ITEM 1. Business
Company Background
As used herein the terms "We", the
"Company", "CAMG", the "Registrant," or the "Issuer" refers to CAM Group, Inc., formerly
known as “RT Technologies, Inc.”, its subsidiaries and predecessors, unless indicated otherwise. The Company
was
originally incorporated as Savannah River Technologies, Inc. under the laws of the State of South Carolina on March 2, 1995. On
July 20, 2007, the Company formed a corporation pursuant to the laws of the State of Nevada having a par value of $0.001 for both
the preferred and common stock. On August 11, 2007, the stockholders of the Company approved a change of corporate domicile which
resulted in the dissolution of the South Carolina Corporation and the Company became domiciled in the State of Nevada. On
September
13, 2012, the Company changed its name to CAM Group Inc. (“CAMG”) to more accurately reflect its business after a stock
exchange transaction set forth below.
On April 17, 2012, CAMG completed a stock exchange
transaction with China Agriculture Media Group Co., Ltd (“CAM Group”). CAM Group is organized and exists under the
laws of Hong Kong Special Administrative Region of the People’s Republic of China (the “PRC”), which was incorporated
on March 30, 2011. CAM Group is an investment holding company, whose only asset is 100% equity interest in China Agriculture Media
(Hong Kong) Group Co. Ltd. (“CAM HK”). CAM HK is an investment holding company organized and exists under the laws
of Hong Kong Special Administrative Region of PRC, with its only asset being a 98% equity interest in China Agriculture Media (Hebei)
Co. Ltd. ( “CAM Hebei”). CAM Hebei was established in the Hebei Province, PRC on November 28, 2011 as a Chinese domestic
enterprise. Immediately upon the Closing date, CAMG issued to the CAM Group shareholders 22,500,000 new investment shares of CAMG
Common Stock and 1,000,000 shares of CAMG super-voting Preferred Stock to the CAMG Shareholders in exchange for all of their shares
of registered capital of CAM Group. Upon completion of the exchange, CAM Group and its subsidiaries became subsidiaries of CAMG
and the former owners of CAM Group then owned
a ‘controlling interest’ in
CAMG
representing 98% of the voting shares of
CAMG
and 90% of the issued and outstanding shares of
Common Stock
. Our corporate structure after closing is set forth as follows:
CAM Group, Inc. (f/k/a RT Technologies, Inc.)
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China Agriculture Media Group Co., Ltd.
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China Agriculture Media (Hong Kong)
Group Co., Ltd.
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China Agriculture Media (Hebei) Co., Ltd.
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CAMG, CAM HK and
CAM Hebei are hereafter collectively referred to as the “Company”.
Since the reverse merger was consummated, we
have continued operations of CAM Hebei, a company which is principally engaged in developing the Chinese rural consumer market.
We plan to build up our core business into four areas within two years: advertising, wholesale and retail sales, store rental and
value-added services.
Current Business
CAMG will acquire full management and
operational rights to a comprehensive retail network composed of up to 16,000 retail stores located in Hebei province that are
currently owned and operating under the state-owned system of China Supply and Marketing Cooperative Association (“China
Co-Op”) and China National Agricultural Means of Production Group Corporation (“National AMP”) and have been
in operation for 60 years (the “Network”). CAMG does not have ownership of stores within the Network. It draws a large
percentage of the region’s farming population who take advantage of government subsidized agricultural products only sold
within the Network stores. Although farmers are free to visit stores outside the Network, the restrictions on the sale of fertilizer
products and subsidized pricing of the Network significantly reduce competition. As a result, our Network has a “captive”
audience consisting of farmers who would otherwise be priced out of purchasing fertilizer at other locations because these government
subsidies are only available within the Network.
In
the first stage of 24-months, CAMG will complete the development of integrating, managing and operating approximately 16,000 retail
locations in Hebei province, which are currently owned and operating within the National AMP and China Co-Op’s retail system.
The Network covers a rural population of over 40 million people or approximately 55% of Hebei’s 70 million residents and
is managed by National AMP and China Co-Op’s Hebei province subsidiaries (respectively Hebei Agricultural Means of Production
Co. Ltd. (“Hebei AMP”) and Hebei Supply and Marketing Cooperative Association (“China Co-Op Hebei”)).
Hebei AMP is a major related party of the Company by common shareholders and directors. Heibei AMP is our related party and major
shareholder through a trustee holding.
CAMG plans to lease the retail store’
space from the Network and then sub-lease them to chain store companies, product distributors and/or manufacturers for store rental
income. The stores will be remodeled as convenience stores selling both agricultural and non-agricultural products such as fertilizer,
homecare, personal care and healthcare products.
Advertising tools such as LCD displays, posters,
and outdoor billboards will be available for potential clients who are intended to develop Chinese rural market, to advertise their
products. These tools will also assist clients to build their corporate images, and assist government departments in providing
general public service announcements to local residents.
Clients can either directly manage their stores
or pay for CAMG’s value-added management services. CAMG plans to roll-out its services first in Hebei province, and then
implement the same business model in different provinces throughout China.
By utilizing existing resources, such as the
facilities, network and experience of our strategic partners, Hebei AMP and China Co-Op Hebei, CAMG can promptly establish its
access to the rural retail market. We will act as the exclusive sales and advertising agent for up to 16,000 retail outlets located
in Hebei province and strive to assist our clients to promote suitable products attractive to the rural consumer.
Our Products and Services
Advertising Solutions
CAMG will generate advertising service
revenues from the sale of time slots in out-of-home television advertising networks and through the sales of frame space on poster
frames and on traditional billboard networks.
CAMG will ultimately establish an advertising
network primarily by installing LCD’s display in up to 16,000 retail outlets within the Network. Clients including service
providers, product manufacturers and government agencies will be able to utilize our advertising network to build corporate images,
promote their products and spread the governments’ latest policies and news. Compared to traditional print ads and posters,
we believe LCD’s offer the following advantages:
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Ability to immediately alter or edit content
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Higher return on investment by sharing space with multiple clients
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High resolution graphics and increased visual appeal
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Flexible distribution of content
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Although LCD’s display have many advantages,
other advertising channels are also valuable. For example, a tire manufacturer may want to have outdoor billboards placed near
highways to catch drivers’ attention; a manufacturer may want to use leaflets to promote their products; or an insurance
company may prefer to use a brochure to elaborate on various insurance plans. Therefore, CAMG offers a choice of advertising channels
including:
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LCD displays (26 or 32 inches)
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Poster boards displayed on metal racks
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Posters and outdoor billboards
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Clients can choose the means of advertising
based on the characteristics of their products or needs. The major advantages of using our advertising service include:
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High market penetration
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Cost-effective and efficient
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Customizable service packages
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Wholesale and Retail Solutions
CAMG currently has the sole right to manage
and operate sales areas under CAMG’s administration within the Network. It can distribute consumer goods directly to the
Network rather than going through various levels of distributors. By utilizing the existing resources, such as the facilities,
network and experience of our strategic partners, Hebei AMP and China Co-Op Hebei, CAMG can promptly establish its access to the
rural retail market. The main features of our merchandising service include:
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Providing clients with instant access to the rural retail market
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Lowering traditional barriers to entry into the rural market
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Providing integrated services including merchandising, logistics, and advertising
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Saving clients’ time in establishing their own retail network
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Giving clients an opportunity to increase existing market share
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Value-Added Service Solutions
The clients can distribute their products by
themselves, send promoters to the stores, and advertise products using their own resources. However, they are free to choose our
value-added services to ease operations and lower capital costs in the stores. CAMG offers logistic, storage, advertising, product
and store management services for clients who are interested in minimizing the operating risk.
Business Revenue Model
During the first 24-month stage, CAMG will
focus on developing the Network.
Advertising Business
CAMG installed the first batch of 300 LCD display
in the Network during 2012 and will continue to roll-out more installation in 2013 and 2014.
CAMG plans to charge at least RMB 2.54 ($0.40)
per second for a 30-second video broadcasting 60 times per day within the Network when the number of LCD display is less than 3,000.
The price per second will be increased when the number of LCD display exceeds 3,000 to reflect the increasing influence from the
Network. The LCD displays will operate up to 12 hours a day in some locations and allow a maximum capacity of 15.8 million seconds
per year available for sale.
CAMG is also planning to execute agreements
for the development of outdoor billboards and expects to operate approximately 20 locations by the end of 2013. In addition, clients
can place posters in the Network of stores in Hebei Province.
Wholesale and Retail Business
CAMG plans to generate wholesale and retail
commission by selling different kinds of products in the Network. CAMG will select appropriate products among prospective product
manufacturers and/or chain store companies so that the products match the needs of rural population.
Store Rental Business
CAMG will sublease retail store space to chain
store companies, product distributors and/or manufacturers for store rental revenue. The stores will be remodeled as convenience
stores which sell both agricultural and non-agricultural products such as fertilizer, homecare, personal care and healthcare products
etc.
Value-Added Services Business
CAMG will provide value-added services
in store management, logistics and warehousing. These value-added services will be calculated based on a pre-determined percentage
of sales volume.
Contractual
Agreements with Hebei Agricultural Means of Production Co., Ltd. (Related Party and major shareholder through a trustee holding)
Advertising Revenues
After
completing the installation of the LCD displays in 2012, CAMG has entered an advertising services contract with Hebei AMP, pursuant
to which Hebei AMP agrees to purchase a total of 15,768,000 seconds per year for LCD advertising time at a rate of no less than
RMB2.54 (USD0.40), starting from June 2012 to May 2013. During the year of 2012, CAMG generated all its advertising revenues from
its major related party Hebei AMP in amount of $3,963,860.
Services revenues
Starting from December 2012, CAMG
serves as an agent for Hebei AMP in fertilizer trading and generated all its revenues of $14,896 from the services provided.
These services are generally billed on a time-cost plus basis. Revenue is recognized when services are rendered, products
have been delivered, payments have been received, and risk of ownership has been transferred and accepted by the
customers.
Overview of the PRC Rural Market Development
The annual national expenditure on the development
of the rural market in the PRC grew from RMB 3.4 trillion (approximately $53 billion) in 2006 to more than RMB 10 trillion (approximately
$156 billion) in 2011. This growth demonstrates the commitment of the government in stimulating domestic demand and promoting rural
economic growth.
Source: Ministry of Finance of the People’s
Republic of China
Overview of the PRC Advertising Industry
According to data released by the National
Bureau of Statistics of China, sales revenue generated from the Chinese advertising industry in 2004 was RMB 12.6 billion (approximately
$2 billion) and RMB 20.6 billion (approximately $3 billion) in 2009 representing an average annual growth rate of 10.3%.
Source: National Bureau of Statistics of China
Overview of the PRC Wholesale and Retail
Industry
China
Product sales increased from $1.5 trillion
in 2005 to $3.1 trillion in 2009 representing a growth rate of 115% over four years. Sales remained strong during the global financial
crisis in 2008 and 2009; we believe the sales volume will continue to stay above $3 trillion during 2013.
Wholesale and Retail Industry in China (USD in billions)
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2005
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2006
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2007
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2008
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2009
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Number of Legal Entities
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47,698
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5,1788
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55,737
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100,935
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95,468
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People working in this industry (in millions)
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5.2
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5.4
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6.0
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7.4
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7.5
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Merchandise Purchase volume
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$1,367
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$1,611
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$2,014
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$2,875
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$2,800
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Import volume
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110
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116
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139
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226
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208
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Merchandise Sales volume
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1,456
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1,720
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2,074
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3,254
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3,143
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Export volume
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133
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150
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174
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216
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1745
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Merchandise inventory level
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110
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119
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144
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240
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250
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Source: National Bureau of Statistics of China
Hebei Province
The table below shows that 2009 merchandise
sales in Hebei Province was $57.3 billion which was comprised of $42.67 billion in wholesale revenue and $14.69 billion in retail
revenue.
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2009 Wholesale and Retail Sales in Hebei Province and China (USD in billions)
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Hebei
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China
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Wholesale
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Retail
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Total
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Wholesale
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Retail
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Total
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Number of Legal Entities
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805
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1,010
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1,815
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52,853
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42,615
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95,468
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People working in this industry (in millions)
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0.08
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0.14
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0.22
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3.1
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4.4
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7.5
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Merchandise Purchase volume
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$35.59
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$12.52
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$48.11
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$2,234.5
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$565.5
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$2,800.0
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Import volume
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0.55
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0.04
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0.59
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198.4
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9.5
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207.9
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Merchandise Sales volume
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42.67
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14.69
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57.36
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2,466.2
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677.1
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3,143.2
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Export volume
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0.82
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0.00
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0.82
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174.3
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0.3
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174.6
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Merchandise inventory level
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2.36
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1.38
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3.74
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185.1
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65.2
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250.4
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Source: National Bureau of Statistics of China
Target Market and Audience
China
According to the National Bureau of Statistics
of China, there were 713 million people (53.4% of total population) living in rural areas in China and the population increased
at a natural birth rate of 5.1% annually. The government recently released a series of policies regarding the renovation of the
rural market and the improvement of living standards for the rural population. We believe that the growth in China will be driven
by the rural market in the future.
Hebei Province
In the first stage, CAMG will focus on developing
our business in the Network. Hebei province is an agriculturally dominant province and an ideal location for developing the Chinese
rural market. The following lists some key attributes of Hebei province:
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40 million rural population; total population of approximately 70 million; ranked 6th in China.
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Natural birth rate is 6.5%.
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Gross GDP of RMB 1.7 trillion ($270 billion); ranked 6th in China
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Gross production of grains in Hebei reached 29 billion kilograms, which is 5.5% of the nation; ranked 7th in China
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One of the 13 grain production provinces in China; Hebei uses area of 6.3 million hectares as farmland for grains
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The income per capita of rural population increased
from RMB 2,253 ($353) in 2000 to RMB 5,153 ($807) in 2009, and it is expected to keep increasing under a series of supportive governmental
policies.
Source: National Bureau of Statistics of China
Marketing Strategy
Market Development for Advertising Business
CAMG will target mature enterprises who want
to build their corporate images in the rural market, such as national telecom providers, state-owned banks, large fertilizer manufacturers,
etc.
Our own market research has indicated that
local service providers such as banks and hospitals are using various channels such as newspaper and television to advertise their
services in the rural markets. CAMG will provide another channel for governmental departments to educate the rural population and
spread news and the latest public policies. We provide a cost efficient and effective solution compared to TV advertising and focus
on out–of-home rather than in-home advertising.
Under the guidance of current rural development
policy promulgated by the government, various programs such as culture broadcast programs, policy publishing and others could be
implemented into our advertising channel.
Market Development for Wholesale and Retail
Business
We believe CAMG offers an attractive, cost-effective
alternative for established retailers and consumer products companies to access the rural market without incurring the full cost
and risk of prematurely entering or over-expending into the rural provinces. However, the profit margin of cooperating with these
companies may be lower because their products are mature and they have relatively more bargaining power. CAMG will provide recommendations
to prospective clients based on our market research of spending behavior in the rural market.
Early Phase Promotional Scheme
CAMG will cooperate with other media companies
such as radio stations, television stations, and magazines to promote its clients.
Market Expansion for Advertising Business
CAMG will place LCD displays in the agricultural
retail stores in Hebei province. It will also use outdoor billboards and poster frames as a medium for advertisement. Once we have
achieved the goal of developing the Network, CAMG will apply its business model to other northern provinces of China and hopes
to gradually expand to all rural areas in China.
Cost Management
CAMG plans to control the costs of their advertising
network by placing advertising channels such as LCD displays and kiosks in targeted public areas in order to take advantage of
relatively low maintenance overhead.
Existing Client Base
Hebei AMP has been operating over 60 years
and is one of the authorized companies by the PRC central government to sell chemical fertilizers in Hebei Province, and as a result,
there is an existing pool of agricultural product manufacturers and consumers who are loyal to the Network stores. We believe this
existing client base and loyalty towards the Network stores will create an opportunity for CAMG’s rapid growth in Hebei Province.
Competition
We compete with other companies in advertising
area such as Focus Media, JCDecaux, ClearMedia, SearchMedia, AirMedia and VisionChina and the branded, like 7-11, and independent
stores in China.
Comparison to Competitors and Competitive
Advantage
Developing the Rural Market
Focus Media, AirMedia and VisionChina mainly
expand their advertising networks within commercial buildings in urban cities, airports, and mass transportation systems respectively.
Our advertising business model is very similar to the business model of our competitors, but CAMG focuses on the national rural
market which has relatively less competition compared to the urban areas. Although the income per capita of rural population is
less than that of urban population, the volume of this market should compensate for the income gap between the rural and urban
population.
Rural LCD Network
LCD display advertising is relatively new in
rural areas of the PRC. We believe LCD technology could attract the attention of local people who may be curious about the new
technology and as a result buy our advertised merchandise.
Mature Network
The Network has over 60 years of operating
history, among it, Hebei AMP developed 19 large-scale logistic centers and more than 120 regional distribution centers. The total
retail locations are approximately 16,000.
Barriers to entry
The barriers to entering the
advertising market Hebei Province and establishing an LCD network of this size would be unattainable without enormous amounts
of in capital. By leveraging the pre-existing Network, and utilizing existing logistics systems, we believe that we can
effectively reduce our startup costs and substantially lower our barriers to entry in this market. Since Hebei AMP is a
state-owned company and the Chinese government has officially granted them the rights to manage the 16,000 retail locations in
Hebei province covering a rural population of over 40 million people or approximately 55% of Hebei’s 70 million
residents, , we believe that other outdoor advertising companies will be at a competitive disadvantage to us.
Outsourcing
The development of our LCD network will be
work intensive and likely require us to outsource additional employees for installation of the LCD screens. We installed the first
batch of 300 LCD displays in the Network during 2012 and will continue to roll-out more installation in 2013 and 2014. These stores
are unevenly distributed amongst the rural areas of Hebei, and it is difficult to calculate the exact travel distance between each
of them. The management team believes that it is not feasible to build a single engineering team to complete this task, therefore,
we will outsource the installation to third parties.
Government Regulation
PRC regulations require any foreign entities
that invest directly in the advertising services industry to have at least two years of direct operations in the advertising industry
outside of China. Since December 10, 2005, foreign investors have been allowed to own directly 100% of PRC companies operating
an advertising business if the foreign entity has at least three years of direct operations in the advertising business outside
of China or less than 100% if the foreign investor has at least two years of direct operations in the advertising industry outside
of China.
Current PRC regulations do not restrict
domestic companies controlled by Wholly Foreign-Owned Enterprise (“WFOEs”) through contractual arrangements from operating
advertising businesses. Nevertheless, PRC governmental authorities may in the future deem that such business operations by domestic
companies controlled by WFOEs evade the qualifications requirements on foreign investment in the advertising industry, and thus,
restrict our business operations.
Despite these restrictions, the PRC restriction
on foreign investment in the advertising industry does not expressly apply to the investment activities of WFOEs, and starting
from late 2007, the advertising industry has been re-classified from a “restricted” area to a “permitted”
area for foreign investment. Thus, WFOEs may establish subsidiaries in China to operate advertising business directly in China.
However, the PRC governmental authority may determine in the future that such indirect investments evade the qualification requirements
on foreign investment in the advertising industry and thus bans such investment activities.
Relevant PRC regulatory authorities, including
the State Administration for Industry and Commerce, or SAIC, which regulates advertising companies, and the Ministry of Commerce,
which regulates foreign investments in China, have broad discretion in regulating business entities, including:
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Imposing fines or other monetary penalties on PRC subsidiaries or affiliates;
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Revoking the business and operating licenses of PRC subsidiaries and affiliates;
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Discontinuing or restricting PRC subsidiaries’ and affiliates’ operations;
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Imposing conditions or requirements that are impossible to comply with;
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Requiring a restructuring of the relevant ownership structure or operations; or
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Restricting or prohibiting the use of the proceeds of any offering or from other sources to finance business and operations in China.
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Tax
The newly enacted New Law, and the implementation
regulations to the New Law issued by the PRC State Council, became effective as of January 1, 2008. Under the New Law, China adopted
a uniform tax rate of 25% for all enterprises (including domestically-owned enterprises and foreign-invested enterprises) and revoked
the previous tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises. There is a transition
period for enterprises, whether foreign-invested or domestic, which received preferential tax treatments granted by relevant tax
authorities prior to January 1, 2008. Enterprises that were subject to an enterprise income tax rate lower than 25% prior to January
1, 2008 may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective
date of the New Law subject to relevant transaction rules. Enterprises that were entitled to exemptions or reductions from the
standard income tax rate for a fixed term prior to January 1, 2008 may continue to enjoy such treatment until the fixed term expires.
Preferential tax treatments may be granted to industries and projects that are strongly supported and encouraged by the state,
and enterprises that qualify as “High and New Technology Enterprise” (“HNTE”) are entitled to a 15% enterprise
income tax rate.
Other relevant PRC tax regulations
include the PRC Enterprise Income Tax Law, or the EIT Law, and the implementation regulations for the EIT Law issued by the PRC
State Council, effective as of January 1, 2008. The EIT Law provides that enterprises established outside of China whose “de
facto management bodies” are located in China are considered “resident enterprises” and are generally subject
to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation regulations for the EIT Law
issued by the PRC State Council, “de facto management body” is defined as a body that has material and overall management
and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition
and disposition of properties and other assets of an enterprise. Although substantially all of our operational management is currently
based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident enterprise.
Under the EIT Law and implementation regulations
issued by the State Council, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident
enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place
of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such
dividends have their sources within the PRC. Similarly, any gain realized on the transfer of shares by such investors is also subject
to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC.
Foreign Currency Exchange
Under the PRC foreign currency exchange regulations
applicable to us, the RMB is convertible for current account items, including the distribution of dividends, interest payments,
trade and service-related foreign exchange transactions. Conversion of RMB for capital account items, such as direct investment,
loan, security investment and repatriation of investment, however, is still subject to the approval of the PRC State Administration
of Foreign Exchange, or SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized
to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions,
obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of the PRC are also subject to limitations,
which include approvals by the Ministry of Commerce, the SAFE and the State Reform and Development Commission.
The People’s Bank of China, or
PBOC, sets and publishes daily a Base Exchange rate with reference primarily to the supply and demand of Renminbi against a basket
of currencies in the market during the prior day. The PBOC also takes into account other factors, such as the general conditions
existing in the international foreign exchange markets. Since 1994, the conversion of Renminbi into foreign currencies, including
Hong Kong dollars and U.S. dollars, has been based on rates set by the PBOC, which are set daily based on the previous day’s
inter-bank foreign exchange market rates and current exchange rates in the world financial markets. From 1994 to July 20, 2005,
the official exchange rate for the conversion of Renminbi to U.S. dollars was generally stable. Although PRC governmental policies
were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items,
conversion of Renminbi into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires
the approval of the State Administration for Foreign Exchange and other relevant authorities. On July 21, 2005, the PRC government
introduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based
on market supply and demand and by reference to a basket of currencies. On the same day, the value of the Renminbi appreciated
by 2.0% against the U.S. dollar. Since then, the PRC government has made, and may in the future make, further adjustments to the
exchange rate system. The PBOC announces the closing price of a foreign currency traded against the Renminbi in the inter-bank
foreign exchange market after the closing of the market on each working day, and makes it the central parity for the trading against
the Renminbi on the following working day.
In January and April 2005, the PRC State
Administration of Foreign Exchange, or SAFE, issued two rules that require PRC residents to register with and receive approvals
from SAFE in connection with their offshore investment activities. SAFE has announced that the purpose of these regulations is
to achieve the proper balance of foreign exchange and the standardization of the cross-border flow of funds.
On October 21, 2005, SAFE issued the
Notice on Issues Relating to the Administration of Foreign Exchange in Fundraising and Reverse Investment Activities of Domestic
Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005. Notice
75 replaced the two rules issued by SAFE in January and April 2005 mentioned above. According to Notice 75:
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Prior to establishing or assuming control of an offshore company for the purpose of financing that offshore company with assets or equity interests in an onshore enterprise in the PRC, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch;
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An amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that directly or indirectly holds interests in that offshore company upon either (1) the injection of equity interests or assets of an onshore enterprise to the offshore company, or (2) the completion of any overseas fund raising by such offshore company; and
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An amendment to the registration with the local SAFE branch is also required to be filed by such PRC resident when there is any material change involving a change in the capital of the offshore company, such as (1) an increase or decrease in its capital, (2) a transfer or swap of shares, (3) a merger or division, (4) a long term equity or debt investment, or (5) the creation of any security interests over the relevant assets located in China.
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Notice 75 applies retroactively. As a
result, PRC residents who have established or acquired control of offshore companies that have made onshore investments in the
PRC in the past are required to complete the relevant overseas investment foreign exchange registration procedures by March 31,
2006. Under the relevant rules, failure to comply with the registration procedures set forth in Notice 75 may result in restrictions
being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other
distributions to its offshore parent or affiliate and the capital inflow from the offshore entity, and may also subject relevant
PRC residents to penalties under PRC foreign exchange administration regulations.
Dividend Distributions
Under applicable PRC regulations, foreign-invested
enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, a foreign-invested enterprise in the PRC are required to set aside at least 10% of their
after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves
reach 50% of its registered capital. These reserves are not distributable as cash dividends.
Approvals, Licenses and Certificates
We require a number of approvals, licenses
and certificates in order to operate our business. Our principal approvals, licenses and certificates are set forth below.
China Agriculture
Media (Hebei) Co., Ltd.
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Business License (No. 130100400009277) issued by the Shijiazhuang Administration of Industry and Commerce, valid from November 28, 2011 to November 27, 2031.
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China Agriculture
Media (Hong Kong) Group Co., Ltd.
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Business License (No. 37902611-000-05-12-0) issued by the Hong Kong Special Administrative Region of the People’s Republic of China, valid from April 05, 2013 to March 05, 2014.
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China Agriculture
Media Group Co., Ltd.
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Business License (No. 58158906-000-03-12-3) issue by the Hong Kong Special Administrative Region of the People’s Republic of China, valid from March 30, 2013 to March 29, 2014.
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Employees
As of December 31, 2012, CAM Hebei has 11 full-time
employees and 5 part-time employees. The company expects to hire 14 more employees in 2013.
In addition CAMG will share Hebei AMP’s
existing workforce during the initial phase of development. Initially this will consist only of key senior personnel. According
to the agreement, Mr. Lijun Chen, the existing Chairman and President of Hebei AMP, has been appointed as the Chairman of the Board
of CAM Hebei and Mr. Guojiang Peng, the existing Vice President of Hebei AMP, has been appointed as Executive Director of CAM Hebei.
A copy of the agreement to share workers is attached as Exhibit 10.6
Item 1A. Risk Factors
In addition to the other information set forth
in this report, you should carefully consider the following factors, which could materially affect our business, financial condition
or future results. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or
results of operations.
Risks Related to Our Business and Industry
We rely on our related party for a significant
portion of our business. If we are unable to maintain good relationships with our related party, our business could suffer.
Currently all of our revenues are derived from
Hebei AMP, a related party and major shareholder through a trustee holding through common management located in the PRC. We cannot
assure that we will be able to enter into collaborative agreements with Hebei AMP on terms favorable to us, or at all, and any
future agreement may expose us to risks that our partner might fail to fulfill its obligations and delay commercialization of our
products. We also could become involved in disputes with Hebei AMP, which could lead to delays in or terminations of our development
and commercialization programs and time consuming and expensive litigation or arbitration. Our inability to enter into additional
collaborative arrangements with other partners, or our failure to maintain such arrangements, would limit the number of product
candidates which we could develop and ultimately, decrease our sources of any future revenues.
Our failure to maintain existing relationships
with Hebei AMP, National AMP and China Co-op or obtain new relationships that allow us to place our LCD flat-panel displays, advertising
poster frames and outdoor traditional and LED digital billboards in desirable locations would harm our business and prospects.
Our success is dependent on raising capital
from shareholders or external sources in order to fund our operations, your investment could be at risk.
Development of our operations will require
significant capital expenditures for which we may be unable to provide sufficient financing. Our need for additional capital may
adversely affect the financial condition of CAMG. The Company has relied, and continues to rely, on external sources of financing
to meet its capital requirements, to continue developing its business in China, the LCD network, and to otherwise implement its
corporate development and investment strategies. In the past, the Company has relied upon equity capital and debt as sources of
funding. While the Company hopes to obtain the future funding that it will need through the debt and equity markets, we cannot
assure investors that we will be able to obtain additional funding when it is required. If we fail to obtain the funding that we
need when it is required, the Company may have to forego or delay potentially valuable opportunities to develop its business or
default
on existing commitments to third parties.
Our limited operating history makes it extremely difficult to obtain future
financing and our failure to obtain future financing could result in significant dilution and/or a complete loss of the value of
your shares.
We will derive a substantial majority
of our revenues from the provision of advertising services, and advertising is particularly sensitive to changes in economic conditions
and advertising trends. We may be unable to adequately deal with these changing conditions and trends that could have a negative
impact on our financial statements and the value of your investment.
Demand for advertising time slots and advertising
frame space on our networks, and the resulting advertising spending by our clients, is particularly sensitive to changes in general
economic conditions and advertising spending typically decreases during periods of economic downturn. Advertisers may reduce the
money they spend to advertise on our networks for a number of reasons, including:
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General decline in global economic conditions;
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Deteriorating economic conditions in the particular cities where we conduct business;
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Decision to shift advertising expenditures to other available advertising media;
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Reduced advertising spending in general; or
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Decrease in demand for advertising media in general and for our advertising services in particular would materially and adversely affect our ability to generate revenue from our advertising services, and our financial condition and results of operations.
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In 2008, due to the global economic downturn,
growth in consumer spending in China slowed which resulted in a corresponding slowdown in advertising spending growth. If there
is another deterioration in economic conditions in China, our revenues, net income and results of operations could be materially
adversely affected.
Our operating results are difficult to
predict and may fluctuate significantly from period to period in the future resulting in uncertainty and lower pricing for our
shares
Our operating results are difficult to predict
and may fluctuate significantly from period to period based on the seasonality of consumer spending and corresponding advertising
trends in China. In addition, advertising spending generally tends to decrease during January and February each year due to the
Chinese Lunar New Year holiday. Other factors that are likely to cause our operating results to fluctuate include the seasonality
of advertising spending in China, the effect of the global economic downturn on spending in China, a further deterioration of economic
conditions in China and potential changes to the regulation of the advertising industry in China. If our revenues for a particular
quarter are lower than we expect, we may be unable to reduce our operating expenses for that quarter by a corresponding amount,
which would harm our operating results for that quarter relative to our operating results from other quarters.
Failure to manage our growth and operations
could strain our management, operational and other resources and we may not be able to achieve anticipated levels of growth in
the new networks and media platforms we operate, either of which could materially and adversely affect our business and growth
potential.
To manage our growth and operations, we must
develop and improve our existing administrative and operational systems and our financial and management controls and further expand,
train and manage our work force. As we continue this effort, we may incur substantial costs and expend substantial resources in
connection with any such expansion or to react to more challenging market conditions, due to, among other things, different technology
standards, legal considerations and cultural differences. We may not be able to manage our current or future international operations
effectively and efficiently or compete effectively in such markets. We cannot assure you that we will be able to efficiently or
effectively manage the growth or changes in our operations, recruit top talent and train our personnel. Any failure to efficiently
manage our expansion or changes in operations may materially and adversely affect our business and future growth.
If advertisers or the viewing public
do not accept, or lose interest in, our advertising network, our revenues may be negatively affected and our business may not expand
or be successful.
The market for out-of-home advertising networks
in China is relatively new and its potential is uncertain. We compete for advertising spending with many forms of more established
advertising media. Our success depends on the acceptance of our out-of-home advertising network by advertisers and their continuing
interest in these mediums as components of their advertising strategies. Our success also depends on the viewing public continuing
to be receptive towards our advertising network. Advertisers may elect not to use our services if they believe that consumers are
not receptive to our networks or that our networks do not provide sufficient value as effective advertising mediums. If a substantial
number of advertisers lose interest in advertising on our advertising network for these or other reasons, we will be unable to
generate sufficient revenues and cash flow to operate our business, and our advertising service revenue, liquidity and results
of operations could be negatively affected.
If we are unable to adapt to changing
regulatory requirements or advertising trends and the technology needs of advertisers and consumers, we will not be able to compete
effectively and we will be unable to increase or maintain our revenues which may materially and adversely affect our business prospects
and revenues.
The market for advertising requires us to continuously
identify new advertising trends and the technology needs of advertisers and consumers, which may require us to develop new features
and enhancements for our advertising network. The majority of our displays will use 26 or 32-inch liquid crystal display screens.
We may be required to incur development and acquisition costs in order to keep pace with new technology needs but we may not have
the financial resources necessary to fund and implement future technological innovations or to replace obsolete technology. Furthermore,
we may fail to respond to these changing technology needs. For example, if the use of broadband networking capabilities on our
advertising network becomes a commercially viable alternative and meets all applicable PRC legal and regulatory requirements, and
we fail to implement such changes on our network or fail to do so in a timely manner, our competitors or future entrants into the
market who do take advantage of such initiatives could gain a competitive advantage over us. If we cannot succeed in complying
with new regulatory requirements or developing and introducing new features on a timely and cost-effective basis, advertiser demand
for our advertising networks may decrease and we may not be able to compete effectively or attract advertising clients, which would
have a material and adverse effect on our business prospects and revenues.
We may be subject to, and may expend
significant resources in defending against, government actions and civil suits based on the content and services we provide through
our advertising networks and our operations could be disrupted or end as a result.
PRC advertising laws and regulations require
advertisers, advertising operators and advertising distributors, including businesses such as ours, to ensure that the content
of the advertisements they prepare or distribute is fair, accurate and is in full compliance with applicable laws. Violation of
these laws or regulations may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination
of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving
serious violations, the PRC government may revoke a violator’s license for advertising business operations.
As an advertising service provider, we are
obligated under PRC laws and regulations to monitor the advertising content that is shown on our advertising networks for compliance
with applicable law.
China has also enacted regulations governing
telecommunication service providers and the distribution of news and other information. In the past, the Chinese government has
stopped the distribution of information over the Internet and telecommunications networks that it believes to violate Chinese law,
including content that is pornographic or obscene, incites violence, endangers national security, is contrary to the national interest
or is defamatory. If any of the content that we deliver through our Internet advertising network is found to violate Chinese laws
and regulations, we could be subject to fines or suspensions.
Moreover, civil claims may be filed against
us for fraud, defamation, subversion, negligence, copyright or trademark infringement or other violations due to the nature and
content of the information displayed on our advertising network. If consumers find the content displayed on our advertising network
to be offensive, landlords, property managers, other location providers or telecommunication network operators may seek to hold
us responsible for any consumer claims or may terminate their relationships with us.
In addition, if the security of our content
management system is breached through the placement of unauthorized compact flash, or CF cards in our flat-panel displays and unauthorized
images, text or audio sounds are displayed on our advertising network, viewers or the PRC government may find these images, text
or audio sounds to be offensive, which may subject us to civil liability or government censure despite our efforts to ensure the
security of our content management system. Any such event may also damage our reputation. If our advertising viewers do not believe
our content is reliable or accurate, our business model may become less appealing to viewers in China and our advertising clients
may be less willing to place advertisements on our advertising network.
We may be subject to intellectual property
infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, may materially
disrupt our business.
We cannot be certain that our advertising displays
or other aspects of our business do not or will not infringe upon patents, copyrights or other intellectual property rights held
by third parties. Although we are not aware of any such claims, we may become subject to legal proceedings and claims from time
to time relating to the intellectual property of others in the ordinary course of our business. If we are found to have violated
the intellectual property rights of others, we may be enjoined from using such intellectual property, and we may incur licensing
fees or be forced to develop alternatives. In addition, we may incur substantial expenses in defending against these third party
infringement claims, regardless of their merit. Successful infringement or licensing claims against us may result in substantial
monetary liabilities, which may materially and adversely disrupt our business.
We face significant competition, and
if we do not compete successfully against new and existing competitors, we may lose our market share, and our profitability may
be adversely affected.
We compete with other advertising companies
in China. We compete for advertising clients primarily on the basis of network size and coverage, location, price, the range of
services that we offer and brand name. We also face competition from other out-of-home television advertising network operators
for access to the most desirable locations in cities in China. Individual buildings, hotels, restaurants and other commercial locations
and hypermarket, supermarket and convenience store chains may also decide to independently, or through third-party technology providers,
install and operate their own flat-panel television advertising screens. Our network faces competition with similar networks operated
by domestic out-of-home advertising companies. In the future, we may also face competition from new entrants into the out-of-home
television advertising sector.
Increased competition could reduce our operating
margins and profitability and result in a loss of market share. Some of our existing and potential competitors may have competitive
advantages, such as significantly greater financial, marketing or other resources, or exclusive arrangements with desirable locations,
and others may successfully mimic and adopt our business model. Moreover, increased competition will provide advertisers with a
wider range of media and advertising service alternatives, which could lead to lower prices and decreased revenues, gross margins
and profits. We cannot assure you that we will be able to successfully compete against new or existing competitors.
We do not maintain any business liability
disruption or litigation insurance coverage for our operations, and any business liability, disruption or litigation we experience
might result in our incurring substantial costs and the diversion of resources.
The insurance industry in China is still at
an early stage of development. Insurance companies in China offer limited business insurance products and do not, to our knowledge,
offer business liability insurance. While business disruption insurance is available to a limited extent in China, we have determined
that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially
reasonable terms make it impractical for us to have such insurance. As a result, we do not have any business liability, disruption
or litigation insurance coverage for our operations in China. Any business disruption or litigation may result in our incurring
substantial costs and the diversion of resources.
Our business operations may be affected
by legislative or regulatory changes that have a negative impact on our business and the value of your shares.
There are no existing PRC laws or regulations
that specifically define or regulate out-of-home digital media. Changes in laws and regulations or the enactment of new laws and
regulations governing placement or content of out-of-home advertising, our business licenses or otherwise affecting our business
in China may materially and adversely affect our business prospects and results of operations.
Our failure to comply with certain aspects
of applicable PRC laws and regulations could adversely affect our business operations and corporate structure.
In order to conduct our business operations
through our PRC operating subsidiaries, we are required to comply with a range of PRC laws and regulations, including laws and
regulations applicable to contractual arrangements among our operating subsidiaries, requirements to register the equity pledges
relating to those contractual arrangements, other registration requirements under State Administration for Industry and Commerce,
or SAIC, rules and regulations, and obligations by us, our management and our PRC shareholders or beneficial owners to comply with
the State Administration of Foreign Exchange, or SAFE, registration and disclosure requirements.
Due to uncertainties in the law, the lack of
implementing regulations and, in some instances, our delay in complying with some of these rules, there is a risk that we could
be found to have violated rules and regulations relating to our corporate structure, SAFE and SAIC registration and PRC foreign
exchange rules. As detailed in the risk factor paragraphs below, if we are found to have failed to comply with or breached PRC
laws and regulations applicable to us and our PRC operating subsidiaries we could be subject to, among other things, penalties
including fines, revocation of business licenses of the PRC entities or requirements to restructure our business operations. Our
failure to comply with PRC laws and regulations relating to the registration of equity pledges under our contractual arrangements
with our PRC operating affiliates could also render the equity pledge, and the structure, unenforceable.
Further, advertising businesses conducted by
our operating subsidiaries are subject to certain risks associated with PRC laws and regulations on foreign investment in advertising
businesses in China. If the PRC government determines that the ownership structure of our operating subsidiaries or our operating
affiliates, or the agreements that establish the structure for operating our China business do not comply with current or future
PRC governmental restrictions on foreign investment in the advertising industry, we could be subject to penalties which may materially
and adversely affect our business or financial condition.”
If we were subject to any such penalties or
negative consequences, our business and operations could be materially and adversely affected.
Due to uncertainties in the implementation
of PRC laws and regulations, we may be put at risk from failures to comply with all such laws resulting in disruptions in our business
and complete failure of the company.
We use contractual arrangements with our PRC
partners of our China operations, and uncertainties in the PRC legal system could limit our ability to enforce these contractual
arrangements and thus our ability to conduct our business. PRC regulations relating to offshore investment activities by PRC residents
may increase our administrative burden and restrict our overseas and cross-border investment activity. A failure by us or our shareholders
or beneficial owners who are PRC citizens or residents in China to comply with such regulations could restrict our ability to distribute
profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which could adversely
affect our business and financial condition. This could subject us to fines or other penalties, which could negatively impact our
revenues or interfere with our ability to operate our business relating to the failure of some of our indirect operating subsidiaries
or our operating affiliates to register with the relevant local branch of SAIC for their expansion of business or for their branch
offices in each of the cities where we operate.
If the PRC government determines that the ownership
structure of our company, or the agreements that establish the structure for operating our China business do not comply with current
or future PRC governmental restrictions on foreign investment in the advertising industry, we could be subject to severe penalties.
Substantially all of our operations will rely
on our relationship with the National AMP Group and China Co-op, and through our contractual arrangements with our consolidated
affiliated entities in China. PRC regulations require any foreign entities that invest directly in the advertising services industry
to have at least two years of direct operations in the advertising industry outside of China. Since December 10, 2005, foreign
investors have been allowed to directly own 100% of PRC companies operating an advertising business if the foreign entity has at
least three years of direct operations in the advertising business outside of China or less than 100% if the foreign investor has
at least two years of direct operations in the advertising industry outside of China.
If we, our existing or future PRC operating
subsidiaries and operating affiliates or their ownership structure or the contractual arrangements are found to be in violation
of any existing or future PRC laws or regulations, or our existing or future PRC operating subsidiaries or operating affiliates
fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the State
Administration for Industry and Commerce, or SAIC, which regulates advertising companies, and the Ministry of Commerce, which regulates
foreign investments in China, would have broad discretion in dealing with such violations, including:
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Imposing fines or other monetary penalties on our PRC subsidiaries or affiliates;
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Revoking the business and operating licenses of our PRC subsidiaries;
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Discontinuing or restricting our PRC subsidiaries’ and affiliates’ operations;
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Imposing conditions or requirements with which we or our PRC subsidiaries may not be able to comply;
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Requiring us or our PRC subsidiaries to restructure the relevant ownership structure or operations; or
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Restricting or prohibiting our use of the proceeds of any offering or from other sources to finance our business and operations in China.
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The imposition of any of these penalties could
result in additional administrative and legal costs, less favorable business relationships or other regulatory burdens or otherwise
materially and adversely affect our business.
Similarly, if our relationship with National
AMP Group and China Co-op is terminated, we may not be able to operate at all within the Network. While we do not believe these
relationships will be terminated in the near future, we rely heavily on these strategic partners and any use of their retail Networks
will continue to be pursuant to the JV Agreement and the discretion of the PRC government.
We plan to use contractual arrangements
with the Network locations to generate rental income for a portion of our China operations, and uncertainties in the PRC legal
system could limit our ability to enforce these contractual arrangements and thus our ability to conduct our business.
Lease or sublease agreements in the PRC are
governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal
procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements.
We may rely principally on dividends
and other distributions on equity paid by our WFOE operating subsidiaries to fund any cash and financing requirements we may have,
and any limitation on the ability of our operating subsidiaries to pay dividends to us could have a material adverse effect on
our ability to conduct our business, as a result your shares could lose value since we would no longer have access to the capital
generated by our subsidiaries, if any.
We are a holding company, and we may rely principally
on dividends and other distributions on equity paid by our operating subsidiaries for our cash requirements, including the funds
necessary to service any debt we may incur. If any of our operating subsidiaries incurs debt on its own behalf, the instruments
governing the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities
may require us to adjust our taxable income in a manner that would materially and adversely affect our operating subsidiaries’
ability to pay dividends and other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends
by our PRC operating subsidiaries only out of their retained earnings, if any, determined in accordance with PRC accounting standards
and regulations.
Under PRC laws and regulations, each of our
PRC operating subsidiaries is also required to set aside a portion of its net income each year to fund specific reserve funds.
These reserves are not distributable as cash dividends. In particular, subject to certain cumulative limits, the statutory general
reserve fund requires annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends. Our operating
subsidiaries will have to allocate annual after-tax profits to each of their respective reserve funds in compliance with these
laws and regulations. Any limitation on the ability of our operating subsidiaries to receive distributions or pay dividends to
us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses,
pay dividends, or otherwise fund and conduct our business. A failure by our shareholders or beneficial owners who are PRC citizens
or residents in China to comply with such regulations could restrict our ability to distribute profits, restrict our overseas and
cross-border investment activities or subject us to liability under PRC laws, which could adversely affect our business and financial
condition.
PRC regulation of loans and direct investment
by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to
our PRC operating subsidiaries resulting in the failure of our business and the loss of your investment.
As an offshore holding company of our PRC operating
subsidiaries, we may make loans to our PRC subsidiaries and consolidated PRC affiliated entities, or we may make additional capital
contributions to our WFOE operating subsidiaries. Any loans to our PRC subsidiaries or consolidated PRC affiliated entities are
subject to PRC regulations and approvals. For example:
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Loans by us to our foreign invested enterprises to finance their respective activities cannot exceed statutory limits and must be registered with the PRC State Administration of Foreign Exchange or its local counterpart; and
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Loans by us in foreign exchange to our PRC operating affiliates and our PRC operating subsidiaries owned by our operating subsidiaries, which are domestic PRC enterprises, must be approved by the relevant government authorities and must also be registered with the PRC State Administration of Foreign Exchange or its local counterpart. In practice, it is very difficult if not impossible in most cases, to obtain the approval of or complete the registration regarding our loan to any PRC operating affiliate.
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We may also determine to finance our PRC foreign
invested enterprises by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce
or its local counterpart. We cannot assure you that we can obtain these government registrations or approvals on a timely basis,
if at all, with respect to future loans or capital contributions by us to our PRC operating affiliates and our PRC operating subsidiaries
owned by our operating subsidiaries. If we fail to receive such registrations or approvals, our ability to capitalize our PRC operations
would be negatively affected which would adversely and materially affect our liquidity and our ability to expand our business.
We may be deemed a PRC resident enterprise
under the PRC Enterprise Income Tax Law and be subject to the PRC taxation on our worldwide income which could create losses or
a significant reduction in our net income and a decrease in the value of your shares.
The newly enacted PRC Enterprise Income Tax
Law, or the New Law, and the implementation regulations to the New Law issued by the PRC State Council, became effective as of
January 1, 2008. The New Law provides that enterprises established outside of China whose “de facto management bodies”
are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise
income tax rate as to their worldwide income. Under the implementation regulations for the New Law issued by the PRC State Council,
“de facto management body” is defined as a body that has material and overall management and control over the manufacturing
and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and
other assets of an enterprise.
Further, on April 22, 2009, the State Administration
of Tax (“SAT”) issued a Tax Circular, Guoshuifa [2009] No. 82 on Certain Issues regarding the Determination of Offshore
Companies Controlled by PRC Companies as Resident Enterprises pursuant to “De Facto Management Bodies” Standard, or
Circular 82, which took effect on January 1, 2008. According to Circular 82, any company established pursuant to laws and regulations
other than PRC laws but that is controlled by companies or company groups within China shall be deemed as a resident enterprise
for PRC tax purposes if all the following conditions are met: (i) the senior management in charge of the daily operation and management
of the company is based within China or the premises where the senior management performs its duties are located within China;
(ii) the financial matters (such as raising funds, financing or financial risk management) and human resources matters (such as
appointment and dismissal of employees or their payrolls) are decided by companies or individuals within China or require approval
from companies or individuals within China; (iii) primary property, books and accounts, company seals and board and shareholder
meeting minutes are kept or placed within China; and (iv) 50% or more of the directors with voting rights or senior management
habitually reside within China. According to this Circular 82, in determining the location of de facto management, “substance
over form” principle should be followed. Although Circular 82 was issued to regulate the PRC tax resident judgment of companies
established overseas and controlled by PRC companies, which is not applicable in our case, the criteria in Circular 82 should be
used as a reference to the SAT’s view on this issue.
Most of our major board decisions, such as
those relating to strategic planning, significant investments, raising funds and all matters related to capital market activities
are made outside of the PRC. We are based in Hong Kong, however there is uncertainty regarding whether PRC tax authorities would
deem us to be a PRC resident enterprise. If we are treated as a resident enterprise for PRC tax purposes, we will be subject to
PRC tax on our worldwide income, which would have an adverse effect on our effective tax rate and net income.
PRC regulations relating to offshore
investment activities by PRC residents may increase our administrative burden and restrict our overseas and cross-border investment
activity. A failure by us or our shareholders or beneficial owners who are PRC citizens or residents in China to comply with such
regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities or subject
us to liability under PRC laws, which could adversely affect our business and financial condition.
The PRC National Development and Reform Commission,
or NDRC, and SAFE promulgated regulations that require PRC residents and PRC corporate entities to register with and obtain approvals
from relevant PRC government authorities in connection with their direct or indirect offshore investment activities and subsequent
round trip investment into China. These regulations apply to our shareholders who are PRC residents and may apply to any offshore
acquisitions that we make in the future.
Under such SAFE regulations, PRC residents
who make, or have previously made, direct or indirect investments in offshore companies will be required to register those investments.
In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to file with the local
branch of SAFE, with respect to that offshore company, any material change involving capital variation, such as an increase or
decrease in capital, transfer or swap of shares, merger, division, long term equity or debt investment or creation of any security
interest over the assets located in China. The SAFE regulations also impose obligations on onshore subsidiaries of the offshore
special purpose company to coordinate with and supervise the beneficial owners of the offshore entity who are PRC residents to
complete the SAFE registration process. If any PRC resident fails to comply with such SAFE regulations, the PRC subsidiaries of
that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital,
share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited from injecting
additional capital into their PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described
above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions, such as fines.
A failure to comply with PRC regulations
regarding the registration of shares and share options held by our employees who are PRC citizens may subject such employees or
us to fines and legal or administrative sanctions. As a result, we may be unable to operate and the value of your shares could
decrease.
Pursuant to the Implementation Rules of the
Administrative Measures on Individual Foreign Exchange, or the Individual Foreign Exchange Rules, promulgated on January 5, 2007
by SAFE and relevant guidance issued by SAFE in March 2007, PRC citizens who are granted shares or share options by an overseas-listed
company according to its employee share option or share incentive plan are required, through the PRC subsidiaries of such overseas-listed
company or other qualified PRC agents, to register with SAFE and complete certain other procedures related to the share option
or other share incentive plan. In addition, the overseas listed company or its PRC subsidiaries or other qualified PRC agent is
required to appoint an asset manager or administrator and a custodian bank, and open special foreign currency accounts to handle
transactions relating to the share option or other share incentive plan. If we make equity compensation grants to persons who are
PRC citizens, they may be required to register with SAFE. We may also face regulatory uncertainties that could restrict our ability
to adopt an equity compensation plan for our directors and employees and other parties under PRC law.
On April 6, 2007, SAFE issued the Operating
Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of
An Overseas Listed Company, also known as Circular 78. It is not clear whether Circular 78 covers all forms of equity compensation
plans or only those which provide for the granting of stock options. For any plans which are so covered and are adopted by a non-PRC
listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals
from SAFE prior to their participation in the plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and
make the necessary applications and filings if they participated in an overseas listed company's covered equity compensation plan
prior to April 6, 2007. We intend to adopt an equity compensation plan in the future and make option grants to our officers and
directors, most of whom are PRC citizens. Circular 78 may require our officers and directors who receive option grants and are
PRC citizens to register with SAFE. We believe that the registration and approval requirements contemplated in Circular 78 will
be burdensome and time-consuming. If it is determined that any of our equity compensation plans is subject to Circular 78, failure
to comply with such provisions may subject us and participants of our equity incentive plan who are PRC citizens to fines and legal
sanctions and prevent us from being able to grant equity compensation to our PRC employees. In that case, our ability to compensate
our employees and directors through equity compensation would be hindered and our business operations may be adversely affected.
Risks Relating to the People’s
Republic of China
Substantially all of our assets are located
in China and substantially all of our revenues are derived from our operations in China. Accordingly, our business, financial condition,
results of operations and prospects are subject, to a significant extent, to economic, political and legal developments in China.
The PRC’s economic, political and
social conditions, as well as governmental policies, could affect the financial markets in China and our liquidity and access to
capital and limit our ability to effectively operate our business.
The PRC economy differs from the economies
of most developed countries in many respects, including the amount of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth over the past,
growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various
measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy,
but may also have a negative effect on us. For example, under current PRC regulations, since December 10, 2005, foreign entities
have been allowed to directly own 100% of a PRC advertising business if the foreign entity has at least three years of direct operations
of an advertising business outside of China, or to directly own less than 100% of a PRC advertising business if the foreign entity
has at least two years of direct operations of an advertising business outside of China. This may encourage foreign advertising
companies with more experience, greater technological know-how and more extensive financial resources than we have to compete against
us and limit the potential for our growth. Moreover, our financial condition and results of operations may be adversely affected
by government control over capital investments or changes in tax regulations that are applicable to us.
The PRC economy has been transitioning from
a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s
emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the
establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is
still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry
development by imposing industrial policies. The PRC government also exercises significant control over China’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. Since late 2003, the PRC government implemented a number
of measures, such as raising bank reserves against deposit rates to place additional limitations on the ability of commercial banks
to make loans and raise interest rates, in order to slow down specific segments of China’s economy which it believed to be
overheating. These actions, as well as future actions and policies of the PRC government, could materially affect our liquidity
and access to capital and our ability to operate our business.
The PRC legal system embodies uncertainties
which could limit the legal protections available to you and us. As a result, we may be unable to adequately defend ourselves against
certain claims made in China or you may be unable to file a legal claim against us.
The PRC legal system is a civil law system
based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value.
In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general.
The overall effect of legislation over the past 32 years has significantly enhanced the protections afforded to various forms of
foreign investment in China. Each of our PRC operating subsidiaries is subject to PRC laws and regulations. However, these laws,
regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example,
we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract.
However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory
and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of
legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts
we have entered into with our operating affiliates. In addition, such uncertainties, including the inability to enforce our contracts,
could materially and adversely affect our business and operation. In addition, intellectual property rights and confidentiality
protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect
of future developments in the PRC legal system, particularly with regard to the advertising industry, including the promulgation
of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national
laws. These uncertainties could limit the legal protections available to us, including our ability to enforce our agreements.
If tax benefits currently available to
us in PRC were no longer available, our effective income tax rates for our PRC operations could increase. If our PRC tax rates
increase we may be unable to operate or turn a profit and you may lose the entire value of your investment. .
The newly enacted New Law, and the implementation
regulations to the New Law issued by the PRC State Council, became effective as of January 1, 2008. Under the New Law, China adopted
a uniform tax rate of 25% for all enterprises (including domestically-owned enterprises and foreign-invested enterprises) and revoked
the previous tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises. There is a transition
period for enterprises, whether foreign-invested or domestic, which received preferential tax treatments granted by relevant tax
authorities prior to January 1, 2008. Enterprises that were subject to an enterprise income tax rate lower than 25% prior to January
1, 2008 may continue to enjoy the lower rate and gradually transition to the new tax rate within five years after the effective
date of the New Law subject to relevant transaction rules. Enterprises that were entitled to exemptions or reductions from the
standard income tax rate for a fixed term prior to January 1, 2008 may continue to enjoy such treatment until the fixed term expires.
Preferential tax treatments may be granted to industries and projects that are strongly supported and encouraged by the state,
and enterprises that qualify as “High and New Technology Enterprise” (“HNTE”) are entitled to a 15% enterprise
income tax rate.
We cannot assure you that the tax authorities
will not, in the future, discontinue any of our preferential tax treatments, potentially with retroactive effect. The discontinuation
of our preferential tax treatments or the change of the applicable preferential tax rate could materially increase our tax obligations.
Dividends we receive from our operating
subsidiaries located in the PRC may be subject to PRC withholding tax. As a result, we may be unable to receive income from our
operations and our share price could drop significantly.
The New Law, and the implementation regulations
for the New Law issued by the PRC State Council, became effective as of January 1, 2008. The New Law provides that a maximum income
tax rate of 20% will be applicable to dividends payable to non-PRC investors that are “non-resident enterprises,” to
the extent such dividends are derived from sources within the PRC, and the State Council has reduced such rate to 10% through the
implementation regulations. Pursuant to the New Law, dividends generated after January 1, 2008 and payable by a foreign-invested
enterprise in China to its foreign investors will be subject to a 10% withholding tax, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
We are a Hong Kong holding company and substantially
all of our income may be derived from dividends and royalty fees we receive from our operating subsidiaries located in the PRC.
Thus, dividends paid to us by our operating subsidiaries in China are subject to the 10% withholding tax if we are considered as
a “non-resident enterprise” under the New Law. If we are required under the New Law to pay income tax for any dividends
we receive from our subsidiaries, it will materially and adversely affect the amount of dividends, if any, we may pay to our shareholders.
Furthermore, the State Administration of Taxation promulgated the Notice on How to Understand and Determine the Beneficial Owners
in Tax Agreement in October 2009, or Circular 601, which provides guidance for determining whether a resident of a contracting
state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements with other
countries or regions. According to Circular 601, a beneficial owner generally must be engaged in substantive business activities.
An agent or conduit company will not be regarded as a beneficial owner and, therefore, will not qualify for treaty benefits. The
conduit company normally refers to a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating
profits. We cannot assure you that any dividends to be distributed by our operating subsidiaries to our non-PRC subsidiaries who
are their respective overseas parent companies, will be entitled to the benefits under the relevant tax treaties or other similar
tax arrangements.
Our PRC operating subsidiaries and operating
affiliates may have engaged in business activities without the necessary registration with local authorities. This could subject
us to fines or other penalties, which could negatively impact our revenues or interfere with our ability to operate our business.
According to relevant PRC laws, a company shall
conduct business within its business scope and make supplementary registration with the relevant company registration authority
if the company expands or changes its business operation. Furthermore, a company that sets up a branch to conduct an advertising
business in a location where it is not registered must register with the local branch of the SAIC. As our business expands, some
of our indirect operating subsidiaries or our operating affiliates may fail to register with the relevant local branch of SAIC
for their expansion of business or for their branch offices in each of the cities where we operate and, as a result, we may be
subject to administrative order for rectification and penalties for failing to register. These penalties may include fines, disgorgement
of profits or revocation of business licenses of our operating subsidiaries or our operating affiliates, although we believe that,
as a matter of practice, the authorities typically impose an extreme penalty only after repeated warnings are ignored or where
a violation is blatant and continuous. Because of the discretionary nature of regulatory enforcements in the PRC, we cannot assure
you that we will not be subject to these penalties as a result of violations of the requirement to register with the local branches
of SAIC for our local branch offices or for our expansion of business, or that these penalties would not substantially inhibit
our ability to operate our business.
A PRC rule on mergers and acquisitions
may subject us to sanctions, fines and other penalties and affect our future business growth through acquisitions of complementary
businesses.
On August 8, 2006, six PRC government and regulatory
authorities, including the PRC Ministry of Commerce and the Chinese Securities Regulatory Commission, or the CSRC, promulgated
a rule entitled “Provisions regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,” or the
New M&A Rule, which became effective on September 8, 2006 and was revised in 2009. The New M&A Rule, among other things,
requires that an offshore special purpose vehicle, or SPV, formed for the listing purpose through acquisition of a PRC domestic
entity and controlled by PRC residents should obtain approval from the CSRC prior to publicly listing its securities on an overseas
stock market. Based on consultation with the International Department of the CSRC regarding its interpretation of the New M&A
Rule, our PRC counsel, Global Law Office, advised us that the CSRC approval was not required for the listing of our shares. However,
we cannot assure you that the relevant PRC government agency, including the Ministry of Commerce or other applicable departments
of the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory body subsequently determines
that the CSRC’s approval was, or will be, required for future offerings of our shares in the U.S., and we may face sanctions
by the CSRC or other PRC regulatory agencies. In such event, 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 any offering, or
take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our American Depositary Share - ADS.
The New M&A Rule also established additional
procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex,
including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise. In the future, we may grow our business in part by acquiring
complementary businesses, although we do not have any plans to do so at this time. Complying with the requirements of the New M&A
Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from
the Ministry of Commerce, may delay or inhibit the completion of such transactions, which could affect our ability to expand our
business or maintain our market share.
Restrictions on currency exchange may
limit our ability to utilize our revenues effectively. If we are not able to utilize our revenues we may be unable to execute our
business plan or compete with other companies in the advertising services market.
Substantially all of our revenues and operating
expenses are denominated in Renminbi. The Renminbi is currently convertible under the “current account”, which includes
dividends, trade and service-related foreign exchange transactions, but not under the “capital account”, which includes
foreign direct investment and loans. We cannot assure you that the relevant PRC governmental authorities will not further limit
or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenues will be
denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenues generated
in Renminbi to fund our business activities outside China, if any, or expenditures denominated in foreign currencies. Foreign exchange
transactions under the capital account are still subject to limitations and require approvals from, or registration with, the State
Administration of Foreign Exchange and other relevant PRC governmental authorities. This could affect the ability of each of our
operating subsidiaries to obtain foreign exchange through debt or equity financing, including by means of loans or capital contributions
from us. It may also restrict our ability to remit amounts overseas including to our Hong Kong holding company. If we transfer
amounts to overseas accounts, it may be deemed a dividend paid on profits which is subject to PRC taxation, which could affect
the feasibility and efficiency of conducting actions overseas, such as issuing dividends to shareholders, conducting share repurchase
programs or otherwise.
Fluctuations in exchange rates could
result in foreign currency exchange losses. Such losses could negatively impact our financial statements and in turn negatively
affect your shares.
Appreciation or depreciation in the value of
the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect
to any underlying change in our business or results of operations. Since July 2005 the Renminbi is no longer pegged solely to the
U.S. dollar. Instead, it is reported to be pegged against a basket of currencies, determined by the People’s Bank of China,
against which it can rise or fall by as much as 1% each day. This change in policy has resulted in the gradual increase in the
value of the Renminbi against the U.S. dollar over time. As of December 31, 2010, the Renminbi had appreciated approximately 20.3%
against the U.S. dollar since July 21, 2005. On February 3, 2012, the Renminbi was valued against the U.S. dollar at approximately
RMB 6.3 to the U.S. dollar. The Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the long
term, depending on the fluctuation of the basket of currencies against which it is currently valued or it may be permitted to enter
into a full float, which may also result in a significant appreciation or depreciation of the Renminbi against the U.S. dollar.
Fluctuations in the exchange rate will also affect the relative value of any dividend we issue in the future which will be exchanged
into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments we make in the future.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an
effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the
future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure
at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability
to convert Renminbi into foreign currency.
Our financial and operating performance
may be adversely affected by epidemics, natural disasters and other catastrophes resulting in disruptions in our business and a
loss of your investment.
From December 2002 to June 2003, China and
other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as Severe Acute Respiratory
Syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the SARS outbreak had been contained. Since September
2003, however, a number of isolated new cases of SARS have been reported, most recently in central China in April 2004. During
May and June of 2003, many businesses in China were closed by the PRC government to prevent transmission of SARS. In addition,
many countries, including China, have encountered incidents of the H5N1 strain of bird flu, or avian flu. This disease, which is
spread through poultry populations, is capable in some circumstances of being transmitted to humans and is often fatal. In April
2009, an outbreak of the H1N1 virus, also commonly referred to as “swine flu”, occurred in Mexico and spread to other
countries. Cases of swine flu were reported in Hong Kong and mainland China. A new outbreak of SARS or an outbreak of avian or
swine flu may result in health or other government authorities requiring the closure of our offices or other businesses, including
office buildings, retail stores and other commercial venues, which comprise the primary locations where we provide our out-of-home
digital and poster frame advertising services. Any recurrence of the SARS outbreak, an outbreak of avian or swine flu or a development
of a similar health hazard in China, may deter people from congregating in public places, including a range of commercial locations
such as office buildings and retail stores. Such occurrences would severely impact the value of our LCD display and poster frame
networks to advertisers, significantly reduce the advertising time purchased by advertisers and severely disrupt our business and
operations. In addition, losses caused by epidemics, natural disasters and other catastrophes, including earthquakes or typhoons,
are either uninsurable or too expensive to justify insuring against in China.
Similarly, war, including the potential of
war, terrorist activity, threats of terrorist activity, social unrest and heightened travel security measures instituted in response,
travel-related accidents, as well as geopolitical uncertainty and international conflict, will affect travel and may in turn have
a material adverse effect on our business and results of operations. In addition, we may not be adequately prepared in contingency
planning or recovery capability in relation to a major incident or crisis, and as a result, our operational continuity may be adversely
and materially affected and our reputation may be harmed.
The failure to manage growth effectively
could have an adverse effect on our employee efficiency, product quality, working capital levels and results of operations. Any
such adverse effects could negatively impact the value of your stock.
Any significant growth in the market for our
products or our entry into new markets may require an expansion of our employee base for managerial, operational, financial and
other purposes. As of the date of this Current Report, we had 11 full-time employees. During any growth, we may face
problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We
would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant
added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.
Aside from increased difficulties in the management
of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the purchase of
raw materials and supplies, development of new products, and the hiring of additional employees. For effective growth
management, we will be required to continue improving our operations, management, and financial systems and controls. Our
failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our
profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain
the quality standards required by our existing and potential customers.
New labor law in the PRC may adversely
affect our results of operations because they could negatively impact our ability to operate efficiently in China. Disruptions
or inefficiencies caused by the new labor law could negatively impact the value of your stock.
On January 1, 2008, the PRC government promulgated
the Labor Contract Law of the PRC, or the New Labor Contract Law. The New Labor Contract Law imposes greater liabilities
on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. Further, it
may require certain terminations to be based upon seniority and not merit. In the event we decide to significantly change
or decrease our workforce, the New 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.
Failure to comply with the United States
Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences resulting in significant losses, disruption
to our operations or even a complete failure of the company. As a result you could lose your entire investment.
As our ultimate holding company is a U.S. corporation,
we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery
or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs,
theft and other fraudulent practices may occur from time-to-time in the PRC. Although we specifically forbid our employees
from engaging in such corrupt practices, we can make no assurance that our employees or other agents will not engage in such conduct
for which we might be held responsible. If our employees or other agents are found to have engaged in such practices,
we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition
and results of operations.
Investors may experience difficulties
in effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC based upon U.S. laws,
including federal securities laws or other foreign laws against us or our management so you may be unable to ever file a claim
against us or receive an enforceable judgment.
All of our current business operations are
conducted in the PRC. Moreover, our directors and officers are nationals and residents of the PRC or Hong Kong. All
the assets of these persons are located outside the United States and in the PRC or Hong Kong. As a result, it may not be possible
to effect service of process within the United States or elsewhere outside the PRC and Hong Kong upon these persons. In
addition, uncertainty exists as to whether the PRC courts would recognize or enforce judgments of United States courts obtained
against us or such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United
States or any state thereof, or be competent to hear original actions brought in the PRC against us or such persons predicated
upon the securities laws of the United States or any state thereof.
Risks Relating to Investment in Our Securities
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 stock in the public marketplace
could reduce the price of our common stock.
Holders of a significant number of our shares
and/or their designees may be eligible to sell our shares of common stock by means of ordinary brokerage transactions in the open
market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, or Rule 144, subject to certain limitations. In
general, pursuant to Rule 144, a non-affiliate stockholder (or stockholders whose shares are aggregated) who has satisfied a six-month
holding period, and provided that there is current public information available, may sell all of its securities. Rule
144 also permits the sale of securities, without any limitations, by a non-affiliate that has satisfied a one-year holding period.
Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price
of our common stock by creating an excessive supply.
If we fail to maintain effective internal
controls, we may not be able to accurately report our financial results or prevent fraud, and our business, financial condition,
results of operations and reputation could be materially and adversely affected causing the value of your stock to significantly
drop.
We are a public company and our internal controls
will be essential to the integrity of our business and financial results. Our public reporting obligations may place a strain on
our management, operational and financial resources and systems. If we encounter difficulties in improving our internal controls
and management information systems, we may incur additional costs and management time in meeting our improvement goals. We cannot
assure you that the measures taken to improve our internal controls will be effective. If we fail to maintain effective internal
controls in the future, our business, financial condition, results of operations and reputation may be materially and adversely
affected.
We do not have an Audit Committee nor
do we have adequate Disclosure Controls and Procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) so
we may be unable to operate effectively as a public company and as a result our stock could trade at a significantly lower price.
Currently we do not have the resources to hire
professionals with extensive financial and accounting experience. Although we hope to form an audit committee soon, there is no
guaranty that we will be able to find talented individuals with the necessary experience for such a position. Even if we are able
to locate experienced financial professionals to assist us as members of our audit committee, it is unlikely that we will be able
to pay them the compensation needed to retain them in such a role. Currently none of our Officers or Directors have U.S. accredited
professional background in finance or accounting, and we do not have an audit committee financial expert on our board of directors
to evaluate the effectiveness of the Company's disclosure controls and procedures. Unless CAMG receives additional funding we will
be unable to remedy the weakness of our internal controls and we may be unable to form an audit committee now or in the future.
As a result, your stock may trade at a lower multiple when compared to companies that have a full audit committee. In addition,
without the benefit of an audit committee review, we may be unable to spot weaknesses in our financial statements or prevent certain
errors. Your stock could become substantially less valuable as a result, and to the extent that errors occur you may lose all or
a portion of your investment.
Compliance with changing regulation of
corporate governance and public disclosure will result in additional expenses that could negatively impact our financial statements
and the price of your stock.
Changing laws, regulations and standards relating
to corporate governance and public disclosure, including Sarbanes-Oxley Act (“SOX”) and related SEC regulations, have
created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets
and public reporting. Our management team must invest significant time and financial resources to comply with both existing
and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of
management’s time and attention from revenue-generating activities to compliance activities.
We do not foresee paying cash dividends
in the near future and as a result you will not receive any dividend yield from holding our securities.
We do not plan to declare or pay any cash dividends
on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As
a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income.
We may need to issue more stock, which
could dilute your stock and negatively impact the value of your investment.
If we do not have enough capital to meet future
capital requirements, we may need to conduct additional capital-raising in order to continue operations. To the extent that additional
capital is raised through the sale of equity and/or convertible debt securities, the issuance of such securities could result in
dilution to shareholders and/or increased debt service commitments. Accordingly, if we issue additional stock, it could reduce
the value of your stock.
Our common shares are thinly traded and,
you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to
liquidate your shares. As a result you may be unable to exit your position and you may lose all or a portion of your investment.
We cannot predict the extent to which an active
public market for our common stock will develop or be sustained.
Our common shares have historically been sporadically
or "thinly-traded" on the over-the-counter markets, meaning that the number of persons interested in purchasing our common
shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number
of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional
investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention
of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several
days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We
cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained,
or that current trading levels will be sustained.
The market price for our common stock is particularly
volatile given our status as a relatively small company with a small and thinly traded “float” and lack of current
revenues that could lead to wide fluctuations in our share price. The price at which you purchase our common stock may not be indicative
of the price that will prevail in the trading market. You may be unable to sell your common stock at or above your purchase price
if at all, which may result in substantial losses to you.
The market for our common shares is characterized
by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more
volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable
to a number of factors. First, as noted above, our common shares are sporadically and/or thinly traded. As a consequence of this
lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that
a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which
could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or "risky"
investment since all of revenues are derived from related party in 2012 and future market acceptance for our current and potential
products is uncertain. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or
most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market
more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. The following factors may add
to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results;
adverse outcomes, additions or departures of our key personnel, as well as other items discussed herein. Many of these factors
are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot
make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including
as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability
of common shares for sale at any time will have on the prevailing market price.
Penny stock markets have been prone to
abuse in recent years. Such abuse represents an increased risk for you not only because only because our shares may be subject
to higher risk of abuse and manipulation but also because our shares will trade at a lower valuation than securities traded on
more reputable stock exchanges.
Shareholders should be aware that, according
to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns
include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
(2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler
room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive
and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse
of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the
penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of practical limitations to prevent the described patterns
from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility
of our share price and lower our valuation.
The application of the "penny stock"
rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.
As long as the trading price of our common
shares is below $5 per share, the open-market trading of our common shares will be subject to the "penny stock" rules.
The "penny stock" rules impose additional sales practice requirements on broker-dealers who sell securities to persons
other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income
exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make
a special suitability determination for the purchase of securities and have received the purchaser's written consent to the transaction
before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver,
before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the
limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction
costs for sales and purchases of our common shares as compared to other securities.
Volatility in our common share price
may subject us to securities litigation.
The market for our common stock is characterized
by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more
volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action
litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the
target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's
attention and resources.
The ability of our Chinese operating
subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balance of
the Chinese operating subsidiaries.
The ability of our Chinese operating subsidiaries
to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balance of the Chinese
operating subsidiaries. Because substantially all of our operations are conducted in China and substantially all of our revenues
are generated in China, our revenue being earned and currency received are denominated in Renminbi (RMB). RMB is subject to the
exchange control regulation in China. Under the current unified floating exchange rate system, the People’s Bank
of China (“PBOC”) publishes an exchange rate, which we refer to as the PBOC exchange rate, based on the previous day’s
dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into
foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market
conditions.
Pursuant to the Foreign Exchange Control Regulations
of the PRC issued by the State Council which came into effect on April 1, 1996, and the Regulations on the Administration of Foreign
Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion
of Renminbi into foreign exchange by Foreign Investment Enterprises, or FIE’s, for use on current account items, including
the distribution of dividends and profits to foreign investors, is permissible. FIEs are permitted to convert their after-tax dividends
and profits into foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in the PRC. Conversion
of Renminbi into foreign currencies for capital account items, including direct investment, loans, and security investment, is
still under certain restrictions. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added,
among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international
payments and transfers under current account items.
Enterprises in the PRC (including FIEs) which
require foreign exchange for transactions relating to current account items, may, without approval of the State Administration
of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange
banks by providing valid receipts and proofs.
Convertibility of foreign exchange in respect
of capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior
approval from the SAFE or its relevant branches must be sought.
Furthermore, the Renminbi is not freely convertible
into foreign currencies nor can it be freely remitted abroad. Under the PRC’s Foreign Exchange Control Regulations and the
Administration of Settlement, Sales and Payment of Foreign Exchange Regulations, Foreign Invested Enterprises are permitted either
to repatriate or distribute its profits or dividends in foreign currencies out of its foreign exchange accounts, or exchange Renminbi
for foreign currencies through banks authorized to conduct foreign exchange business. The conversion of Renminbi into foreign exchange
by Foreign Invested Enterprises for recurring items, including the distribution of dividends to foreign investors, is permissible.
The conversion of Renminbi into foreign currencies for capital items, such as direct investments, loans and securities investments,
is subject, however, to more stringent controls.
Our operating subsidiaries are FIEs to which
the Foreign Exchange Control Regulations are applicable. Accordingly, we will have to maintain sufficient foreign exchange to pay
dividends and/or satisfy other foreign exchange requirements.