Standard - Logistics Terminology . He is also a member of the National Ministry of Education Logistics Specialty Guidance Steering Committee, Board of Trustee of the National Natural Science Fund Committee Management Division, Committee of the National Professional Commission for Certification of Logistics Specialist, Deputy Secretary General of the China Logistics Technology Association, Executive Director of the China Society of Logistics, and Executive Director of the China Marketing Association.
Mr. Liu obtained his bachelor’s in Logistics from Huazhong University of Science and Technology in 1986. After his graduation, he served as an assistant, lecturer, associate professor, professor and doctoral tutor in the University, and focuses on researching and teaching logistics management, supply chain management, international trade, international business operations and marketing. Recently, he published six (6) representative works, including the Modern Logistics Handbook , and more than forty (40) papers in domestic and foreign mainstream journals. He also hosted and participated in academic forums on Research on Model of Supply Chain Logistics Management and Case Studies on China’s Auto Supply Chain and other studies initiated by the National Natural Science Foundation. Mr. Liu has led research on the Shandong Weifang City Logistics Development Strategy Plan, Planning of Jiangyin Yangtze Port Integrated Logistics Zone and Logistics Solutions for Dongfeng Vehicles, Study on Transition of Wuhan Iron and Logistics Transportation Companies and a number of other logistics management topics. Mr. Liu and his research have been awarded the Outstanding Scientific Achievement Award under China’s “Ninth Five-Year” key scientific and technological projects, and Second Place in the National Commerce Scientific Advancement Award. We have selected Mr. Liu as a director because of his expertise and scholarship in the industry.
Tongmin Wang, Independent Director (age 58)
Mr. Wang was a chief engineer of Logistical Equipment at Wuhan Iron and Steel Limited from January 2011. Mr. Wang has worked for Wuhan Iron and Steel Limited and Wuhan Port Terminal Foreign Trade Co., Ltd. since 2007. He has served as the deputy general manager of the Office of Corporate Integration, Chief Administrative Officer, Director of Cargo Unloading and Chief Engineer of Logistical Equipment. Mr. Wang worked for Wuhan Port Group from 1992 to 2007. During this period, he held positions include Deputy Administrate Officer, Deputy Director of the Wuhan Water Company, Director of the Wuhan Port Mechanical Company, Manager of the Office of the Corporate Integration, Director of the Cargo Unloading Division and etc. From 1981 to 1992, Mr. Wang worked for the Wuhan Port Machinery Plant of the Ministry of Transportation in China.
Mr. Wang possesses professional knowledge and more than three decades of experience in the management of a port. He is familiar with the logistics industry and takes a practical approach in the organization and management of cargo loading/unloading. He is able to utilize his expertise to solve practical problems involving the day-to-day operations at a port terminal. We have selected Mr. Wang as a director because of his expertise in the industry.
He received his bachelor’s degree in Mechanical Engineering from Wuhan Institute of Maritime and master’s degree in Industrial Management from the Chinese Academy of Social Sciences in 1998.
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Adam S. Goldberg, Independent Director, Chair of the Social Media Committee (age 47)
Mr. Goldberg is the president and founder of Telco Experts LLC since March 2008. He served as CEO of Gemini Communications from March 1996 to March 2008. At Telco, Mr. Goldberg obtained regulatory approval as a licensed telephone company in 21 states and manages staff of 30 telecommunication professionals and engineers. Mr. Goldberg has extensive experience in business development, regulatory affairs, strategic planning, employee development and project management. We have selected Mr. Goldberg as a director because of his expertise in project management and strategic planning.
Mr. Goldberg obtained his bachelor’s degree in Marketing and finance from University of Maryland, Robert H. Smith School of Business in 1993.
Daniel W. Heffernan, Independent Director Chair of the Nomination and Board Oversight Committees (age 57)
Mr. Heffernan has served as the Principal of HRK Associates, specializing in credit enhanced finance since 1998. Mr. Heffernan was the Principal of HRK Associates since January 2011. Mr. Heffernan was appointed as a member of the Board in December 2015. Prior to his position at HRK, from 1973 to 1986, Mr. Heffernan served as an officer at New York Life Insurance Company. From 1986 to 1998, Mr. Heffernan was employed as an officer at Jhminer, Co. Ltd., in New York. Mr. Heffernan has more than thirty years of financial experience in the highly specialized niche market of mitigation of risk through the use of insurance and reinsurance related financial products. He has provided services to clients operating throughout the U.S. and in the international marketplace, leveraging his experience in providing credit enhanced, customized financial solutions that provide a distinctive bridge to the capital markets.
Mr. Heffernan is actuarially trained and has previously worked for New York Life Insurance Company, where he ran the Pension Department and supervised its two hundred eighty employees, and MINET/MIPI Brokers. While at New York Life, he consulted with a client base in excess of 5,000 corporations and unions, providing services ranging from structuring to administration. We have selected Mr. Heffernan as a director because of his expertise in finance.
Mr. Daniel W. Heffernan obtained his bachelor’s degree in Theology from New York Shadowbrook Jesuit Seminary in 1972.
Zhihong Su, Independent Director, Chair of the Governance and Human Resources Committee (age 57)
Mr. Su has served as the managing partner of the Beijing Hengjun Law Firm since December 2001, practicing in areas such as securities, litigation, general corporate and banking. Mr. Su was appointed as member of the Board in January 2016. Mr. Su started his career as in-house counsel for China International Trust and Investment Corporation (“CITIC”) in December 1984, and was responsible for the legal affairs of overseas investments. In January 1990, Mr. Su was sent to station at the Washington DC-based law firm Arnold and Porter LLP as a foreign lawyer to oversee a full spectrum of legal matters of CITIC’s subsidiaries in the United States, namely, CITIC Steel Group, CITIC Buffalo Tungsten Company, CITIC Seattle Woodland and CITIC Florida Real Estate Co. Ltd. During his stay in Washington from 1990 to June 1996, he worked on a number of matters involving corporate and securities law. Upon returning to China in July 1996, Mr. Su worked for the Law Offices of Jiahe as one of the founding members and as an attorney until November 2001. We have chosen Mr. Su to serve as a director because of the perspective he brings to legal matters in China.
Mr. Su earned his bachelor’s degree in Laws (LLB) from China University of Political Science and Law where he had taught for a year after graduation before becoming a qualified Chinese lawyer in the same year.
Term of Office
Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our Board of Directors and hold office until removed by the board.
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Family Relationships
There are no family relationships between any of our directors or executive officers and any other directors or executive officers. None of our directors or executive officers or their respective immediate family members or affiliates are indebted to us.
Involvement in Certain Legal Proceedings
Except as described below, to the best of our knowledge, none of our directors or executive officers has, during the past ten years:
| ● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| ● | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; | |
| ● | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, by any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; | |
| ● | been found by a court of competent jurisdiction in a civil action or by the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| ● | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| ● | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
On December 19, 2015, James Coleman joined us as Executive Director. Prior to joining us, Mr. Coleman was the managing member and owner of Firebird International LLC, Dream International Holdings LLC and Dream Recovery International LLC, all of which are privately held companies engaged primarily in drug rehabilitation businesses, from January 2014 to September 2016. On September 13, 2016, all three entities mentioned above filed voluntary petitions in the United States Bankruptcy Court for the District of Southern Florida seeking relief under the provisions of chapter 7 of title 11 of the United States Code in order to facilitate liquidations in these three entities.
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
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Committees of the Board of Directors
On January 25, 2016, the Board formed and adopted charters for six standing committees: Audit Committee, Compensation Committee, Nomination Committee, Governance and Human Resources Committee, Board Oversight Committee, Social Media Committee (collectively the “Committees”). Each Committee consists of only independent directors of the Company. The Board also adopted charter for the Regulatory, Compliance and Government Affairs Committee, for which the charter will be implemented once the committee is formed. The Company believes that the adoption of these charters and formation of these Committees are necessary for the implementation of effective internal control and oversight and a significant step towards remediating any material weakness the Company currently has.
Audit Committee
The Audit Committee shall make such examinations as are necessary to monitor the corporate financial reporting and external audits of the Company and its subsidiaries; to provide to the Board the results of its examinations and recommendations derived therefrom; to outline to the Board improvements made, or to be made, in internal accounting controls; to nominate independent auditor; and to provide to the Board such additional information and materials as it may deem necessary to make the Board aware of significant financial matters requiring Board attention.
Compensation Committee
The purpose of the Compensation Committee is to review and make recommendations to the Board regarding all forms of compensation to be provided to the executive officers and directors of the Company, including stock compensation and loans, and all bonus and stock compensation to all employees.
Nomination Committee
The purpose of the Nomination Committee shall be to review and make recommendations to the Board regarding matters concerning corporate governance; review the composition of and evaluate the performance of the Board; recommend persons for election to the Board and evaluate director compensation; review the composition of committees of the Board and recommend persons to be members of such committees; review and maintain compliance of committee membership with applicable regulatory requirements; and review conflicts of interest of members of the Board and corporate officers.
Governance and Human Resources Committee
The Governance and Human Resources Committee shall be is responsible for (1) developing Company’s approach to the Board and corporate governance issues; (2) helping to maintain an effective working relationship between the Board and management; (3) exercising, within the limits imposed by the by-laws of the Company, by applicable laws, and by the Board, the powers of the Board for the management and direction of the affairs of the Company during the intervals between meetings of the Board; (4) reviewing and making recommendations to the Board for the appointment of senior executives of the Company and for considering their terms of employment; (5) reviewing succession planning, matters of compensation; (6) recommending awards under the Company’s long term and short term incentive plans; (7) assuming the role of administrator, whether by delegation or by statute, for the corporate-sponsored registered pension plans and the Supplementary Executive Retirement Plan of the Company and its wholly-owned subsidiaries and any future, additional or replacement plans relating to the plans; and (8) monitoring the investment performance of the trust funds for the plans and compliance with applicable legislation and investment policies.
Board Oversight Committee
Board Oversight Committee shall assist the Board Oversight Committee and the Board in the exercise of its responsibilities, particularly by defining the scope of the Committee’s authority in respect of risk oversight matters delegated to it by the Board.
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Social Media Committee
The Social Media Committee shall oversee the social media strategy initiatives for the Company pursuant to Regulation FD. The Committee shall 1) provide compliant Regulation FD strategic leadership for social media through the alignment of social media strategies and activities with enterprise strategic objectives and processes; 2) establish and maintain corporate policies with respect to use of social media for both process-driven social engagements, as well as for use of social media by employees for participating in social conversations (e.g. blogging and Tweeting by subject matter experts); 3) prioritize social media initiatives and deliver final approvals and recommendations on proceeding with proposed social media projects, including process, technology, and organizational project; 4) ensure open communication between the social media department and the other functional units of the Company so as to promote collaborative strategies, planning, and implementation.
As of March 8, 2018, the following are the respective members of each committee.
| ● | Audit Committee: Harvey Leibowitz (Chair), Zhihong Su, Daniel W. Heffernan, Adam Goldberg, Tongmin Wang | |
| ● | Compensation Committee: Harvey Leibowitz (Chair), Zhihong Su, Zhixue Liu, Adam Goldberg, Daniel W. Heffernan | |
| ● | Nomination Committee: Daniel W. Heffernan (Chair), Harvey Leibowitz, Zhixue Liu, Adam Goldberg, Zhihong Su | |
| ● | Governance and Human Resources Committee: Zhihong Su (Chair), Harvey Leibowitz, Adam Goldberg, Daniel W. Heffernan, Tongmin Wang | |
| ● | Board Oversight Committee: Daniel W. Heffernan (Chair), Zhixue Liu, Harvey Leibowitz, Adam Goldberg, Zhihong Su | |
| ● | Social Media Committee: Adam Goldberg (Chair), Harvey Leibowitz, Zhihong Su, Daniel W. Heffernan, Tongmin Wang |
Corporate Governance
The business and affairs of the company are managed under the direction of our Board. We have conducted Board meetings regularly since inception. Each of our directors has attended all meetings either in person or via telephone conference, or through written consent for special meetings. In addition to the contact information in this Annual Report, the Board has adopted procedures for communications to the officers and directors as of January 28, 2016. Each stockholder will be given specific information on how he/she can direct communications to the officers and directors of the Company at our annual stockholders meeting. All communications from stockholders are relayed to the members of the Board.
Board Meetings
The Board of Directors and its committees held the following number of meetings during 2017:
| Board of Directors | 7 | |||
| Audit Committee | 4 | |||
| Compensation Committee | 1 | |||
| Nominating Committee | 1 | |||
| Governance and Human Resources Committee | - | |||
| Board Oversight Committee | - | |||
| Social Media Committee | - |
The above table includes meetings held by means of a conference telephone call, but not actions taken by unanimous written consent.
Board Leadership Structure and Role in Risk Oversight
Our Board is primarily responsible for overseeing our risk management processes. The Board receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The Board focuses on the most significant risks facing our Company and our Company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the Board’s appetite for risk. While the Board oversees our Company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company and that our Board leadership structure supports this approach.
The audit committee, which was formed on June 28, 2016, assists our Board in its general oversight of, among other things, the company’s policies, guidelines and related practices regarding risk assessment and risk management, including the risk of fraud. As part of this endeavor, the audit committee reviews and assesses the company’s major financial, legal, regulatory, environmental and similar risk exposures and the steps that management has taken to monitor and control such exposures. The audit committee also reviews and assesses the quality and integrity of the company’s public reporting, the company’s compliance with legal and regulatory requirements, the performance and independence of the company’s independent auditors, the performance of the company’s internal audit department, the effectiveness of the company’s disclosure controls and procedures, and the adequacy and effectiveness of the company’s risk management policies and related practices.
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Insider Trading Policy
The Board also adopted an insider trading policy that allows insiders to sell securities of the Company pursuant to pre-arranged trading plans.
This insider trading policy was put in place because effective October 23, 2000, the Securities and Exchange Commission (the “SEC”) adopted rules related to insider trading. One of these rules, Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, provides an exemption to the insider trading rules in the form of an affirmative defense. Rule 10b5-1 recognizes the creation of formal programs under which executives and other insiders may sell the securities of publicly traded companies on a regular basis pursuant to written plans that are entered into at a time when the plan participants are not aware of material non-public information and that otherwise comply with the requirements of Rule 10b5-1.
The Board also adopted a written disclosure policy, which applies to all directors, officers and employees of the Company and its wholly owned subsidiaries, to ensure that communications to the investing public about the Company are timely, factual and accurate and broadly disseminated in accordance with all applicable legal and regulatory requirements.
Whistleblower Policy
We have adopted a code of ethics as of the date of this Annual Report that applies to our principal executive officer, principal financial officer, directors and principal accounting officer as well as our employees. Our standards are in writing and are to be posted on our website at www.yerr.com.cn at a future time. The following is a summation of the key points of the Code of Ethics we adopted:
Code of Ethics
We have adopted a code of ethics as of the date of this Annual Report that applies to our principal executive officer, principal financial officer, directors and principal accounting officer as well as our employees. Our standards are in writing and are to be posted on our website at www.yerr.com.cn at a future time. The following is a summation of the key points of the Code of Ethics we adopted:
| ● | Honest and ethical conduct, including ethical handling of actual or apparent conflicts of interest between personal and professional relationships; | |
| ● | Full, fair, accurate, timely, and understandable disclosure reports and documents that a small business issuer files with, or submits to, the Commission and in other public communications made by our Company; | |
| ● | Full compliance with applicable government laws, rules and regulations; | |
| ● | The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and | |
| ● | Accountability for adherence to the code. |
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Exchange Act, our directors and certain of our officers, and persons holding more than 10 percent of our common stock are required to file forms reporting their beneficial ownership of our common stock and subsequent changes in that ownership with the United States Securities and Exchange Commission.
Based solely upon a review of copies of such forms filed on Forms 3, 4, and 5, and amendments thereto furnished to us, we believe that as of March 8, 2018, our executive officers, directors and greater than 10 percent beneficial owners have complied on a timely basis with all Section 16(a) filing requirements.
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Item 11. Executive Compensation.
Compensation Discussion and Analysis
The following is a discussion of our executive compensation program and the compensation decisions made for fiscal year 2017 with respect to Mr. Xiangyao Liu, our President, Chief Executive Officer, Secretary and Chairman (referred to as our “CEO”) and Xin (“Cindy”) Zheng , our ex-Chief Financial Officer and Mr. Tsz-Kit Chan, our present Chief Financial Officer (referred to as our “CFO”). We refer to these executive officers as the “named executive officers.”
As of December 31, 2017, Mr. Liu and Mr. Chan were the only two executive officers. Ms. Zheng resigned as our CFO on May 10, 2017. Currently, the position of President is vacant, and our CEO has assumed the responsibilities of that office on an interim basis.
In 2017, the Compensation Committee accepted recommendations and ideas from senior management and combined with market data to determine the compensation to be paid to the Company’s executive officers.
Important determining factors included the Company’s financial and operating performance and prospects, the level of compensation paid to similarly situated executives in comparably sized companies, equity grants made in prior years, and the contributions made by each of the executive officers to the success of the Company. The compensation committee is responsible for approving and overseeing executive compensation.
Mr. Liu has been involved in the Board’s deliberations regarding executive compensation in the past and has provided recommendations with respect to his and any other executive officers’ compensation. Beginning in January 25, 2016 determinations of Mr. Liu’s, Ms. Zheng’s and Mr. Chan’s compensation have been made solely by our compensation committee, and neither Mr. Liu, Ms. Zheng nor Mr. Chan has taken part in any discussions regarding their own respective compensation.
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The key elements of our executive compensation program
In the fiscal year of 2017, the key elements of our compensation program are salary, an annual cash incentive, and long-term equity-based compensation awards.
Base salary
Salaries are based on the executive’s performance, scope of responsibilities and experience, competitive pay practices and tenure. Base salary is intended to provide a fixed, baseline level of compensation that is not contingent upon the Company’s performance, although performance does influence salary adjustments. We believe that the base salaries of our executives should be targeted at or above the median of base salaries for executives in similar positions with similar responsibilities at comparable companies, consistent with our compensation philosophy. At the end of the year, each executive's performance is evaluated by our Compensation Committee, which takes into account the individual's performance, responsibilities of the position, experience, and external market conditions and practices. Ms. Zheng and Mr. Chan’s salary continue to be similar to the market median. Mr. Liu has voluntarily decided not to receive any compensation until the Company is fully operational and generates revenue.
Annual Cash Bonus
It has not been the practice of the Company to pay annual bonuses. The Compensation Committee continues to review its use of discretionary bonuses. There has been some consideration for establishing a formulaic approach to paying bonuses but the uncertainty of world-wide economic growth and how that will affect our markets has caused the Committee to maintain its current approach.
Equity-based long-term incentive awards
The primary part of our compensation program will eventually be long-term equity-based compensation. The Compensation Committee has been considering performance shares and other types of equity grants that increase the performance element of equity grants. No grants has been made yet.
Role of Long-Term Incentive Awards. Long-term incentive grants as the primary component of compensation provide a number of benefits as follows:
| ● | allows us to offer a compensation package that is competitive and enhances our ability to attract and retain executive talent; | |
| ● | aligns the interests of our executives with those of our shareholders, thereby encouraging the creation of shareholder value; and | |
| ● | helps establish a direct link between compensation amounts, total shareholder return and company operating performance. |
Award Process. In making awards, the Compensation Committee will not issue a targeted number of shares. Instead, in taking into account market comparison data and the executive’s performance, the Compensation Committee will first determine the total dollar value of the award to be granted to the named executive officer.
The values assigned by the Compensation Committee to the individual equity grants are then translated into a specific number of full share grants such as restricted stock or options to purchase stock, in each case based on the fair market value at the date of the grant. The value ultimately realized from these awards will depend on a number of factors, including our operating performance and movements in our stock price.
Timing of Equity Awards. The Compensation Committee has not formally adopted a timing policy for the granting of stock options; however, stock option grants have not been made to the executive officers nor are there plans to do so in the future.
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Other benefits
At present we do not provide nor do we plan to provide, pension benefits, deferred compensation, life insurance or other benefits to our named executive officers. Our philosophy is to have pay based almost exclusively on performance and at levels above market.
Summary Compensation Table
The Summary Compensation Table below sets forth information regarding the compensation awarded to or earned by the company’s executive officers for our fiscal years ended December 31, 2017, 2016 and 2015.
| Name | Year | Salary ($) | Bonus ($) | Securities-based Compensation ($) | All other compensation ($) | Total ($) | ||||||||||||||||||
| Xiangyao Liu | 2017 | - | - | - | - | - | ||||||||||||||||||
| Chief Executive Officer(1) | 2016 | - | - | - | - | - | ||||||||||||||||||
| 2015 | - | - | - | - | - | |||||||||||||||||||
| Jianfeng Guo | ||||||||||||||||||||||||
| Former Chief Executive Officer, | ||||||||||||||||||||||||
| Former Chairman of the Board (2) | 2015 | - | - | - | - | - | ||||||||||||||||||
| Longlin Hu | ||||||||||||||||||||||||
| Former Chief Executive Officer(3) | 2015 | 37,500 | - | - | - | 37,500 | ||||||||||||||||||
| Xin “Cindy” Zheng | 2017 | 18,000 | - | - | - | 18,000 | ||||||||||||||||||
| Former Chief Financial Officer (4) | 2016 | 54,000 | - | - | - | 54,000 | ||||||||||||||||||
| 2015 | 54,000 | - | - | - | 54,000 | |||||||||||||||||||
| Tsz-Kit Chan | 2017 | 53,678 | - | - | - | 53,678 | ||||||||||||||||||
| Chief Financial Officer (5) | 2016 | - | - | - | - | - | ||||||||||||||||||
| 2015 | - | - | - | - | - | |||||||||||||||||||
| (1) | On December 19, 2015, Company acquired Energetic Mind and its wholly-owned subsidiaries and in connection with that transaction, Mr. Liu was appointed as our President, Chief Executive Officer, Secretary and Chairman of the Board. As of the date of this Annual Report, Mr. Liu is the President, Chief Executive Officer, Secretary and Chairman of the Board. |
| (2) | Mr. Guo was appointed as our President and Chief Executive Officer on June 1, 2015 and resigned as an executive officer and director on December 19, 2015 as a result of the transaction describe above in (1). |
| (3) | Mr. Hu resigned from all his officer and director positions as president and chief executive office of the Company and as a member of the Board of Directors on June 1, 2015. Prior to his resignation, Mr. Hu served as the President and Chief Executive Officer and a member of the Board of Directors from March 1, 2011. |
| (4) | Ms. Zheng was appointed as our Chief Financial Officer on April 27, 2011 and resigned from that position on May 10, 2017. |
| (5) | Mr. Chan was appointed as our Chief Financial Officer on May 10, 2017. The term of Mr. Chan’s employment is for one year, commencing on May 10, 2017, and automatically renews for successive one year periods, subject to the Company’s right to terminate the employment agreement at any time upon thirty (30) days prior written notice. Mr. Chan will receive a monthly salary of US $8,000, and share-based compensation of 100,000 shares of the Company’s common stock for his first year of employment. |
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Employment Agreements
We have employment agreements with all of our directors and officers except Xiangyao Liu.
As disclosed above, Mr. Tsz-Kit Chan was appointed as the Chief Financial Officer the Company on May 5, 2017. Pursuant to the Mr. Chan’s employment agreement, the term of his employment is for one year, commencing on May 10, 2017, and automatically renews for successive one year periods, subject to the Company’s right to terminate the employment agreement at any time upon thirty (30) days prior written notice. In addition, during the term of the employment agreement, Mr. Chan has the right to resign and terminate his employment agreement upon thirty (30) days prior written notice to the Company. The employment agreement also contains covenants regarding non-competition and confidentiality. Pursuant to the employment agreement, Mr. Chan will receive a monthly salary of US $8,000, and share-based compensation of 100,000 shares of the Company’s common stock for his first year of employment. Mr. Chan may also be eligible to participate in incentive plans that the Company may establish from time to time, subject to the terms and conditions of the applicable plan.
We have entered into director agreements with each of our directors. These agreements set forth the services to be provided and compensation, with an annual rate ranging from $24,000 to $70,000, to be received by our directors, as well as the directors’ obligations in terms of confidentiality, non-competition and non-solicitation. Pursuant to these agreements, the directorship of our directors will last until the earlier of (i) the date on which the director ceases to be a member of our board of directors for any reason or (ii) the date of termination of these agreements.
We have no other employment agreements with any of our executive officers.
Option Grants
We had no outstanding equity awards as of the end of fiscal year 2017.
Option Exercises and Fiscal Year-End Option Value Table
There were no stock options exercised during fiscal 2017 by the executive officers.
Long-Term Incentive Plans and Awards
There were no awards made to a named executive officer in fiscal 2017 under any long-term incentive plan.
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Director Compensation Table
The following table sets forth the compensation received by each of our Directors for the year ended December 31, 2017.
| Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Non-Qualified Deferred Compensation ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||
| Xiangyao Liu Chairman of the Board | - | - | - | - | - | - | - | |||||||||||||||||||||
| James Stuart Coleman Executive Director(1) | 70,000 | - | - | - | - | - | 70,000 | |||||||||||||||||||||
| Zhanhuai Cheng Executive Director (1) | 24,000 | - | - | - | - | - | 24,000 | |||||||||||||||||||||
| Yanliang Wu Executive Director (1) | 24,000 | - | - | - | - | - | 24,000 | |||||||||||||||||||||
| Yu Zong Executive Director(1) | 24,000 | - | - | - | - | - | 24,000 | |||||||||||||||||||||
| Harvey Leibowitz Independent Director (2) | 48,000 | - | - | - | - | - | 48,000 | |||||||||||||||||||||
| Zhixue Liu Independent Director(3) | 24,000 | - | - | - | - | - | 24,000 | |||||||||||||||||||||
| Tongmin Wang Independent Director(3) | 24,000 | - | - | - | - | - | 24,000 | |||||||||||||||||||||
| Daniel W. Heffernan Independent Director (4)(5) | 48,000 | - | - | - | - | - | 48,000 | |||||||||||||||||||||
| Romano Tio Independent Director(4)(5)(6) | - | - | - | - | - | - | - | |||||||||||||||||||||
| Adam Goldberg Independent Director (6) | 42,133 | - | - | - | - | - | 42,133 | |||||||||||||||||||||
| Zhihong Su Independent Director(3)(5) | 24,000 | - | - | - | - | - | 24,000 | |||||||||||||||||||||
| (1) | As employee directors, James Coleman will be provided with cash compensation of $70,000 per year. Yanliang Wu, Yu Zong and Zhanhuai Cheng will be provided with cash compensation of $24,000 per year, payable monthly. |
| (2) | As an independent director and Chair of the Audit Committee, Harvey Leibowitz will be provided with the following compensation: (a) subject to the Board’s approval, the Company will issue each a total of 20,000 of restricted common stock for services rendered to the Company, with an annual compensation in cash of $48,000, payable quarterly; and (b) during the directorship term, the Company will reimburse the independent directors for all reasonable out-of-pocket travel expenses incurred by the director in attending any in-person meetings, provided that the director complies with the generally applicable policies, practices and procedures of the Company for submission of expense reports, receipts or similar documentation of such expenses. |
| (3) | As independent directors, Zhihong Su, Tongmin Wang and Zhixue Liu will be provided with the following compensation: (a) subject to the Board’s approval, the Company will issue each a total of 10,000 of restricted common stock for services rendered to the Company, with an annual compensation in cash of $24,000, payable monthly; and (b) during the directorship term, the Company will reimburse the independent directors for all reasonable out-of-pocket travel expenses incurred by the director in attending any in-person meetings, provided that the director complies with the generally applicable policies, practices and procedures of the Company for submission of expense reports, receipts or similar documentation of such expenses. |
| (4) | As independent directors, Daniel W. Heffernan, Romano Tio and Adam Goldberg will be provided with the following compensation: (a) subject to the Board’s approval, the Company will issue each a total of 15,000 of restricted common stock for services rendered to the Company, with an annual compensation in cash of $48,000, payable quarterly; and (b) during the directorship term, the Company will reimburse the independent directors for all reasonable out-of-pocket travel expenses incurred by the director in attending any in-person meetings, provided that the director complies with the generally applicable policies, practices and procedures of the Company for submission of expense reports, receipts or similar documentation of such expenses. |
| (5) | Individuals were appointed as members of the Board in January, 2016. |
| (6) | Adam Goldberg replaced Romano Tio as member of the Board in February 2017. |
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information regarding our shares of common stock beneficially owned as of March 8, 2018, for (i) each stockholder known to be the beneficial owner of 5% or more of the Company’s outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.
Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, at the address of: c/o 41 John Street, Suite 2A, New York, NY 10038.
| Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Common Stock(1) | ||||||
| Xiangyao Liu, CEO, President, Chief Executive Officer, and Chairman of the Board(2) | 91,240,000 | 52.94 | % | |||||
| James Stuart Coleman, Executive Director(3) | 4,060,000 | 2.36 | % | |||||
| Xin Zheng, Chief Financial Officer | 0 | 0 | % | |||||
| Yanliang Wu, Executive Director | 0 | 0 | % | |||||
| Yu Zong, Executive Director | 0 | 0 | % | |||||
| Harvey Leibowitz, Independent Director | 0 | 0 | % | |||||
| Zhixue Liu, Independent Director | 0 | 0 | % | |||||
| Tongmin Wang, Independent Director | 0 | 0 | % | |||||
| Daniel W. Heffernan, Independent Director | 0 | 0 | % | |||||
| Adam S. Goldberg, Independent Director | 0 | 0 | % | |||||
| Zhihong Su, Independent Director | 0 | 0 | % | |||||
| Zhanhuai Cheng, Executive Director | 0 | 0 | % | |||||
| All directors and executive officers as a group (12 person) | 95,370,000 | 55.64 | % | |||||
| 5% Shareholders: | ||||||||
| Jasper Lake Holdings Limited(2) | 91,240,000 | 52.94 | % | |||||
| Crestlake Holdings Limited(4) | 16,600,000 | 9.63 | % | |||||
| Fortunate Drift Limited(5) | 16,600,000 | 9.63 | % | |||||
| Majestic Symbol Limited(6) | 16,600,000 | 9.63 | % | |||||
| Zhimin Chen(7) | 14,575,298 | 8.46 | % | |||||
| (1) | Based on 172,344,446 shares of Common Stock outstanding as of the March 8, 2018. |
| (2) | Mr. Liu has investing and dispositive power of shares beneficially owned by Jasper Lake Holdings Limited. |
| (3) | Mr. Coleman owns all of the membership interest of Best Future Investment LLC., which owns 4,060,000 shares of the Company’s common stock. Mr. Coleman may be deemed to be the beneficial owner of the shares of our common stock held by Best Future Investment LLC. |
| (4) | Yanliang Hu has investing and dispositive power of shares beneficially owned by Crestlake Holdings Limited. |
| (5) | Linyu Chen has investing and dispositive power of shares beneficially owned by Fortunate Drift Limited. |
| (6) | Long Zhao has investing and dispositive power of shares beneficially owned by Majestic Symbol Limited. |
| (7) | Including 14,455,247 shares through Prolific Lion Limited and 1,745,950 shares through Valiant Power Limited where Mr. Chen has investing and dispositive power. |
Authorized Capital Stock
Our authorized share capital consists of 500,000,000 shares of common stock, par value $0.0001 per share, and 100,000,000 shares of preferred stock, par value $0.0001 per share. As of March 8, 2018, 172,344,446 shares of our common stock and no shares of our preferred stock were outstanding.
Common Stock
Each share of our common stock entitles its holder to one vote in the election of each director and on all other matters voted on generally by our stockholders, other than any matter that (1) solely relates to the terms of any outstanding series of preferred stock or the number of shares of that series and (2) does not affect the number of authorized shares of preferred stock or the powers, privileges and rights pertaining to the common stock. No share of our common stock affords any cumulative voting rights. This means that the holders of a majority of the voting power of the shares voting for the election of directors can elect all directors to be elected if they choose to do so.
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Holders of our common stock will be entitled to dividends in such amounts and at such times as our Board of Directors in its discretion may declare out of funds legally available for the payment of dividends. We currently intend to retain our entire available discretionary cash flow to finance the growth, development and expansion of our business and do not anticipate paying any cash dividends on the common stock in the foreseeable future. Any future dividends will be paid at the discretion of our Board of Directors after taking into account various factors, including:
| ● | general business conditions; | |
| ● | industry practice; |
| ● | our financial condition and performance; |
| ● | our future prospects; | |
| ● | our cash needs and capital investment plans; | |
| ● | our obligations to holders of any preferred stock we may issue; | |
| ● | income tax consequences; and | |
| ● | the restrictions Nevada and other applicable laws and our credit arrangements then impose. |
If we liquidate or dissolve our business, the holders of our common stock will share ratably in all our assets that are available for distribution to our stockholders after our creditors are paid in full and the holders of all series of our outstanding preferred stock, if any, receive their liquidation preferences in full.
Our common stock has no preemptive rights and is not convertible or redeemable or entitled to the benefits of any sinking or repurchase fund.
Preferred Stock
At the direction of our Board of Directors, without any action by the holders of our common stock, we may issue one or more series of preferred stock from time to time. Our Board of Directors can determine the number of shares of each series of preferred stock, the designation, powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions applicable to any of those rights, including dividend rights, voting rights, conversion or exchange rights, terms of redemption and liquidation preferences, of each series.
Undesignated preferred stock may enable our Board of Directors to render more difficult or to discourage an attempt to obtain control of our company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of our management. The issuance of shares of preferred stock may adversely affect the rights of our common stockholders. For example, any preferred stock issued may rank prior to the common stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of common stock. As a result, the issuance of shares of preferred stock, or the issuance of rights to purchase shares of preferred stock, may discourage an unsolicited acquisition proposal or bids for our common stock or may otherwise adversely affect the market price of our common stock or any existing preferred stock.
Warrants
There are no outstanding warrants.
Transfer Agent and Registrar
The Transfer Agent for our common stock is VStock Transfer, LLC located at 18 Lafayette Pl, Woodmere, NY 11598. The telephone number is: (212) 828-8436.
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Item 13. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons
Loans from a Related Party
On July 13, 2015, Wuhan Renhe Group Co., Ltd (“Wuhan Renhe”), where Xiangyao Liu, our CEO and President, was a majority shareholder, transferred all of its interests in Wuhan Newport to Ricofeliz. As a former shareholder of Wuhan Newport, Wuhan Renhe provided numerous loans to Wuhan Newport prior to the transfer. On June 30, 2015, Wuhan Renhe forgave a total amount of $285,413,074 with the Company. The Company has credited the amount of $285,413,074 to additional paid-in capital in equity. As of December 31, 2016 and December 31, 2015, the amounts due to Wuhan Renhe Real Estate Co., Ltd, an entity controlled by Geng Wang, who is an affiliate of Wuhan Renhe, were $0 and $667,776, respectively.
As of December 31, 2016, and December 31, 2015, the amounts due to Weibin Zhao, an officer of Wuhan Newport and a related party, were $118,130 and $126,516, respectively. The amount is unsecured, interest free and does not have a fixed repayment date.
As of December 31, 2016 and December 31, 2015, the amounts due to Mr. Liu Xiangyao, our President and CEO, were $31,751,959 and $2,428,731, respectively. The amount is unsecured, interest free and does not have a fixed repayment date.
As of December 31, 2017 and 2016, the amount due to Mr. Zhao Weibin were $126,240 and $118,263, respectively. The amount is unsecured, interest free and does not have a fixed repayment date.
As of December 31, 2017 and 2016, the amount due to Mr. Liu Xiangyao were $35,821,264 and $31,751,959, respectively. The amount is unsecured, interest free and does not have a fixed repayment date.
Director Independence
We believe our corporate governance initiatives comply with the rules and regulations of the SEC and with the rules of The Nasdaq Stock Market, or Nasdaq. Our board of directors evaluates our corporate governance principles and policies on an ongoing basis.
NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
| ● | the director is, or at any time during the past three years was, an employee of the company; |
| ● | the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service); |
| ● | a family member of the director is, or at any time during the past three years was, an executive officer of the company; |
| ● | the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions); |
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| ● | the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or |
| ● | the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit. |
Based on this review, Harvey Leibowitz, Zhixue Liu, Yongming Wang, Adam Goldberg, Daniel Heffernan and Zhihong Su “independent” directors. In addition and by definition, the Board has determined that all members of each of the audit and compensation committees are independent.
The Board has determined that Mr. Harvey Leibowitz qualifies as an “audit committee financial expert,” as that term is defined in applicable regulations of the SEC.
As of March 8, 2017, our Board is composed of eleven members, of which six directors are independent directors. The six independent directors are Harvey Leibowitz, Zhixue Liu, Yongming Wang, Adam Goldberg, Daniel Heffernan and Zhihong Su. In addition, as indicated above, each of our audit and compensation committees is composed entirely of independent directors, including the chairperson of the audit committee and compensation committees.
Item 14. Principal Accounting Fees and Services.
The following is a summary of the audit fees for the fiscal years ended December 31, 2017 and 2016.
| Fee Category | 2017 | 2016 | ||||||
| Audit fees | $ | 156,000 | $ | 156,000 | ||||
| Audit-related fees | - | - | ||||||
| Tax fees | - | - | ||||||
| Other fees | - | - | ||||||
| Total Fees | $ | 156,000 | $ | 156,000 | ||||
All of the services provided and fees charged by our independent registered accounting firm were approved by the board of directors and audit committee.
Audit Fees
For the Company’s fiscal years ended December 31, 2017 and December 31, 2016, we were billed approximately $156,000 and $156,000 for each year, for professional services rendered for the audit and reviews of our financial statements.
Audit Related Fees
The Company did not incur any audit related fees, other than the fees discussed in Audit Fees, above, for services related to our audit for the fiscal years ended December 31, 2017 and December 31, 2016.
Tax Fees
For the Company’s fiscal years ended December 31, 2017 and December 31, 2016, we did not incur any fees for professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
The Company did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended December 31, 2016 and December 31, 2015.
Pre-Approval of Services
The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax services and other services. The Audit Committee has adopted a written policy for the pre-approval of services provided by the independent accountants, under which policy the Audit Committee generally pre-approves services for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. For each proposed service, the independent accountant is required to provide detailed back-up documentation at the time of approval. The Audit Committee may delegate pre-approval authority to one or more of its members. Such a member must report any decisions to the Audit Committee at the next scheduled meeting.
| 62 |
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this report:
| (1) | Financial Statements: |
The audited balance sheet of the Company as of December 31, 2017 and December 31, 2016, the related condensed statements of operations, changes in stockholders’ deficiency and cash flows for the years then ended, the footnotes thereto, and the report of Dominic KF Chan & Co., independent auditors, are filed herewith.
| (2) | Financial Schedules: |
None
Financial statement schedules have been omitted because they are either not applicable or the required information is included in the financial statements or notes hereto.
| (3) | Exhibits: |
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report.
(b) The following are exhibits to this Report and, if incorporated by reference, we have indicated the document previously filed with the SEC in which the exhibit was included.
Certain of the agreements filed as exhibits to this Report contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
| ● | may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements; | |
| ● | may apply standards of materiality that differ from those of a reasonable investor; and | |
| ● | were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.
| 63 |
| 64 |
+ In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.
| 65 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| YANGTZE RIVER PORT AND LOGISTICS LIMITED | ||
| By: | /s/ Xiangyao Liu | |
| Xiangyao Liu | ||
|
President and Chief Executive Officer (Principal Executive Officer) | ||
| Date: | March 9, 2018 | |
| By: | /s/ Tsz-Kit Chan | |
| Tsz-Kit Chan | ||
|
Chief Financial Officer (Principal Financial and Accounting Officer) | ||
| Date: | March 9, 2018 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Title | Date | ||
| /s/ Xiangyao Liu | President, Chief Executive Officer and Director | March 9, 2018 | ||
| Xiangyao Liu | (Principal Executive Officer) | |||
| Chief Financial Officer | ||||
| /s/ Tsz-Kit Chan | (Principal Financial and Accounting Officer) | March 9, 2018 | ||
| Tsz-Kit Chan | ||||
| /s/ James Stuart Coleman | Director | March 9, 2018 | ||
| James Stuart Coleman | ||||
| /s/ Zhanhuai Cheng | Director | March 9, 2018 | ||
| Zhanhuai Cheng | ||||
| /s/ Yanliang Wu | Director | March 9, 2018 | ||
| Yanliang Wu | ||||
| /s/ Yu Zong | Director | March 9, 2018 | ||
| Yu Zong | ||||
| /s/ Harvey Leibowitz | Independent Director | March 9, 2018 | ||
| Harvey Leibowitz | ||||
| /s/ Zhixue Liu | Independent Director | March 9, 2018 | ||
| Zhixue Liu | ||||
| /s/ Tongming Wang | Independent Director | March 9, 2018 | ||
| Tongming Wang | ||||
| /s/ Adam S. Goldberg | Independent Director | March 9, 2018 | ||
| Adam S. Goldberg | ||||
| /s/ Daniel W. Heffernan | Independent Director | March 9, 2018 | ||
| Daniel W. Heffernan | ||||
| /s/ Zhihong Su | Independent Director | March 9, 2018 | ||
| Zhihong Su |
| 66 |
TABLE OF CONTENTS
| F-1 |
 |
中正達會計師事務所有限公司
Centurion ZD CPA Limited Certified Public Accountants (Practising) |
Unit 1304, 13/F, Two Harbourfront, 22 Tak Fung Street, Hunghom, Hong Kong.
香港 紅磡 德豐街22號 海濱廣場二期 13樓1304室
Tel 電話: (852) 2126 2388 Fax 傳真: (852) 2122 9078
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Yangtze River Port and Logistics Limited (fka Yangtze River Development Limited)
Opinion on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Yangtze River Port and Logistics Limited (the “Company”) as of December 31, 2017, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, changes in owners’ equity and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| F-2 |
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Certain control deficiencies existed in the internal control over financial reporting as of December 31, 2017, including (1) lack of adequate policies and procedures in internal audit function, which resulted in lack of communication between internal audit department and the Audit Committee and the Board of Directors; (2) insufficient internal audit work to ensure that the Company’s policies and procedures have been carried out as planned; (3) lack of sufficient full-time accounting staff that have experience and knowledge in identifying and resolving complex accounting issues under U.S. Generally Accepted Accounting Principles (“GAAP”); and (4) lack of sufficient accounting personnel which would provide segregation of duties within the internal control procedures to support the accurate reporting of the Company’s financial results. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 financial statements, and this report does not affect our report dated March 9, 2018 on those financial statements.
| /s/ Centurion ZD CPA Ltd |
Centurion ZD CPA Ltd. (fka DCAW (CPA) Ltd. as successor to Dominic K.F. Chan & Co.)
Hong Kong
March 9, 2018
We have served as the Company's auditor since 2015.
| F-3 |
YANGTZE RIVER PORT AND LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
consolidated Balance Sheets
| December 31, 2017 | December 31, 2016 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 58,414 | $ | 63,092 | ||||
| Other assets and receivables | 4,448,417 | 4,151,752 | ||||||
| Real estate property completed | 31,497,258 | 29,507,108 | ||||||
| Real estate properties and land lots under development | 364,774,643 | 341,427,234 | ||||||
| Property and equipment, net | 62,713 | 89,742 | ||||||
| Deferred tax assets | 5,855,625 | 4,472,581 | ||||||
| Total Assets | $ | 406,697,070 | $ | 379,711,509 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities | ||||||||
| Accounts payable | 5,499,177 | 5,159,212 | ||||||
| Due to related parties | 35,947,504 | 31,870,222 | ||||||
| Other taxes payable | 13,321 | 49,918 | ||||||
| Other payables and accrued liabilities | 18,632,545 | 8,985,719 | ||||||
| Real estate property refund and compensation payables | 28,146,601 | 24,997,563 | ||||||
| Convertible note | 75,000,000 | 75,000,000 | ||||||
| Loans payable | 44,221,399 | 41,456,074 | ||||||
| Total Liabilities | $ | 207,460,547 | $ | 187,518,708 | ||||
| Equity | ||||||||
| Preferred stock at $0.0001 par value; 100,000,000 shares authorized; none issued or outstanding | $ | - | $ | - | ||||
| Common stock at $0.0001 par value; 500,000,000 shares authorized; 172,344,446 and 272,269,446 shares respectively issued and outstanding at December 31, 2017 and 2016 | 17,234 | 27,227 | ||||||
| Additional paid-in capital | 243,614,178 | 242,696,445 | ||||||
| Accumulated losses | (41,238,467 | ) | (28,989,090 | ) | ||||
| Accumulated other comprehensive loss | (3,156,422 | ) | (21,541,781 | ) | ||||
| Total Equity | $ | 199,236,523 | $ | 192,192,801 | ||||
| Total Liabilities and Equity | $ | 406,697,070 | $ | 379,711,509 | ||||
See notes to the consolidated financial statements
| F-4 |
YANGTZE RIVER PORT AND LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
consolidated Statements of OPERATIONS and Comprehensive LOSS
| For the Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenue | $ | - | $ | - | $ | - | ||||||
| Costs of revenue | - | - | - | |||||||||
| Gross profit | - | - | - | |||||||||
| Operating expenses | ||||||||||||
| Selling expenses | - | 2,348 | 11,577 | |||||||||
| General and administrative expenses | 5,076,347 | 5,446,175 | 4,547,646 | |||||||||
| Total operating expenses | 5,076,347 | 5,448,523 | 4,559,223 | |||||||||
| Loss from operations | (5,076,347 | ) | (5,448,523 | ) | (4,559,223 | ) | ||||||
| Other income (expenses) | ||||||||||||
| Other income | 8,145 | 3,587 | 868 | |||||||||
| Other expenses | (861 | ) | (174 | ) | (3,231 | ) | ||||||
| Interest income | 296 | 229 | 55 | |||||||||
| Interest expenses | (8,221,483 | ) | (8,424,794 | ) | (3,199,031 | ) | ||||||
| Total other expenses | (8,213,903 | ) | (8,421,152 | ) | (3,201,339 | ) | ||||||
| Loss before income taxes | (13,290,250 | ) | (13,869,675 | ) | (7,760,562 | ) | ||||||
| Income taxes benefits | 1,040,873 | 1,143,595 | 1,378,700 | |||||||||
| Net loss | $ | (12,249,377 | ) | $ | (12,726,080 | ) | $ | (6,381,862 | ) | |||
| Other comprehensive income | ||||||||||||
| Foreign currency translation adjustments | 18,385,359 | (19,227,596 | ) | (6,649,917 | ) | |||||||
| Comprehensive Income (loss) | $ | 6,135,982 | $ | (31,953,676 | ) | $ | (13,031,779 | ) | ||||
| Loss per share - basic and diluted | $ | (0.06 | ) | $ | (0.07 | ) | $ | (0.04 | ) | |||
| Weighted average shares outstanding | ||||||||||||
| Basic | 188,465,024 | 177,459,678 | 151,682,554 | |||||||||
| Diluted | 193,745,496 | 177,459,678 | 151,682,554 | |||||||||
See notes to the consolidated financial statements
| F-5 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
consolidated Statements of CHANGES IN Equity
| Common stock | Additional | Accumulated other | ||||||||||||||||||||||
| Number
of shares | Amount | paid-in capital | Accumulated losses | comprehensive (loss) income | Total | |||||||||||||||||||
| Balance, January 1, 2015 | 151,000,000 | $ | 15,100 | $ | 27,955,331 | $ | (9,881,148 | ) | $ | 4,335,732 | $ | 22,425,015 | ||||||||||||
| Forgiveness of loan from Wuhan Renhe | - | - | 285,413,074 | - | - | 285,413,074 | ||||||||||||||||||
| Effect of share exchange | 20,596,546 | 2,060 | (86,182,521 | ) | - | - | (86,180,461 | ) | ||||||||||||||||
| Restricted shares issued for services | 657,900 | 65 | 3,749,965 | - | - | 3,750,030 | ||||||||||||||||||
| Extinguishment of debt with a former officer | - | - | 11,687,098 | - | - | 11,687,098 | ||||||||||||||||||
| Net loss | - | - | - | (6,381,862 | ) | - | (6,381,862 | ) | ||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | (6,649,917 | ) | (6,649,917 | ) | ||||||||||||||||
| Balance, December 31, 2015 | 172,254,446 | $ | 17,225 | $ | 242,622,947 | $ | (16,263,010 | ) | $ | (2,314,185 | ) | $ | 224,062,977 | |||||||||||
| Restricted shares issued for services | 15,000 | 2 | 73,498 | - | - | 73,500 | ||||||||||||||||||
| Issuance of shares | 100,000,000 | 10,000 | - | - | - | 10,000 | ||||||||||||||||||
| Net loss | - | - | - | (12,726,080 | ) | - | (12,726,080 | ) | ||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | (19,227,596 | ) | (19,227,596 | ) | ||||||||||||||||
| Balance, December 31, 2016 | 272,269,446 | 27,227 | 242,696,445 | (28,989,090 | ) | (21,541,781 | ) | 192,192,801 | ||||||||||||||||
| Cancellation of shares issued | (100,000,000 | ) | (10,000 | ) | - | - | - | (10,000 | ) | |||||||||||||||
| Issuance of shares | 75,000 | 7 | 917,733 | - | - | 917,740 | ||||||||||||||||||
| Net loss | - | - | - | (12,249,377 | ) | - | (12,249,377 | ) | ||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | 18,385,359 | 18,385,359 | ||||||||||||||||||
| Balance, December 31, 2017 | 172,344,446 | 17,234 | 243,614,178 | (41,238,467 | ) | (3,156,422 | ) | 199,236,523 | ||||||||||||||||
See notes to the consolidated financial statements
| F-6 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
consolidated Statements of Cash Flows
| For the Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Cash Flows from Operating Activities: | ||||||||||||
| Net loss | $ | (12,249,377 | ) | $ | (12,726,080 | ) | $ | (6,381,862 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Depreciation of property, and equipment | 31,357 | 62,536 | 79,064 | |||||||||
| Loss on disposal of property, and equipment | - | - | 3,082 | |||||||||
| Deferred tax benefit | (1,040,874 | ) | (1,143,595 | ) | (1,378,700 | ) | ||||||
| Share-based compensation expense | 1,785,480 | 2,014,664 | 1,808,867 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Other assets and receivables | (25,580 | ) | - | (1,534,700 | ) | |||||||
| Real estate property completed | - | - | (312,163 | ) | ||||||||
| Real estate properties and land lots under development | (307,384 | ) | (367,826 | ) | (778,977 | ) | ||||||
| Accounts payable | (7,500 | ) | (7,553 | ) | - | |||||||
| Other taxes payable | (38,467 | ) | 39,139 | (13,914 | ) | |||||||
| Other payables and accrued liabilities | 8,388,760 | 8,559,773 | 2,257,051 | |||||||||
| Real estate property refund and compensation payables | 1,408,234 | 1,433,737 | 1,517,110 | |||||||||
| Net Cash Used In Operating Activities | (2,055,351 | ) | (2,135,205 | ) | (4,735,142 | ) | ||||||
| Cash Flows from Investing Activities: | ||||||||||||
| Purchase of property and equipment | - | (1,851 | ) | (11,733 | ) | |||||||
| Proceeds from disposal of property and equipment | - | - | 130 | |||||||||
| Effect of share exchange | - | - | 505,782 | |||||||||
Net Cash (Used In) Provided By Investing Activities | - | (1,851 | ) | 494,179 | ||||||||
| Cash Flows from Financing Activities: | ||||||||||||
| Repayment of financial institution loans | (29,590 | ) | (150,532 | ) | (176,599 | ) | ||||||
| Advances from related parties | 2,099,650 | 2,201,144 | 4,874,761 | |||||||||
| Repayment to related parties | (21,553 | ) | (361,843 | ) | - | |||||||
| Net Cash Provided By Financing Activities | 2,048,507 | 1,688,769 | 4,698,162 | |||||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | 2,166 | (1,190 | ) | (996 | ) | |||||||
| Net Decrease (Increase) In Cash and Cash Equivalents | (4,678 | ) | (449,477 | ) | 456,203 | |||||||
| Cash and Cash Equivalents at Beginning of Year | 63,092 | 512,569 | 56,366 | |||||||||
| Cash and Cash Equivalents at End of Year | $ | 58,414 | $ | 63,092 | $ | 512,569 | ||||||
| Supplemental Cash Flow Information: | ||||||||||||
| Cash paid for interest expense | $ | - | $ | - | $ | 3,001,771 | ||||||
| Cash paid for income tax | $ | - | $ | - | $ | - | ||||||
| Supplemental Disclosure of Non-Cash Transactions: | ||||||||||||
| Restricted shares issued for services | $ | 917,740 | $ | 73,500 | $ | 3,750,030 | ||||||
| Cancellation of shares for the Armada transaction | $ | 10,000 | $ | - | $ | - | ||||||
| Forgiveness of loans from an owner | $ | - | $ | - | $ | 285,413,074 | ||||||
| Issuance of convertible note | $ | - | $ | - | $ | 150,000,000 | ||||||
| Reduction of convertible note | $ | - | $ | - | $ | 75,000,000 | ||||||
See notes to the consolidated financial statements
| F-7 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
December 31, 2017 and December, 31 2016
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
The consolidated financial statements include the financial statements of Yangtze River Port and Logistics Limited (the “Company” or “Yangtze River”) and its subsidiaries, Energetic Mind Limited (“Energetic Mind”), Ricofeliz Capital (HK) Limited (“Ricofeliz Capital”), and Wuhan Yangtze River Newport Logistics Co., Ltd. (“Wuhan Newport”).
The Company, formerly named as Yangtze River Development Limited, Kirin International Holding, Inc., and Ciglarette, Inc., was incorporated in the State of Nevada on December 23, 2009. The Company was a development stage company and has not generated significant revenue since inception to March 1, 2011.
On March 1, 2011, the Company entered into a share exchange agreement that Kirin China Holding Limited (“Kirin China”) became the Company’s wholly-owned subsidiary. Kirin China engaged in the development and sales of residential and commercial real estate properties, and development of land lots in People’s Republic of China (“China”, or the “PRC”).
On December 19, 2015, the Company completed a share exchange (the “Share Exchange”) with Energetic Mind and all the shareholders of Energetic Mind, whereby Yangtze River acquired 100% of the issued and outstanding capital stock of Energetic Mind, in exchange for 151,000,000 shares of Yangtze River’s common stock, which constituted approximately 88% of its issued and outstanding shares on a fully-diluted basis of Yangtze River immediately after the consummation of the Share Exchange, and an 8% convertible note (the “Note”) in the principal amount of $150,000,000. As a result of the Share Exchange, Energetic Mind became Yangtze River’s wholly-owned subsidiary and Jasper Lake Holdings Limited (“Jasper”), the former shareholder of Energetic Mind, became Yangtze River’s controlling stockholder. The Share Exchange transaction with Energetic Mind was treated as an acquisition, with Energetic Mind as the accounting acquirer and Yangtze River as the acquired party. The financial statements before the date of the Share Exchange are those of Energetic Mind with the results of the Company being condensed consolidated from the date of the Share Exchange.
Energetic Mind owns 100% of Ricofeliz Capital and operates its business through its subsidiary Wuhan Newport.
Wuhan Newport was a wholly owned subsidiary of Wuhan Renhe Group Co., Ltd. (the “Wuhan Renhe”), a company incorporated in the PRC as at September 23, 2002. On July 13, 2015, Wuhan Renhe transferred all of the equity interests of the Company to Ricofeliz Capital, a company incorporated in Hong Kong on March 25, 2015. Ricofeliz Capital was incorporated by Energetic Mind, a company incorporated in British Virgin Islands (“BVI”). Energetic Mind was incorporated by Mr. Liu Xiangyao on January 2, 2015, and was subsequently purchased by various companies incorporated in BVI or the United States of America (“USA”), among whom Jasper became its 64% owner. Jasper was 100% owned by Mr. Liu Xiangyao, a Hong Kong citizen.
The major assets of Wuhan Newport include land lots for developing commercial buildings that are in line with the principal activities of Kirin China.
On December 31, 2015, the Company entered into certain stock purchase and business sale agreements (the “Agreements”) with Kirin Global Enterprises, Inc. (the “Purchaser”), a California corporation and an entity controlled by a former officer and director of the Company whereby the Company sold its interest in certain subsidiaries (see Note 11) for an aggregate of $75,000,002. (the “Sale”).
Pursuant to the terms of the Agreements, Jasper agreed to finance the Sale by reducing Company’s financial obligations of the Note by an aggregate of $75,000,000. In addition, the Purchaser agreed to pay the remaining two dollars in cash.
Upon completion of the Sale, the Company operates its business solely through its subsidiary Wuhan Newport, primarily engaging in the business as a port logistic center located in the middle reaches of the Yangtze River in the PRC.
| F-8 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
1.1 Armada transaction
On October 6, 2016 and November 23, 2016 the Company, by and among Armada Enterprises GP (“Armada”) and Wight International Construction, LLC (“Wight”), entered into (i) a Contribution, Conveyance and Assumption Agreement (“Contribution Agreement”) dated October 3, 2016 and its first and second addendums and (ii) an Amended and Restated Limited Liability Company Agreement dated November 16, 2016 (collectively with the Contribution Agreement, the “Agreements” or “Transaction”), whereby the Company acquired 100 million preferred B membership units, which will be ultimately converted into 100 million LP units in Armada Enterprises LP and in exchange, the Company issued a $500 million convertible promissory note (“Note”) and 50,000,000 shares of the Company’s common stock to Wight. As result of the Transaction and the conversion of the Note on November 17, 2016, Wight owns 100,000,000 shares of the Company’s common stock representing 36.73% of the Company’s voting power; the Company owns 100 million preferred B membership units in Wight representing 62.5% non-voting equity interest in Wight.
Under the terms of the Transaction, at the first closing, Wight was required to provide an aggregate total of $200 million, consisting $50 million in Working Capital and $150 million in Construction Funding, to the Company by January 18, 2017. Wight did not provide the funding on January 18, 2017 and the Company gave Notice of Default and Request for Cure. Wight proposed to provide $50 million in Working Capital on or before February 15, 2017 and secure $150 million in Construction Funding on or before March 15, 2017. Wight failed to provide the $50 million in Working Capital as proposed by February 15, 2017. Therefore, the Company, on February 24, 2017 determined to terminate the Transaction for non-performance by Wight pursuant to the Agreements executed among the Company, Armada and Wight. Pursuant to the Agreements, the termination of the Transaction calls for the immediate return of the 100,000,000 shares of common stock issued by the Company to Wight. On February 27, 2017, the Company issued a Notice of Termination to Wight and demanded the return of the 100,000,000 shares of common stock according to the Agreements. The Company reserves the right to pursue any further legal action with respect to Armada and Wight’s default.
Under the terms of the Armada Agreement, at the first closing, Wight was required to provide an aggregate total of $200 million, $50 million in Working Capital and $150 million in Construction Funding, to us by January 18, 2017. Wight did not provide the funding on January 18, 2017 and we gave Notice of Default and Request for Cure. Wight proposed to provide $50 million in Working Capital on or before February 15, 2017 and secure $150 million in Construction Funding on or before March 15, 2017. Wight failed to provide the $50 million in Working Capital as proposed by February 15, 2017.
On February 24, 2017, due to Wight’s nonperformance and nonpayment of $50 million for the First Financing, the Company decided to unwind Armada Financing. Pursuant to Armada Agreement, the termination of the Armada Agreement calls for the immediate return of the 100,000,000 shares of common stock issued by the Company to Wight. On February 27, 2017, the Company issued a notice of termination of contract to Wight. As at March 1, 2017, the Company cancelled the 100,000,000 shares of common stocks issued to Wight.
1.2 Wuhan EDP transaction
On December 26, 2017, the Company entered into an agreement with shareholders holding 100% of the equity interest of Wuhan Economic Development Port Limited (the “Acquiree” or “Wuhan EDP”) to acquire all the interests of Acquiree; and the Acquiree Shareholders will acquire all the equity interest held by the Company in Energetic Mind Limited, a BVI company and a wholly-owned subsidiary of the Company. Energetic Mind Limited holds 100% interest in Ricofeliz Capital (HK) Ltd., a Hong Kong company that holds 100% capital stock of Wuhan Yangtze River Newport Logistics Co., Ltd., a wholly foreign-owned enterprise formed under the laws of the People’s Republic of China that primarily engages in the business of real estate and infrastructural development with a port logistics center located in Wuhan, Hubei Province of China.
Upon execution of the Purchase Agreement, the Acquiree will undergo reorganization. As a result of the reorganization, the Acquiree has become a limited liability company. It will be held by a Hong Kong company, which will be 100% owned by a BVI entity.
The closing of the transaction, which shall be no later than March 31, 2018, is conditioned upon satisfaction of due diligence by both parties, the completion of auditing of the financial statements of the Acquiree, and the approval of relevant regulatory agencies. By December 31, 2017, the deal between the Company and the acquiree was not closed and effective.
The consideration of the acquisition transaction will be first offset against both parties of the target companies leaving the balance of RMB 600 million (or approximately $91 million) to be paid by the Company to the Acquiree Shareholders. Refundable deposit of RMB 30 million shall be paid to the Acquiree Shareholders upon initial due diligence and auditing. The remaining RMB 570 million shall be paid at closing in cash or in the form of a 7% convertible note.
| F-9 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
2.1 Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).
The consolidated financial statements include the financial statements of all the subsidiaries. All transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.
The consolidated balance sheets are presented unclassified because the time required to complete real estate projects and the Company’s working capital considerations usually stretch for more than one-year period.
2.2 Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews these estimates using the currently available information. Changes in facts and circumstances may cause the Company to revise its estimates. Significant accounting estimates reflected in the consolidated financial statements include: (i) the allowance for doubtful debts; (ii) accrual of estimated liabilities; (iii) contingencies; (iv) deferred tax assets; (v) impairment of long-lived assets; (vi) useful lives of property plant and equipment; and (vii) real estate property refunds and compensation payables.
2.3 Cash and cash equivalents
Cash and cash equivalents consist of cash and bank deposits with original maturities of three months or less, which are unrestricted as to withdrawal and use the Company maintains accounts at banks and has not experienced any losses from such concentrations.
2.4 Property and equipment
The property and equipment are stated at cost less accumulated depreciation. The depreciation is computed on a straight-line method over the estimated useful lives of the assets with 5% salvage value. Estimated useful lives of property and equipment are stated in Note 7.
The Company eliminates the cost and related accumulated depreciation of assets sold or otherwise retired from the accounts and includes any gain or loss in the statement of income. The Company charges maintenance, repairs and minor renewals directly to expenses as incurred; major additions and betterment to equipment are capitalized.
| F-10 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
2.5 Impairment of long-lived assets
The Company applies the provisions of ASC No. 360 Sub topic 10, “Impairment or Disposal of Long-Lived Assets” (ASC 360- 10) issued by the Financial Accounting Standards Board (“FASB”). ASC 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property and equipment and finite lived intangible assets, for impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows as the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary. There were no impairment losses in the year ended December 31, 2017, 2016 and 2015.
2.6 Fair values of financial instruments
ASC Topic 825, Financial Instruments (“Topic 825”) requires disclosure of fair value information of financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Topic 825 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company.
| Level 1 | inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| Level 2 | inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments. |
| Level 3 | inputs to the valuation methodology are unobservable and significant to the fair value. |
As of December 31, 2017 and 2016, financial instruments of the Company primarily comprise of cash, accrued interest receivables, other receivables, short-term bank loans, deposits payables and accrued expenses, which were carried at cost on the balance sheets, and carrying amounts approximated their fair values because of their generally short maturities.
2.7 Convertible notes
In accordance with ASC subtopic 470-20, the convertible notes are initially carried at the principal amount of the convertible notes. Debt premium or discounts, which are the differences between the carrying value and the principal amount of convertible notes at the issuance date, together with related debts issuance cost, are subsequently amortized using effective interest method as adjustments to interest expense from the debt issuance date to its first redemption date. Convertible notes are classified as a current liability if they are or will be callable by the Company or puttable by the debt holders within one year from the balance sheet date, even though liquidation may not be expected within that period.
| F-11 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
2.8 Foreign currency translation and transactions
The Company’s consolidated financial statements are presented in the U.S. dollar (US$), which is the Company’s reporting currency. Yangtze River, Energetic Mind, and Ricofeliz Capital uses US$ as its functional currency. Wuhan Newport uses Renminbi Yuan(“RMB”) as its functional currency. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the statements of operations.
In accordance with ASC 830, Foreign Currency Matters, the Company translated the assets and liabilities into US$ using the rate of exchange prevailing at the applicable balance sheet date and the statements of operations and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation are recorded in owners’ equity as part of accumulated other comprehensive income.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Balance sheet items, except for equity accounts | 6.5059 | 6.9447 | ||||||
| For the Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Items in the statements of operations and comprehensive income, and statement of cash flows | 6.7591 | 6.6431 | 6.2288 | |||||||||
2.9 Revenue recognition
The Company recognizes revenue from steel trading when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is reasonably assured.
Real estate sales are reported in accordance with the provisions of ASC 360-20, Property, Plant and Equipment, Real Estate Sales.
Revenue from the sales of completed properties and properties where the construction period is twelve months or less is recognized by the full accrual method when (a) sale is consummated; (b) the buyer’s initial and continuing involvements are adequate to demonstrate a commitment to pay for the property; (c) the receivable is not subject to future subordination; (d) the Company has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the property. A sale is not considered consummated until (a) the parties are bound by the terms of a contract or agreement, (b) all consideration has been exchanged, (c) any permanent financing for which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed. Fair value of buyer’s payments to be received in future periods pursuant to sales contract is classified under accounts receivable. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method of accounting. Under the deposit method, all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.
Revenue and profit from the sale of development properties where the construction period is more than twelve months is recognized by the percentage-of-completion method on the sale of individual units when the following conditions are met: (a)construction is beyond a preliminary stage; (b) the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit; (c) sufficient units have already been sold to assure that the entire property will not revert to rental property; (d) sales prices are collectible and (e) aggregate sales proceeds and costs can be reasonably estimated. If any of these criteria are not met, proceeds are accounted for as deposits until the criteria are met and/or the sale consummated.
The Company has not generated any revenue from the sales of real estate property for the years ended December 31, 2017, 2016 and 2015.
| F-12 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
2.10 Real estate capitalization and cost allocation
Real estate property completed and real estate properties and land lots under development consist of commercial units under construction and units completed. Properties under development or completed are stated at cost or estimated net realizable value, whichever is lower. Cost capitalization of development and redevelopment activities begins during the predevelopment period, which we define as the activities that are necessary to begin the development of the property. We cease capitalization upon substantial completion of the project, but no later than one year from cessation of major construction activity. We also cease capitalization when activities necessary to prepare the property for its intended use have been suspended. Costs include costs of land use rights, direct development costs, interest on indebtedness, construction overhead and indirect project costs. The Company acquires land use rights with lease terms of 40 years through government sale transaction. Land use rights are divided and transferred to customers after the Company delivers properties. The Company capitalizes payments for obtaining the land use rights, and allocates to specific units within a project based on units’ gross floor area. Costs of land use rights for the purpose of property development are not amortized. Other costs are allocated to units within a project based on the ratio of the sales value of units to the estimated total sales value.
2.11 Capitalization of interest
In accordance with ASC 360, Property, Plant and Equipment, interest incurred during construction is capitalized to properties under development. For the years ended December 31, 2017, 2016 and 2015, $nil, $nil and $nil were capitalized as properties under development, respectively.
2.12 Advertising expenses
Advertising costs are expensed as incurred, or the first time the advertising takes place, in accordance with ASC 720-35, Advertising Costs. For the years ended December 31, 2017, 2016 and 2015, the Company recorded advertising expenses of $nil, $2,348 and $7,724, respectively.
2.13 Share-based compensation
The Company grants restricted shares to its non-employee consultants. Awards granted to non-employees are measured at fair value at the earlier of the commitment date or the date the services are completed, and are recognized using graded vesting method over the period the service is provided.
2.14 Income taxes
Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the liability method. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements at each year-end and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income.
The Company adopts a more likely than not threshold and a two-step approach for the tax position measurement and financial statement recognition. Under the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation process, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. As of December 31, 2017, 2016 and 2015, the Company did not have any uncertain tax position.
2.15 Land Appreciation Tax (“LAT”)
In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures, including borrowing costs and all property development expenditures. LAT is prepaid at 1% to 2% of the pre-sales proceeds each year as required by the local tax authorities, and is settled generally after the construction of the real estate project is completed and majority of the units are sold. The Company provides LAT as expensed when the related revenue is recognized based on estimate of the full amount of applicable LAT for the real estate projects in accordance with the requirements set forth in the relevant PRC laws and regulations. LAT would be included in income tax expense in the statements of operations and comprehensive income (loss).
| F-13 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
2.16 Earnings (loss) per share
Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed using the weighted average number of common shares and potential common shares outstanding during the period for convertible notes under if-convertible method, if dilutive. Potential common shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
2.17 Comprehensive loss
Comprehensive loss includes net income (loss) and foreign currency adjustments. Comprehensive loss is reported in the consolidated statements of operations and comprehensive loss. Accumulated other comprehensive loss, as presented on the consolidated balance sheets are the cumulative foreign currency translation adjustments.
2.18 Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450 Sub topic 20, “Loss Contingencies”, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.
2.19 Recently issued accounting pronouncements
The Company does not believe other recently issued but not yet effective accounting standards from ASU 2018-23, if currently adopted, would have a material effect of the consolidated financial position, results of operation and cash flows.
3. Risks
(a) Liquidity risk
The Company is exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures.
(b) Foreign currency risk
A majority of the Company’s operating activities and a significant portion of the Company’s assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.
| F-14 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
4. OTHER assets and receivables
Other assets and receivables as of December 31, 2017 and 2016 consisted of:
| December 31, 2017 | December 31, 2016 | |||||||
| Deposits | $ | 845 | $ | 792 | ||||
| Other receivables | 2,000 | - | ||||||
| Underwriting commission deposit | 1,600,000 | 1,606,000 | ||||||
| Prepaid rent and deposit | 29,580 | - | ||||||
| Temporary investment deposit | - | 10,000 | ||||||
| Prepaid share based compensation expenses | 110,057 | - | ||||||
| Excessive business tax and related urban construction and education surcharge | 1,722,639 | 1,578,178 | ||||||
| Excessive land appreciation tax | 983,296 | 956,782 | ||||||
| $ | 4,448,417 | $ | 4,151,752 | |||||
Business tax and LAT are payable each year at 5% and 1% - 2% respectively of customer deposits received. The Company recognizes sales related business tax and LAT in the income statement to the extent that they are proportionate to the revenue recognized each period. Any excessive amounts of business and LAT liabilities recognized at period-end pursuant to tax laws and regulations over the amounts recognized in the income statement are capitalized in prepayments and will be expensed in subsequent periods.
5. REAL ESTATE PROPERTY COMPLETED
The account balance and components of the real estate property completed were as follow:
December 31, | December 31, 2016 | |||||||
| Properties completed | ||||||||
| Wuhan Centre China Grand Steel Market | ||||||||
| Costs of land use rights | $ | 7,700,150 | $ | 7,213,617 | ||||
| Other development costs | 23,797,108 | 22,293,491 | ||||||
| $ | 31,497,258 | $ | 29,507,108 | |||||
As of December 31, 2017, the sole and wholly owned developing project of the Company is called Wuhan Centre China Grand Steel Market (Phase 1) Commercial Building in the south of Hans Road, Wuhan Yangluo Economic Development Zone with approximately 222,496.6 square meters of total construction area. Since June 2009, the Company commenced the construction of the project that funded through a combination of bank loans and advances from shareholders. The Company has obtained certificates representing titles of the land use rights used for the development of the project. As of December 31, 2017, the Company has completed the construction of four buildings covering area of approximately 35,350.4 square meters of construction area. The Company values the real estate assets based on estimates using present value by quoted prices for comparable real estate projects.
| F-15 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
6. REAL ESTATE PROPERTIES AND LAND LOTS UNDER DEVELOPMENT
The components of real estate properties and land lots under development were as follows:
December 31, | December 31, 2016 | |||||||
| Properties under development | ||||||||
| Wuhan Centre China Grand Steel Market | ||||||||
| Costs of land use rights | $ | 9,286,634 | $ | 8,699,859 | ||||
| Other development costs | 39,592,579 | 36,791,759 | ||||||
| Land lots undeveloped | ||||||||
| Costs of land use rights | 315,895,430 | 295,935,616 | ||||||
| $ | 364,774,643 | $ | 341,427,234 | |||||
The investments in undeveloped land were acquired in September, 2007. The Company leases the land under land use right leases with various terms from the PRC government, and does not have ownership of the underlying land.
As of December 31, 2017, the Company has three buildings under development of the project described in Note 5 covering area of approximately 57,450.4 square meters of construction area.
Land use right with net book value of $180,891,395, including in real estate held for development and land lots undeveloped were pledged as collateral for the financial institution loan as at December 31, 2017. (See Note 10)
7. Property and Equipment
The Company’s property and equipment used to conduct day-to-day business are recorded at cost less accumulated depreciation. Depreciation expenses are calculated using straight-line method over the estimated useful life with 5% of estimated salvage value below:
| Useful life years | December 31, 2017 | December 31, 2016 | ||||||||
| Fixture, furniture and office equipment | 5 | $ | 65,205 | $ | 60,017 | |||||
| Vehicles | 5 | 527,270 | 493,955 | |||||||
| Less: accumulated depreciation | (529,762 | ) | (464,230 | ) | ||||||
| Property and equipment, net | $ | 62,713 | $ | 89,742 | ||||||
Depreciation expense totaled $31,357, $62,536 and $79,064 for the years ended December 31, 2017, 2016 and 2015, respectively.
8. OTHER PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities as of December 31, 2017 and 2016 consisted of:
| December 31, 2017 | December 31, 2016 | |||||||
| Salaries payable | $ | 1,036,582 | $ | 301,590 | ||||
| Compensation payable to consultants | 427,321 | - | ||||||
| Business tax and related urban construction and education surcharge | 20,492 | 10,577 | ||||||
| Deposits from contractors | 167,540 | 156,954 | ||||||
| Interest payable on convertible bond | 12,197,260 | 6,197,260 | ||||||
| Interest payable on loans | 4,783,350 | 2,319,338 | ||||||
| $ | 18,632,545 | $ | 8,985,719 | |||||
| F-16 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
9. REAL ESTATE PROPERTY REFUND AND COMPENSATION PAYABLe
During the years 2012 and 2011, the Company signed 443 binding agreements of sales of commercial offices of the project with floor area of 22,790 square meters to unrelated purchasers (the transactions or the real estate sales transactions). The Company received deposits and considerations from the purchasers as required by the agreements. The construction commenced in the 2010, which was originally expected to be delivered to customers in late of 2012. No revenue was recognized from the sales of the commercial offices due to the reason stated below.
Owing to commercial reasons, the Company decided to terminate the agreements made for the sale of the real estate properties in relation to the project of Wuhan Centre China Grand Market. According to the agreements of sales, the Company is obliged to compensate the purchaser at a rate equal to 6% per annum or 0.05% per day on the deposits paid. In the years ended December 31, 2017, 2016 and 2015, the Company incurred $1,408,233, $1,433,737 and $1,528,126 compensation expenses which were included in general and administrative expenses.
As at December 31, 2017, 375 out of 443 agreements were cancelled, and no completed office (or real estate certificate) has been delivered to the purchaser. The Company is still in the progress of negotiating with the purchasers for the cancellation of the remaining agreements. The directors of the Company are of the opinion that almost all of the purchasers shall accept the cancellation. If, finally the purchaser insisted on the execution of the agreement, the Company will accept.
Real estate property refund and compensation payable represent the amount of customer deposits received and the compensation calculated in accordance with the provisions in the sales agreements. The payable consists of the followings:
December 31, | December 31, 2016 | |||||||
| Property sales deposits | $ | 20,108,667 | $ | 18,838,103 | ||||
| Compensation | 8,037,934 | 6,159,460 | ||||||
| $ | 28,146,601 | $ | 24,997,563 | |||||
10. Loans payable
| Bank name | Term | December 31, | December 31, | |||||||||
| China Construction Bank | From May 30, 2014 to May 29, 2020 | $ | 44,221,399 | $ | 41,456,074 | |||||||
Loans are floating rate loans whose rates (2017: 6% per annum and 2016: 6% per annum) are set at 5% above the over 5 years base borrowing rate stipulated by the People’s Bank of China. Interest expenses incurred on loans payable for the years ended December 31, 2017, 2016 and 2015 was $2,221,138, $2,424,794 and $3,001,771, respectively.
Land use right with net book value of $180,891,395, including in real estate held for development and land lots under development were pledged as collateral for the loan as at December 31, 2017.
The aggregate maturities of loans payable of each of years subsequent to December 31, 2017 are as follows:
| 2018 | $ | 3,074,132 | ||
| 2019 | 15,370,664 | |||
| 2020 | 25,776,603 | |||
| $ | 44,221,399 |
| F-17 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
11. CONVERTIBLE NOTE
On December 19, 2015, the Company issued an 8% convertible note in the principal amount of $150,000,000 to Jasper, a related party, in the Share Exchange (see Note 1). The holder of the Note may convert all or any portion of the then aggregate outstanding principal amount, together with any accrued and unpaid interest, into shares of Company’s common stock at $10.00 per share. The maturity date of the Note is December 19, 2018.
On December 31, 2015, pursuant to the terms and conditions of the Agreements, Jasper, financed the Purchaser for the Sale by reducing Company’s financial obligations under the Note by an aggregate of $75,000,000 (see Note 1). As a result of the Sale, the outstanding balance due to Jasper under the Note was $75,000,000 plus any accrued interest.
There was no beneficial conversion feature attributable to the Note as the set conversion price of the Note was greater than the fair value of the common share price at the date of issuance. The Company has accounted for the Note in accordance with ASC 470-20, as a single instrument as a non-current liability. The Note is initially carried at the gross cash received at the issuance date.
The interest expense for the convertible note included in the consolidated statements of operations was $6,000,000, $6,000,000 and $197,260, respectively, for the years ended December 31, 2017, 2016 and 2015.
The interest payable for the convertible note included in the consolidated balance sheets was $12,197,260 and $6,197,260, respectively as at December 31, 2017 and 2016.
There was no redemption of convertible note for the years ended December 31, 2017, 2016 and 2015.
12. Employee Retirement Benefit
The Company has made employee benefit contribution in accordance with Chinese relevant regulations, including retirement insurance, unemployment insurance, medical insurance, work injury insurance and birth insurance. The Company recorded the contribution in the salary and employee charges when incurred. The contributions made by the Company were $96,963, $125,027 and $64,005 respectively, for the years ended December 31, 2017, 2016 and 2015.
| F-18 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
13. INCOME TAXES
The Company was incorporated in the state of Nevada. Under the current law of Nevada, the Company is not subject to state corporate income tax. No provision for federal corporate income tax has been made in the financial statements as there are no assessable profits.
Energetic Mind was incorporated in the British Virgin Islands (“BVI”). Under the current law of the BVI, Energetic Mind is not subject to tax on income.
Ricofeliz Capital was incorporated in Hong Kong. No provision for Hong Kong profits tax has been made in the financial statements as there are no assessable profits.
Wuhan Newport was incorporated in the PRC, was governed by the income tax law of the PRC and is subject to PRC enterprise income tax (“EIT”). The EIT rate of PRC is 25%.
Income tax expenses for the years ended December 31, 2017, 2016 and 2015 are summarized as follows:
| Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Current | $ | - | $ | - | $ | - | ||||||
| Deferred tax benefit | 1,040,873 | 1,143,595 | 1,378,700 | |||||||||
| $ | 1,040,873 | $ | 1,143,595 | $ | 1,378,700 | |||||||
A reconciliation of the income tax benefit determined at the PRC EIT income tax rate to the Company’s effective income tax benefit is as follows:
| December 31, 2017 | December 31, 2016 | |||||||
| EIT at the PRC statutory rate of 25% | $ | 3,322,563 | $ | 3,467,419 | ||||
| Valuation allowance | (2,281,690 | ) | (2,323,824 | ) | ||||
| $ | 1,040,873 | $ | 1,143,595 | |||||
The Company evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. For the years ended December 31, 2017, 2016 and 2015, the Company had no unrecognized tax benefits.
The Company does not anticipate any significant increase to its liability for unrecognized tax benefit within the next 12 months. The Company will classify interest and penalties related to income tax matters, if any, in income tax expense.
Deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements at each year-end and tax loss carry forwards. The tax effects of temporary differences that give rise to the following approximate deferred tax assets and liabilities as of December 31, 2017 and 2016 are presented below.
December 31, | December 31, 2016 | |||||||
| Deferred tax assets | ||||||||
| Operating loss carry forward | $ | 430,939 | $ | 372,075 | ||||
| Excess of interest expenses | 2,533,387 | 1,887,225 | ||||||
| Accrued expenses | 2,891,299 | 2,213,281 | ||||||
| $ | 5,855,625 | $ | 4,472,581 | |||||
The Company had net operating losses carry forward of $1,723,757 as of December 31, 2017 which will expire on various dates between December 31, 2018 and 2020.
| F-19 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
14. loss per share
| For Years Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Numerator: | ||||||||||||
| Net loss for basic and diluted loss per share | $ | (12,249,377 | ) | $ | (12,726,080 | ) | $ | (6,381,862 | ) | |||
| Denominator: | ||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||
| Basic | 188,465,024 | 177,459,678 | 151,682,554 | |||||||||
| Dilutive shares: | ||||||||||||
| Conversion of convertible note | 5,280,472 | - | - | |||||||||
| Diluted | 193,745,496 | 177,459,678 | 151,682,554 | |||||||||
| Basic and diluted loss per share | $ | (0.06 | ) | $ | (0.07 | ) | $ | (0.04 | ) | |||
Common shares of 8,719,726 resulting from the assumed conversion of 8% Convertible Note (Note 11) were excluded from the calculation of diluted loss per share for the year ended December 31, 2017 as their effect is anti-dilutive.
15. Related Party Transactions
15.1 Nature of relationships with related parties
| Name | Relationships with the Company | |||
Mr Zhao Weibin Mr Liu Xiangyao Jasper Lake Holdings Limited |
Officer Director Controlling stockholder | |||
15.2 Related party balances and transactions
Amount due to Mr Zhao Weibin were $126,240 and $118,263 as at December 31, 2017 and 2016, respectively. The amount is unsecured, interest free and does not have a fixed repayment date.
A summary of changes in the amount due to Mr Zhao Weibin is as follows:
December 31, | December 31, 2016 | |||||||
| At beginning of year | $ | 118,263 | $ | 126,516 | ||||
| Exchange difference adjustment | 7,977 | (8,253 | ) | |||||
| At end of year | $ | 126,240 | $ | 118,263 | ||||
Amount due to Mr Liu Xiangyao were $35,821,264 and $31,751,959 as at December 31, 2017 and 2016, respectively. The amount is unsecured, interest free and does not have a fixed repayment date.
A summary of changes in the amount due to Mr Liu Xiangyao is as follows:
December 31, | December 31, 2016 | |||||||
| At beginning of year | $ | 31,751,959 | $ | 2,428,731 | ||||
| Advances from the director | 2,129,589 | 29,720,658 | ||||||
| Repayment to the director | (22,402 | ) | (359,881 | ) | ||||
| Exchange difference adjustment | 1,962,118 | (37,549 | ) | |||||
| At end of year | $ | 35,821,264 | $ | 31,751,959 | ||||
| F-20 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
As at December 31, 2017 and 2016, the outstanding balance due to Jasper under the convertible note was $75,000,000 plus any accrued interest. The interest payable to Jasper were $12,197,260 and $6,197,260 as at December 31, 2017 and 2016, respectively. Details of the convertible note are stated in Note 11.
A summary of changes in the interest payable to Jasper is as follows:
December 31, | December 31, 2016 | |||||||
| At beginning of year | $ | 6,197,260 | $ | 197,260 | ||||
| Interest expense | 6,000,000 | 6,000,000 | ||||||
| At end of year | $ | 12,197,260 | $ | 6,197,260 | ||||
16. SHARE-BASED COMPENSATION EXPENSES
On December 27, 2015, the Company granted 317,345 and 340,555 shares of the Company’s restricted common stock to a number of consultants, in exchange for its legal and professional services to the Company for the years ended December 31, 2015 and 2016, respectively. These shares were valued at $5.7 per share, the closing bid price of the Company’s common stock on the date of grant. Total compensation expense recognized in the general and administrative expenses of the consolidated statement of operations for the year ended December 31, 2015 was $1,808,867. Total compensation expense of approximately $1,941,163 was recognized in 2016. The shares attributable to fiscal 2015 and 2016 were issued on December 30, 2015.
On January 25, 2016, the Company granted 15,000 shares of the Company’s restricted common stock to a consultant, in exchange for its legal and professional services to the Company for the year 2016. These shares were valued at $4.9 per share, the closing bid price of the Company’s common stock on the date of grant. This compensation expense of approximately $73,500 was recognized in 2016.
On May 5, 2017, the Company entered into an employment agreement with Mr. Tsz-Kit Chan (“Mr Chan”) to serve as the Company’s Chief Financial Officer that the Company granted 100,000 shares of the Company’s common stock for his first year of employment. As at December 31, 2017, the Company has not issued the shares and theses shares were valued at $8.82 per share. The Company recognized $570,279 for the year ended December 31, 2017.
During the period from July to September 2017, on several different dates, the Company granted 75,000 shares totally of the Company’s restricted common stock to several consultants, in exchange for its legal and professional services to the Company for the period between July 2017 and June 2018. These shares were valued at the closing bid price of the Company’s common stock on the date of grant. The compensation expense recognized in the general and administrative expenses of the consolidated statement of operations for the year ended December 31, 2017 was $807,683. On May 12, 2017, the Company had an agreement with Buckman, Buckman & Reid, Inc., that the Company granted 70,000 shares of the Company’s shares of the Company’s common stock for services rendered by Buckman, Buckman & Reid, Inc. As at December 31, 2017, the Company has not issued the shares and theses shares were valued at $8.82 per share. The Company recognized share based compensation of $407,519 for the year ended December 31, 2017.
Total share compensation expenses recognized in the general and administrative expenses of the consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 was $1,785,481, $2,014,663 and $1,808,867 respectively.
17. Concentration of Credit Risks
As of December 31, 2017 and 2016, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in China and the US, which management believes are of high credit quality.
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRC’s economy. The business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
No customer accounted for more than 10% of total accounts receivable as of December 31, 2017 and 2016.
| F-21 |
YANGTZE RIVER PORT and LOGISTICS LIMITED
(FOrmerly Yangtze River Development limited)
NOTES TO the FINANCIAL STATEMENTS
18. Commitments and Contingencies
Operating lease commitments
For the years ended December 31, 2017, 2016 and 2015, rental expenses under operating leases were $90,555, $72,000 and $6,000 respectively.
On April 1, 2017, the Company made a lease agreement with 41 John Street Equities LLC. The term of the lease is one year, beginning on April 1, 2017 and ending on March 31, 2018. The Company made a one-time full payment of $96,135 including security deposit for the entire leasing period.
Legal proceeding
The Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations.
The Company did not identify any commitment and contingency as of December 31, 2017.
19. RESTRICTED NET ASSETS
PRC laws and regulations permit payments of dividends by the Company’s subsidiary incorporated in the PRC only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, the Company’s subsidiary incorporated in the PRC are required to annually appropriate 10% of their net income to the statutory reserve prior to payment of any dividends, unless such reserve have reached 50% of their respective registered capital. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each subsidiary. As a result of the restrictions described above and elsewhere under PRC laws and regulations, the Company’s subsidiary incorporated in the PRC are restricted in their ability to transfer a portion of their net assets to the Company in the form of dividends or advances from PRC subsidiary. Such restriction amounted to $289,656,431 and $287,214,468 as of December 31, 2017 and 2016. Except for the above, there is no other restriction on the use of proceeds generated by the Company’s subsidiary to satisfy any obligations of the Company.
20. GOING CONCERN
As shown in the accompanying financial statements, the Company has sustained recurring losses and negative cash flows from operations. Over the past years, the Company has been funded through a combination of bank loans and advances from shareholders. On January 29, 2016, the Company received an undertaking commitment letter provided by the Company’s majority shareholder who is willing to provide sufficient funding on an as-needed basis. In addition, the Company plans to dispose of the existing developed real estate properties with market value of approximately $42 million when the Company needs cash flows. The Company believes that, as a result of these, it currently has sufficient cash and financing commitments to meet its funding requirements for a reasonable period of time.
21. SUBSEQUENT EVENTS
On February 13, 2018, the Company passed a shareholder resolution of more than 50% of the shareholders and a Board of Directors resolution that the existing shareholders of the Company will receive shares of Yangtze River Blockchain Logistics Limited (“YRBL”)(Formerly known as Avenal River Limited), a newly formed subsidiary of the Company. YRBL was incorporated in the British Virgin Islands on January 30, 2018. YRBL currently holds 100% of the shares of Ricofeliz investment (China) Limited, which in turn wholly owns 100% of Wuhan Yangtze River Newport Trading Limited. YRBL and its subsidiaries has not commenced business and has no material assets.
F-22