UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2018
OR
| [ ] | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to _________
Commission File Number: 000-55869
FUQUAN FINANCIAL COMPANY
(Exact name of registrant as specified in its charter)
| Nevada | 88-0126444 | |
|
(State
or Other Jurisdiction of
Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
|
23 Corporate Plaza, Suite 150, Newport Beach, California |
92660 | |
| (Address of Principal Executive Offices) | (Zip Code) |
949-629-2534
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[ ] Yes [X] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
[ ] Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] | |
| Emerging growth company | [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
The aggregate market value of the shares of common stock of the registrant held by non-affiliates of the registrant as of September 30, 2017, was approximately $117,602 (based upon the assumption that directors and executive officers are the only affiliates).
As of January 22, 2019 there were 2,900,164,114 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
OTHER INFORMATION
As used in this Annual Report on Form 10-K, the terms “we”, “us”, “our”, “FQFC” and the “Company” refer to Fuquan Financial Company, a Nevada corporation, unless otherwise stated. “SEC” refers to the Securities and Exchange Commission.
FUQUAN FINANCIAL COMPANY
Form 10-K
Year Ended March 31, 2018
Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information, this Annual Report contains forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements are based on management’s current expectations, assumptions, and beliefs concerning future developments and their potential effect on our business, and are subject to risks and uncertainties that could negatively affect our business, operating results, financial condition, and stock price. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will,” “would”, “if, “shall”, “might”, “will likely result, “projects”, “goal”, “objective”, or “continues”, or the negative of these terms or other comparable terminology, although the absence of these words does not necessarily mean that a statement is not forward-looking. Additionally, statements concerning future matters such as our business strategy, development of new products, sales levels, expense levels, cash flows, future commercial and financing matters, future partnering opportunities and other statements regarding matters that are not historical are forward-looking statements.
Although the forward-looking statements in this Annual Report reflect our good faith judgment, based on currently available information, they involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors.” Moreover, we operate in a very competitive and rapidly-changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report to conform these statements to actual results or to changes in our expectations. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date we file this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report.
CERTAIN REFERENCES AND NAMES OF OTHERS USED HEREIN
This Annual Report may contain additional trade names, trademarks, and service marks of others, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.
| 1 |
| ITEM 1. | BUSINESS. |
Our Business
We are a shell company as that term is defined under federal securities laws. Our business plan is to seek (i) a new business to enter into; or, (ii) acquire assets or shares of an entity actively engaged in business that generates revenues in exchange for our securities. We intend to focus on acquiring cash-flow positive businesses in the People’s Republic of China. We will not limit our opportunities to any particular sector or industry. We believe that China is entering a new era of economic growth, particularly in the Chinese new economy sectors, which we expect will result in attractive acquisition opportunities for us. We believe this growth will be driven by private sector expansion, technological innovation, increasing consumption by the middle class, structural economic and policy reforms, and demographic changes in China.
Our new management team is comprised of individuals who have extensive experience investing in and building companies with operations in China. They have experience investing in, building, and operating diversified businesses in the Chinese new economy sectors. Our strategy will be to actively participate in growing, building and operating companies. The objective is to generate additional revenue through, among other things, integration of our portfolio companies; cross-selling; consolidation of management and administrative functions; group-wide procurement; centralizing and minimizing risk; forming strategic partnerships; and, improving management capabilities.
This discussion of our business is purposefully general and is not meant to be restrictive of our virtually unlimited discretion to search for and enter potential business opportunities. Management anticipates that it may not be able to participate in more than one potential business venture because we have nominal assets and limited financial resources. This lack of diversification should be considered a substantial risk to our shareholders because it will not permit us to offset potential losses from one venture against gains from another.
Plan of Operations
We currently plan to investigate and, if such investigation warrants, either (i) enter into a new business; or, (ii) acquire assets or shares of an entity actively engaged in business and which is seeking the perceived advantages of being a publicly held corporation. Our principal business objective for the next 12-months and beyond will be to achieve long-term growth potential through either entry into a new business or a combination with an existing business, rather than immediate, short-term earnings. We intend to focus on acquiring cash-flow positive businesses in the People’s Republic of China. We will not limit our opportunities to any particular sector or industry. The analysis of new business opportunities will be undertaken by or under the supervision of the New Board. We have not had any material conversations with potential merger or acquisition targets nor have we entered into any definitive agreement with any party. In our efforts to analyze and evaluate a prospective target business, we will consider several factors, including, without limitation, the following:
| ● | experience and skill of management and availability of additional personnel of the target business; | |
| ● | costs associated with effecting the business combination; | |
| ● | equity interest retained by our shareholders in the merged entity; | |
| ● | growth potential of the target business; | |
| ● | capital requirements of the target business; | |
| ● | capital available to the target business; |
| 2 |
| ● | stage of development of the target business; | |
| ● | proprietary features and degree of intellectual property or other protection of the target business; | |
| ● | the financial statements of the target business; and | |
| ● | the regulatory environment in which the target business operates. |
The foregoing criteria are not intended to be exhaustive and any evaluation relating to the merits of a particular target business will be based, to the extent relevant, on the above factors, as well as other considerations we deem relevant. In connection with our evaluation of a prospective target business, we anticipate that we will conduct a due diligence review which will encompass, among other things, meeting with incumbent management as well as a review of financial, legal and other information.
The time and costs required to select and evaluate a target business (including conducting a due diligence review) and to structure and consummate the business combination (including negotiating and documenting relevant agreements and preparing requisite documents for filing pursuant to applicable corporate and securities laws) cannot be determined at this time. Our officers and directors will not work full-time for the Company. However, they do intend to devote such time as they deem reasonably necessary to carry out our business and affairs. The amount of time devoted to our business and affairs may vary significantly depending upon, among other things, whether we have identified a target business or are engaged in active negotiation of a business combination.
We anticipate that various prospective target businesses will be brought to our attention from various sources, including securities broker-dealers, investment bankers, venture capitalists, bankers and other members of the financial community, including, possibly, from our officers and directors. The way we participate in an opportunity will depend upon the nature of the opportunity, our respective needs and desires as well as those of the promoters of the opportunity, and the relative negotiating strength of ourselves and such promoters.
It is likely that we will acquire our participation in a business opportunity through the issuance of common stock or other securities. Although the terms of any such transaction cannot be predicted, it should be noted that in certain circumstances the criteria for determining whether or not an acquisition is a so-called “tax free” reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”), depends upon the issuance to the shareholders of the acquired company of at least 80% of the common stock of the combined entities immediately following the reorganization. If a transaction were structured to take advantage of these provisions rather than other “tax free” provisions provided under the Code, all prior shareholders would in such circumstances retain 20% or less of the total issued and outstanding shares. Under other circumstances, depending upon the relative negotiating strength of the parties, prior shareholders may retain substantially less than 10% of the total issued and outstanding shares. This could result in substantial additional dilution to the equity of those who were our shareholders prior to such reorganization.
In the case of an acquisition, the transaction may be accomplished upon the sole determination of our management without any vote or approval by shareholders. In the case of a statutory merger or consolidation directly involving our Company, it will likely be necessary to call a shareholders’ meeting and obtain the approval of the holders of a majority of the outstanding shares. The necessity to obtain such stockholder approval may result in delay and additional expense in the consummation of any proposed transaction and will also give rise to certain appraisal rights to dissenting shareholders. Most likely, management will seek to structure any such transaction so as not to require stockholder approval, if possible.
It is anticipated that the investigation of specific business opportunities and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial cost for accountants, attorneys and others. If a decision is made not to participate in a specific business opportunity, the costs theretofore incurred in the related investigation would not be recoverable. Furthermore, even if an agreement is reached for the participation in a specific business opportunity, the failure to consummate that transaction may result in our loss of the related costs incurred.
| 3 |
During the year ended March 31, 2018 we did not engage in any business activities that provided us with positive cash flows. As such, the costs of investigating and analyzing business combinations for the next 12-months and beyond will be paid with funds raised through other sources, which may not be available on favorable terms, if at all. The Company, at this time, does not intend to obtain funds in one or more private placements to finance the operation of any acquired business opportunity until such time as the Company has successfully consummated such a merger or acquisition or entered into a new business. Rather, the Company intends to borrow money to finance ongoing operations.
Government Regulations
The Company’s common stock is a “penny stock,” as defined in Rule 3a51-1 under the Exchange Act. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its sales person in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that the broker-dealer, not otherwise exempt from such rules, must make a special written determination that the penny stock is suitable for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure rules have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. So long as the Company’s common stock is subject to the penny stock rules, it may be more difficult to sell our common stock.
Patents, Trademarks, Franchises, Royalty Agreements or Labor Contracts
We have no current plans for any registrations such as patents, trademarks, copyrights, franchises, concessions, royalty agreements or labor contracts. We will assess the need for any copyright, trademark or patent applications on an ongoing basis.
Need for Government Approval of Products or Services
We are not required to apply for or have any government approval for our products or services.
Research and Development Costs During the Last Two Years
We have not expended funds for research and development costs since inception.
Competition
The Company will remain an insignificant participant among the firms which engage in the acquisition of business opportunities. There are many established venture capital and financial concerns which have significantly greater financial and personnel resources and technical expertise than the Company. In view of the Company’s extremely limited financial resources and limited management availability, the Company will continue to be at a significant competitive disadvantage compared to the Company’s competitors.
Employees
The Company currently has no employees. The business of the Company will be managed by its officers and directors, each of whom may join the Company as an employee in the future. The Company does not anticipate a need to engage any full-time employees at this time.
Available Information
The Company expects to continue to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, proxy statements and other information with the SEC. Any materials filed by the Company with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the SEC’s Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including the Company) file electronically with the SEC. The Internet address of the SEC’s website is http://www.sec.gov . At some point in the near future we intend to make our reports, amendments thereto, and other information available, free of charge, on a website for the Company. At this time, the Company does not maintain a website and there is no estimate for when such a website will be maintained by the Company. Our corporate offices are located at 23 Corporate Plaza, Suite 150, Newport Beach, California, 92660. Our telephone number is 949-629-2534.
| 4 |
| ITEM 1A. | RISK FACTORS. |
You should carefully consider the risks described below together with the other information set forth in this report, which could materially affect our business, financial condition, and future results. The risks described below are not the only risks facing our Company. 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, and operating results.
Risks Related to Our Business
We have no recent operating history or basis for evaluating prospects.
We currently have no operating business or immediate plans to develop one. We are seeking to enter into a merger or business combination with another operating company, or to enter into a new business. To date, our efforts have been limited to meeting our regulatory filing requirements and searching for a business target.
We have limited resources and no revenues from operations, and will need additional financing in order to execute any business plan.
We have limited resources, no revenues from operations to date and our cash on hand will not be sufficient to satisfy our cash requirements during the next twelve months. In addition, we will not achieve any revenues (other than insignificant investment income) until, at the earliest, the consummation of a merger or similar business combination and we cannot ascertain our capital requirements until such time. There can be no assurance that determinations ultimately made by us will permit us to achieve our business objectives.
Our business will have no revenues unless and until we merge with or acquire or start an operating business.
We are an early stage company and have had no revenues from operations. We may not realize any revenues unless and until we successfully merge with or acquire an operating business or start our own operations.
Since the Company has no assets and no present source of revenues, we are dependent upon the financial support of our majority shareholder.
At present, our business activities are limited to seeking potential business opportunities. Due to our limited financial and personnel resources, there is only a limited basis upon which to evaluate our prospects for achieving our intended business objectives. We have no assets and have no operating income, revenues or cash flow from operations. Our majority shareholder, Houyu Huang, is providing us with funding, on an as needed basis, under a loan arrangement, with amounts advanced limited to enabling us to continue our corporate existence and our business objective to seek new business opportunities, as well as funding the costs, including professional accounting and legal fees, of registering our securities under the Exchange Act and continuing to be a reporting company under the Exchange Act. The amount to be loaned by Houyu Huang in the interim financing arrangement is limited to $500,000.
We will be able to effect at most one merger or similar business combination, or enter into just one new business, and thus may not have a diversified business.
Our resources are limited and we will most likely have the ability to effect only a single merger or similar business combination, or enter into a single new business. This probable lack of diversification will subject us to numerous economic, competitive and regulatory developments, any or all of which may have a material adverse impact upon the particular industry in which we may operate subsequent to the consummation of a merger. We will become dependent upon the development or market acceptance of a single or limited number of products, processes or services.
| 5 |
We depend substantially upon our directors to make all management decisions.
Our ability to effect a merger or similar business combination or enter into a new business will be dependent upon the efforts of our directors, Meihua Li and Hua Huang. Notwithstanding the importance of Ms. Li and Ms. Huang, we have not entered into any employment agreement or other understanding with either concerning compensation or obtained any “key man” life insurance on the life of either. The loss of the services of either, or both, Ms. Li and/or Ms. Huang will have a material adverse effect on achieving our business objectives and success. We will rely upon the expertise of both Ms. Li and Ms. Huang and do not anticipate that we will hire additional personnel.
There is competition for those private companies suitable for a business combination of the type contemplated by management.
We are in a highly competitive market for a small number of business opportunities which could reduce the likelihood of consummating a successful business combination. We are and will continue to be an insignificant participant in the business of seeking mergers with, joint ventures with and acquisitions of small private and public entities. A large number of established and well-financed entities, including small public companies and venture capital firms, are active in mergers and acquisitions of companies that may be desirable target candidates for us. Nearly all these entities have significantly greater financial resources, technical expertise and managerial capabilities than we do; consequently, we will be at a competitive disadvantage in identifying possible business opportunities and successfully completing a business combination. These competitive factors may reduce the likelihood of our identifying and consummating a successful business combination.
Future success is highly dependent on the ability of management to locate and attract a suitable target business opportunity.
The nature of our operations is highly speculative. The success of our plan of operation will depend to a great extent on the operations, financial condition and management of the identified business opportunity. While management intends to seek business combination(s) with entities having established operating histories, we cannot assure you that we will be successful in locating candidates meeting that criterion. In the event we complete a business combination, the success of our operations may be dependent upon management of the successor firm or venture partner firm and numerous other factors beyond our control.
We have no agreement for a business combination or other transaction.
We have no definitive agreement with respect to engaging in a merger with, joint venture with or acquisition of, a private or public entity, or to enter into a new business. No assurances can be given that we will successfully identify and evaluate suitable business opportunities or that we will conclude a business combination. We cannot guarantee that we will be able to negotiate a business combination on favorable terms, and there is consequently a risk that funds allocated to the purchase of our shares will not be invested in a company with active business operations.
Current shareholders will be immediately and substantially diluted upon a merger or business combination.
Our Articles of Incorporation currently authorize the issuance of three billion (3,000,000,000) shares of common stock, with a par value of $0.001 per share, of which 2,900,164,114 shares are currently issued. To the extent that additional shares of common stock are authorized and issued in connection with a merger or business combination, our shareholders could experience significant dilution of their respective ownership interests. Furthermore, the issuance of a substantial number of shares of common stock may adversely affect prevailing market prices, if any, for the common stock and could impair our ability to raise additional capital through the sale of equity securities.
| 6 |
There are relatively low barriers to becoming a blank check company or shell company, thereby increasing the competition for a small number of business opportunities.
There are relatively low barriers to becoming a blank check or shell company. A newly incorporated company with a single stockholder and sole officer and director may become a blank check company or shell company by voluntarily subjecting itself to the SEC reporting requirements by filing and seeking effectiveness of a Form 10, thereby registering its common stock pursuant to Section 12(g) of the Securities and Exchange Act of 1934 with the SEC. Assuming no comments to the Form 10 have been received from the SEC, that registration statement is automatically deemed effective 60 days after filing the Form 10 with the SEC. The relative ease and low cost with which a company can become a reporting blank check or shell company can increase the number of public companies seeking a business combination, thereby adding further competition to an already highly competitive market for a limited number of businesses that will consummate a successful business combination.
Our management will only be able to devote a limited amount of time to seeking a target company or new business which may adversely impact our ability to identify a suitable acquisition candidate.
While seeking a business combination or developing our own business plan, management anticipates devoting only a limited amount of time to the Company’s affairs in total. Our two directors and officers, Hua Huang and Meihua Li, have not entered into a written employment agreement with us and neither is expected to do so in the foreseeable future. This limited commitment may adversely impact our ability to identify and consummate a successful business combination. If we pursue a business combination or develop our own plan of operations, we will need to have increased management involvement. There is no assurance that we will be able to expand our management resources to implement a business combination or business plan.
We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, which requires us to incur audit fees and legal fees in connection with the preparation of such reports. These costs could reduce or eliminate our ability to earn a profit.
We are required to file periodic reports with the SEC pursuant to the Securities Exchange Act and the rules and regulations promulgated thereunder. In order to comply with these regulations, our independent registered public accounting firm must review our financial statements on a quarterly basis and audit our financial statements on an annual basis. Moreover, our legal counsel has to review and assist in the preparation of such reports. The costs charged by these professionals for such services cannot be accurately predicted at this time because of factors such as the number and type of transactions that we engage in and the complexity of our reports cannot be determined at this time and will have a major effect on the amount of time to be spent by our auditors and attorneys. However, the incurrence of such costs will obviously be an expense to our future operations and could have a negative effect on our ability to meet our overhead requirements and earn a profit. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information and the trading price of our common stock could drop significantly.
The time and cost of preparing a private company to become a public reporting company may preclude us from entering into a merger or acquisition with the most attractive private companies.
Target companies that fail to comply with SEC reporting requirements may delay or preclude acquisition. Sections 13 and 15(d) of the Exchange Act require reporting companies to provide certain information about significant acquisitions, including audited financial statements for the company acquired, covering one, two, or three years, depending on the relative size of the acquisition. The time and additional costs that may be incurred by some target entities to prepare these statements may significantly delay or essentially preclude consummation of an acquisition. Otherwise suitable acquisition prospects that do not have or are unable to obtain the required audited statements may be inappropriate for acquisition so long as the reporting requirements of the Exchange Act are applicable.
| 7 |
We may be subject to further government regulation which would adversely affect our operations.
Although we will be subject to the reporting requirements under the Exchange Act, management believes we will not be subject to regulation under the Investment Company Act since we will not be engaged in the business of investing or trading in securities. If we engage in business combinations which result in our holding passive investment interests in a number of entities, we could be subject to regulation under the Investment Company Act. If so, we would be required to register as an investment company and could be expected to incur significant registration and compliance costs.
Any potential acquisition or merger with a foreign company may subject us to additional risks.
If we enter into a business combination with a foreign concern, we will be subject to risks inherent in business operations outside of the United States. This is an important risk as it is our preference to acquire a business based in the People’s Republic of China. These risks include, for example, currency fluctuations, regulatory problems, punitive tariffs, unstable local tax policies, trade embargoes, risks related to shipment of raw materials and finished goods across national borders and cultural and language differences. Foreign economies may differ favorably or unfavorably from the United States economy in growth of gross national product, rate of inflation, market development, rate of savings, and capital investment, resource self-sufficiency and balance of payments positions, and in other respects.
The Company may be subject to certain tax consequences in our business, which may increase our cost of doing business.
We may not be able to structure an acquisition to result in tax-free treatment for the companies or their shareholders, which could deter third parties from entering into certain business combinations with us or result in being taxed on consideration received in a transaction. Currently, a transaction may be structured so as to result in tax-free treatment to both companies, as prescribed by various federal and state tax provisions. We intend to structure any business combination so as to minimize the federal and state tax consequences to both us and the target entity; however, we cannot guarantee that the business combination will meet the statutory requirements of a tax-free reorganization or that the parties will obtain the intended tax-free treatment upon a transfer of stock or assets. A non-qualifying reorganization could result in the imposition of both federal and state taxes that may have an adverse effect on both parties to the transaction.
As a blank check company, any registered offering of our securities will have to comply with Rule 419 under the Securities Act of 1933, which could impact our ability to raise equity funds from investors.
In the event we register an offering of our securities with the SEC while we are a blank check company, we will have to comply with Rule 419 under the Securities Act of 1933. Rule 419 is a cumbersome rule applicable to blank check companies selling penny stocks in a registered offering. Rule 419 requires that the gross proceeds raised in such an offering be deposited into an escrow account with a financial institution insured by the FDIC or in a separate bank account established by a registered broker or dealer in which the broker or dealer acts as trustee for the persons having the beneficial interests in the account. Furthermore, Rule 419 requires the securities issued to investors in the blank check offering be issued in the name of such investors but certificates representing such securities must be deposited into the escrow account instead of being delivered directly to investors, and the records of the escrow agent, maintained in good faith and in the regular course of business, must show the name and interest of each party to the account. The initial registration statement for the blank check offering shall disclose the specific terms of the offering, including, but not limited to, (i) the terms and provisions of the escrow or trust agreement and the effect thereof upon the company’s right to receive funds and the effect of the escrow or trust agreement upon the investor’s funds and securities required to be deposited into the escrow or trust account, including, if applicable, any material risk of non-insurance of investors’ funds resulting from deposits in excess of the insured amounts; and, (ii) the obligation of the company to provide, and the right of the purchaser to receive, information regarding an acquisition, including the requirement that pursuant to Rule 419, investors confirm in writing their investment in the Company’s securities. Rule 419 imposes certain additional disclosure obligations on companies making blank check offerings. Due to the requirements of Rule 419 and the fact that investors investing in blank check offerings have no idea if or when an acquisition or merger transaction will occur, or if the acquisition or merger target is worthy of the investors’ money or risks, it may be difficult for the company to successfully complete a blank check offering and even if the company is successful in raising funds in such an offering, it may not be able to find an attractive acquisition or merger candidate. Therefore, investors in a blank check offering will have their funds at risk for a prolonged period of time and they may not be happy with the results of an acquisition or merger, if one were to occur.
| 8 |
Risks Associated with Acquiring and Operating a Business in China
The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors and certain other People’s Republic of China regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors (the “ M&A Rules ”) and some other regulations and rules concerning mergers and acquisitions 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 (the “ MOFCOM ”) be notified in advance of any change-of-control transaction in which a foreign investor takes control of a business enterprise based in the People’s Republic of China (the “ PRC ”). Moreover, the Anti-Monopoly Law of the PRC requires that the MOFCOM shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOFCOM that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
If substantially all of our assets will be located in the PRC and substantially all of our revenue will be derived from our operations there, our results of operations and prospects will be subject, to a significant extent, to the economic, political and legal policies, developments and conditions in the PRC.
The economic, political and social conditions, as well as government policies, of the PRC could affect our business. The economies in Asia differ from the economies of most developed countries in many respects. For the most part, such economies have recently grown at a rate in excess of the United States; however, (i) such economic growth has been uneven, both geographically and among various sectors of the economy; and, (ii) such growth may not be sustained in the future. If in the future such country’s economy experiences a downturn or grows at a slower rate than expected, there may be less demand for spending in certain industries. A decrease in demand for spending in certain industries could materially and adversely affect our ability to find target businesses to acquire, and the ability of such businesses to become profitable.
If relations between the United States and the PRC deteriorate, acquisition targets or their goods or services could become less attractive.
The relationship between the United States and the PRC is subject to sudden fluctuation and periodic tension. For example, the United States recently announced its intention to impose new tariffs and quotas on certain Chinese imports. While intended to be short-term, these may be extended for several years. Such tariffs and quotas may adversely affect political relations between the two countries and result in retaliatory countermeasures by the PRC. Relations may also be compromised if the U.S. becomes a more vocal advocate of Taiwan or proceeds to sell certain military weapons and technology to Taiwan. Changes in political conditions in the PRC and changes in the state of Sino-U.S. relations are difficult to predict and could adversely affect our operations or cause potential acquisition targets or their goods and services to become less attractive.
| 9 |
Contractual arrangements we enter into with potential future subsidiaries and affiliated entities or acquisitions of offshore entities that conduct operations through affiliates in the PRC may be subject to a high level of scrutiny by the relevant tax authorities.
Under the laws of the PRC, arrangements and transactions among related parties may be subject to audit or challenge by the relevant tax authorities. If any of the transactions we enter into with potential future subsidiaries and affiliated entities are found not to be on an arm’s-length basis, or to result in an unreasonable reduction in tax under local law, the relevant tax authorities may have the authority to disallow any tax savings, adjust the profits and losses of such potential future local entities and assess late payment interest and penalties. A finding by the relevant tax authorities that we are ineligible for any such tax savings, or that any of our possible future affiliated entities are not eligible for tax exemptions, would substantially increase our possible future taxes and thus reduce our net income and the value of a shareholder’s investment. In addition, in the event that in connection with an acquisition of an offshore entity that conducted its operations through affiliates in the PRC, the sellers of such entities failed to pay any taxes required under local law, the relevant tax authorities could require us to withhold and pay the tax, together with late-payment interest and penalties. The occurrence of any of the foregoing could have a negative impact on our operating results and financial condition.
China’s economic, political and social conditions, as well as changes in any government policies, laws and regulations, could have a material adverse effect on our business.
A substantial portion of our operations may be conducted in China, and a significant portion of our net revenues may be derived from customers where the contracting entity is located in China. Accordingly, our business, financial condition, results of operations, prospects and certain transactions we may undertake may be subject, to a significant extent, to economic, political and legal developments in China.
China’s 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 in the past two to three decades, growth has been uneven, both geographically and among various sectors of the economy. Demand for target services and products depends, in large part, on economic conditions in China. Any slowdown in China’s economic growth may cause our potential customers to delay or cancel their plans to purchase our services and products, which in turn could reduce our net revenues.
Although China’s economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, 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 allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the economy in China and could have a material adverse effect on our business.
The PRC government has implemented various measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources. However, we cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will have a negative effect on us. China’s social and political conditions may change and become unstable. Any sudden changes to China’s political system or the occurrence of widespread social unrest could have a material adverse effect on our business and results of operations.
| 10 |
If we effect our initial business combination with a business located in the PRC, the laws applicable to such business will likely govern all of our material agreements and we may not be able to enforce our legal rights.
If we effect our initial business combination with a business located in the PRC, the laws of the country in which such business operates will govern almost all of the material agreements relating to its operations, including any contractual arrangements through which we acquire control of target business as described above. We cannot assure you that we or the target business will be able to enforce any of its material agreements or that remedies will be available in this jurisdiction. The system of laws and the enforcement of existing laws in such jurisdiction may not be as certain in implementation and interpretation as in the United States. In addition, the judiciary in the PRC is relatively inexperienced compared to others in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. In addition, to the extent that our target business’ material agreements are with governmental agencies in the PRC, we may not be able to enforce or obtain a remedy from such agencies due to sovereign immunity, in which the government is deemed to be immune from civil lawsuit or criminal prosecution. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital.
After we consummate a business combination, our operating company in China will be subject to restrictions on dividend payments.
After we consummate a business combination, we may rely on dividends and other distributions from our operating company to provide us with cash flow and to meet our other obligations. Current regulations in China would permit our operating company in China to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our operating company in China will be required to set aside at least 10% (up to an aggregate amount equal to half of its registered capital) of its accumulated profits each year. Such cash reserve may not be distributed as cash dividends. In addition, if our operating company in China incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.
If the government of the PRC finds that the agreements we entered into to acquire control of a target business through contractual arrangements with one or more operating businesses do not comply with local governmental restrictions on foreign investment, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to significant penalties or be forced to relinquish our interests in those operations.
The PRC currently prohibits and/or restricts foreign ownership in certain “important industries,” including telecommunications, food production and heavy equipment. There are uncertainties under certain regulations whether obtaining a majority interest through contractual arrangements will comply with regulations prohibiting or restricting foreign ownership in certain industries. For example, the PRC may apply restrictions in other industries in the future. In addition, there can be restrictions on the foreign ownership of businesses that are determined from time to time to be in “important industries” that may affect the national economic security or those having “famous brand names” or “well-established brand names.”
If we or any of our potential future target businesses are found to be in violation of any existing or future local laws or regulations (for example, if we are deemed to be holding equity interests in certain of our affiliated entities in which direct foreign ownership is prohibited), the relevant regulatory authorities might have the discretion to:
| ● | revoke the business and operating licenses of the potential future target business; | |
| ● | confiscate relevant income and impose fines and other penalties; | |
| ● | discontinue or restrict the operations of the potential future target business; |
| 11 |
| ● | require us or the potential future target business to restructure the relevant ownership structure or operations; | |
| ● | restrict or prohibit our use of the proceeds of this offering to finance our businesses and operations in the relevant jurisdiction; or | |
| ● | impose conditions or requirements with which we or the potential future target business may not be able to comply. |
As a result of merger and acquisition regulations implemented on September 8, 2006 relating to acquisitions of assets and equity interests of Chinese companies by foreign persons, it is expected that acquisitions will take longer and be subject to economic scrutiny by the PRC government authorities such that we may not be able to complete a transaction.
On September 8, 2006, the MOFCOM, together with several other government agencies, promulgated a comprehensive set of regulations governing the approval process by which a Chinese company may participate in an acquisition of its assets or its equity interests and by which a Chinese company may obtain public trading of its securities on a securities exchange outside the PRC. Although there was a complex series of regulations in place prior to September 8, 2006 for approval of Chinese enterprises that were administered by a combination of provincial and centralized agencies, the new regulations have largely centralized and expanded the approval process to the MOFCOM, the State Administration of Industry and Commerce (SAIC), the State Administration of Foreign Exchange (SAFE) or its branch offices, the State Asset Supervision and Administration Commission, and the China Securities Regulatory Commission (CSRC). Depending on the structure of the transaction as determined once a definitive agreement is executed, these regulations will require the Chinese parties to make a series of applications and supplemental applications to the aforementioned agencies, some of which must be made within strict time limits and depending on approvals from one or the other of the aforementioned agencies. The application process has been supplemented to require the presentation of economic data concerning a transaction, including appraisals of the business to be acquired and evaluations of the acquirer which will permit the government to assess the economics of a transaction in addition to the compliance with legal requirements. If obtained, approvals will have expiration dates by which a transaction must be completed. Also, completed transactions must be reported to the MOFCOM and some of the other agencies within a short period after closing or be subject to an unwinding of the transaction. It is expected that compliance with the regulations will be more time-consuming than in the past, will be more costly for the Chinese parties and will permit the government much more extensive evaluation and control over the terms of the transaction. Therefore, a business combination we propose may not be able to be completed because the terms of the transaction may not satisfy aspects of the approval process and may not be completed, even if approved, if they are not consummated within the time permitted by the approvals granted.
Because the September 8, 2006, PRC merger and acquisition regulations permit the government agencies to have scrutiny over the economics of an acquisition transaction and require consideration in a transaction to be paid within stated time limits, we may not be able to negotiate a transaction that is acceptable to our shareholders or sufficiently protect their interests in a transaction.
The regulations have introduced aspects of economic and substantive analysis of the target business and the acquirer and the terms of the transaction by the MOFCOM and the other governing agencies through submissions of an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the Chinese business or assets. The regulations require that in certain transaction structures, the consideration must be paid within strict time periods, generally not in excess of a year. Because the Chinese authorities intend to limit offshore flips which converted domestic companies into foreign investment enterprises (FIEs) in order to take advantage of certain benefits, including reduced taxation, in the PRC, the new regulations require new foreign sourced capital of not less than 25% of the domestic company’s post–acquisition capital in order to obtain FIE treatment. Accordingly, if a sufficient amount of foreign capital is not infused into the domestic company, it will not be eligible to obtain FIE treatment. In asset transactions there must be no harm of third parties and the public interest in the allocation of assets and liabilities being assumed or acquired. These aspects of the regulations will limit our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, we may not be able to negotiate a transaction with terms that will satisfy our investors and protect our shareholders’ interests in an acquisition of a Chinese business or assets.
| 12 |
Ambiguities in the regulations of September 8, 2006 may make it difficult for us to properly comply with all applicable rules and may affect our ability to consummate a business combination.
Although the merger and acquisition regulations provide specific requirements and procedures, there are many ambiguities which give the regulators great latitude in the approval process which may cause uncertainty in our ability to complete a transaction on a timely basis.
The merger and acquisition regulations set forth many requirements that have to be followed, but there are still many ambiguities in the meaning of many provisions. Although further regulations are anticipated in the future, until there has been clarification either by pronouncements, regulation or practice, there is some uncertainty in the scope of the regulations. Moreover, the ambiguities give the regulators wide latitude in the enforcement of the regulations and the transactions to which they may or may not apply. Therefore, we cannot predict the extent to which the regulations will apply to a transaction, and therefore, there may be uncertainty in whether or not a transaction will be completed until the approval process is under way or until the preliminary approvals are obtained. This may negatively impact our ability to consummate a business combination.
If we acquire control of a target business through contractual arrangements with one or more operating businesses in the PRC, such contracts may not be as effective in providing operational control as direct ownership of such business and may be difficult to enforce.
We will only acquire a business or businesses that, upon the consummation of our initial business combination, will be our majority-owned subsidiaries and will be neither investment companies nor companies excluded from the definition of an investment company by Section 3(c)(1) or 3(c)(7) of the Investment Company Act. However, the PRC has restricted or limited foreign ownership of certain kinds of assets and companies operating in certain industries. The industry groups that are restricted are wide-ranging, including, for example, certain aspects of telecommunications, food production, and heavy equipment manufacturers. In addition, there can be restrictions on the foreign ownership of businesses that are determined from time to time to be in “important industries” that may affect the national economic security or having “famous brand names” or “well-established brand names.” Subject to the review and approval requirements of the relevant agencies for acquisitions of assets and companies in the relevant jurisdictions and subject to the various percentage ownership limitations that exist from time to time, acquisitions involving foreign investors and parties in the various restricted categories of assets and industries may nonetheless sometimes be consummated using contractual arrangements with permitted local parties. To the extent that such agreements are employed, they may be for control of specific assets such as intellectual property or control of blocks of the equity ownership interests of a company which may provide exceptions to the merger and acquisition regulations mentioned above since these types of arrangements typically do not involve a change of equity ownership in the operating company. The agreements would be designed to provide our company with the economic benefits of, and control over, the subject assets or equity interests similar to the rights of full ownership, while leaving the technical ownership in the hands of local parties who would be our nominees and, therefore, may exempt the transaction from certain regulations, including the application process required thereunder.
| 13 |
However, since there has been limited implementation guidance provided with respect to such regulations, the relevant government agency might apply them to a business combination effected through contractual arrangements. If such an agency determines that such an application should have been made or that our potential future target businesses are otherwise in violation of local laws or regulations, consequences may include confiscating relevant income and levying fines and other penalties, revoking business and other licenses, requiring restructure of ownership or operations, requiring discontinuation or restriction of the operations of any portion or all of the acquired business, restricting or prohibiting our use of the proceeds of this offering to finance our businesses and operations and imposing conditions or requirements with which we or potential future target businesses may not be able to comply. These agreements likely also would provide for increased ownership or full ownership and control by us when and if permitted under local laws and regulations. If we choose to effect a business combination that employs the use of these types of control arrangements, we may have difficulty in enforcing our rights. Therefore, these contractual arrangements may not be as effective in providing us with the same economic benefits, accounting consolidation or control over a target business as would direct ownership. For example, if the target business or any other entity fails to perform its obligations under these contractual arrangements, we may have to incur substantial costs and expend substantial resources to enforce such arrangements, and rely on legal remedies under local law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be sufficient to offset the cost of enforcement and may adversely affect the benefits we expect to receive from the business combination.
Risks Related to Ownership of Our Common Stock
Our common stock is a “penny stock” which may restrict the ability of shareholders to sell our common stock in the secondary market.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price, as defined, of less than $5.00 per share, or an exercise price of less than $5.00 per share, subject to certain exceptions, including an exception of an equity security that is quoted on a national securities exchange. Our Common Stock is not quoted on a national exchange but is traded on the OTC Marketplace Pink Sheets (the “Pink Sheets”). Thus, they are subject to rules that impose additional sales practice requirements on broker-dealers who sell these securities. For example, the broker-dealer must make a special suitability determination for the purchaser of such securities and have received the purchaser’s written consent to the transactions prior to the purchase. Additionally, the rules require the delivery, prior to the transaction, of a disclosure schedule prepared by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered underwriter, and current quotations for the securities, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, among other requirements, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The “penny stock” rules, may restrict the ability of our shareholders to sell our common stock in the secondary market.
Trading in our securities could be subject to extreme price fluctuations that could adversely affect your investment.
Historically speaking, the market prices for securities of small publicly traded companies have been highly volatile. Publicized events and announcements may have a significant impact on the market price of our common stock. In addition, the stock market from time to time experiences extreme price and volume fluctuations that particularly affect the market prices for small publicly traded companies and which are often unrelated to the operating performance of the affected companies.
Because we may seek to complete a business combination through a “reverse merger,” we may not be able to attract the attention of major brokerage firms following such a transaction.
Additional risks may exist since we may assist a privately held business to become public through a “reverse merger”. Securities analysts of major brokerage firms may not provide coverage of our Company since there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on behalf of our post-merger Company in the future.
| 14 |
We cannot assure you that following a business combination with an operating business or business start-up, our common stock will be listed on any securities exchange higher than the Pink Sheets.
Although, our common stock is currently quoted on the Pink Sheet, securities quoted on this trading platform often lack liquidity and analyst coverage, which may result in lower prices for our common stock than might be obtained in a larger, more established stock exchanges and may also result in a larger spread between the bid and asked price for our common stock. Following a business combination or business start-up, we may seek the listing of our common stock on NASDAQ or any other exchange which represents a higher listing than the Pink Sheets. However, we cannot assure you that we will be able to meet the initial listing standards of any of those, or that we will be able to maintain a listing of our common stock on any stock exchange other than the Pink Sheets. Until our common stock is listed on the NASDAQ or another stock exchange, we expect that our common stock would be eligible to continue to trade on the Pink Sheets, where our shareholders may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. If a market for our common stock does not develop or is not sustained, it may be difficult for our shareholders to sell their shares of common stock at an attractive price or at all. In the absence of an active trading market for our common stock, shareholders may not be able to sell their common stock at or above the price at which they acquired the shares or at the time that they would like to sell. We cannot predict the prices at which our common stock will trade. In addition, we cannot assure you that we will be able to meet the initial listing standards of any national securities exchange, or, if we do meet such initial qualitative listing standards, that we will be able to maintain any such listing. In addition, we would be subject to an SEC rule that, if it failed to meet the criteria set forth in such rule, imposes various practice requirements on broker-dealers who sell securities governed by the rule to persons other than established customers and accredited investors. Consequently, such rule may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This would also make it more difficult for us to raise additional capital following a business combination.
Liquidity is limited, and we may be unable to obtain listing of our common stock on a more liquid market.
Our common stock is quoted on the Pink Sheets, which provides significantly less liquidity than a securities exchange (such as the American or New York Stock Exchange) or an automated quotation system (such as the Nasdaq Global Market or Capital Market). There is uncertainty that we will ever be accepted for a listing on an automated quotation system or national securities exchange.
Substantial sales of our common stock may impact the market price of our common stock.
Future sales of substantial amounts of our common stock, including shares that we may issue upon exercise of options and warrants, and the resale of shares by investors who have registration rights, could adversely affect the market price of our common stock. Furthermore, if we raise additional funds through the issuance of common stock or securities convertible into our common stock, the percentage ownership of our shareholders will be reduced and the price of our common stock may fall.
We do not expect to pay dividends for the foreseeable future and investors must look solely to stock appreciation for a return on their investment in us.
We have no plans to pay, and we do not anticipate paying, any cash dividends on our common stock in the foreseeable future. We currently intend to retain all future earnings to fund the development and growth of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the board of directors deems relevant. Investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.
| 15 |
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Our publicly-filed reports are reviewed from time to time by the SEC, and any significant changes or amendments required as a result of any such review may result in material liability to us and may have a material adverse impact on the trading price of our common stock.
The reports and other securities filings of publicly-traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable disclosure requirements. The SEC is required, pursuant to the Sarbanes-Oxley Act of 2002, to undertake a comprehensive review of a company’s reports at least once every three years, although an SEC review may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future reports will comply, in all material respects with the published rules and regulations of the SEC, we could be required to modify, amend, or reformulate information contained in our filings as a result of any SEC review. Any modification, amendment, or reformulation of information contained in such reports could be significant and result in material liability to us and have a material adverse impact on the trading price of our common stock.
We may invest or spend our cash in ways with which you may not agree or in ways which may not yield a significant return.
Our management has considerable discretion in the use of our cash. Our cash may be used for purposes that do not increase our operating results or market value. Until the cash is used, it may be placed in investments that do not produce significant income or that may lose value. The failure of our management to invest or spend our cash effectively could result in unfavorable returns and uncertainty about our prospects, each of which could cause the price of our common stock to decline.
| 16 |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
| ITEM 2. | PROPERTIES. |
We do not currently own any property. The Company’s corporate documents are stored at the offices the Company’s outside general counsel, Spectrum Law Group, APC. We share office space with Spectrum Law Group, APC, for which we are not charged a fee. We may need to rent office space in the future. As of January 22, 2019, we believe that our properties are suitable and adequate to meet our anticipated needs.
| ITEM 3. | LEGAL PROCEEDINGS. |
Although we may, from time to time, be a party to certain lawsuits in the ordinary course of business, we are not currently involved in any lawsuits that would have a material adverse effect on our results of operations, financial condition, or cash flows.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
| 17 |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Information About Our Common Stock
Our shares are quoted on the Over-the-Counter Electronic Bulletin Board (OTCBB) in the Pink Sheets under the symbol “FQFC”. The OTCBB is a regulated quotation service that displays real-time quotes, last sale prices and volume information in over-the-counter securities. The OTCBB is not an issuer listing service, market or exchange. Although the OTCBB does not have any listing requirements per se, to be eligible for quotation on the OTCBB issuers must remain current in their filings with the SEC or applicable regulatory authority. Securities quoted on the OTCBB that become delinquent in their required filings will be removed following a 30 or 60 day grace period if they do not make their required filing during that time. We cannot guarantee that we will continue to have the funds required to remain in compliance with our reporting obligations.
The following table sets forth, for each of the quarterly periods indicated, the high and low sales prices of our common stock, as reported on the OTC Pink:
| Year Ended March 31, 2017 | High | Low | ||||||
| First Quarter ended June 30, 2016 | $ | 0.0021 | $ | 0.0021 | ||||
| Second Quarter ended September 30, 2016 | $ | 0.0021 | $ | 0.002 | ||||
| Third Quarter ended December 31, 2016 | $ | 0.002 | $ | 0.0011 | ||||
| Fourth Quarter ended March 31, 2017 | $ | 0.005 | $ | 0.0011 | ||||
| Year Ended March 31, 2018 | High | Low | ||||||
| First Quarter ended June 30, 2017 | $ | 0.0041 | $ | 0.0031 | ||||
| Second Quarter ended September 30, 2017 | $ | 0.0041 | $ | 0.0041 | ||||
| Third Quarter ended December 31, 2017 | $ | 0.0093 | $ | 0.0037 | ||||
| Fourth Quarter ended March 31, 2018 | $ | 0.055 | $ | 0.0056 | ||||
Penny Stock Rules
The Securities and Exchange Commission has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).
A purchaser is purchasing penny stock which limits the ability to sell the stock. Our shares constitute penny stock under the Securities and Exchange Act. The shares will remain penny stocks for the foreseeable future. The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, which makes it more difficult for a purchaser to liquidate his/her investment. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in us will be subject to Rules 15g-1 through 15g-10 of the Securities and Exchange Act. Rather than creating a need to comply with those rules, some broker-dealers will refuse to attempt to sell penny stock.
| 18 |
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document, which:
| ● | contains a description of the nature and level of risk in the market for penny stock in both public offerings and secondary trading; | |
| ● |
contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the Securities Act of 1934, as amended; |
|
| ● | contains a brief, clear, narrative description of a dealer market, including “bid” and “ask” price for the penny stock and the significance of the spread between the bid and ask price; | |
| ● | contains a toll-free telephone number for inquiries on disciplinary actions; | |
| ● | defines significant terms in the disclosure document or in the conduct of trading penny stocks; and | |
| ● | contains such other information and is in such form (including language, type, size and format) as the SEC shall require by rule or regulation. |
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, to the customer:
| ● | the bid and offer quotations for the penny stock; | |
| ● | the compensation of the broker-dealer and its salesperson in the transaction; | |
| ● | the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and | |
| ● | monthly account statements showing the market value of each penny stock held in the customer’s account. |
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our stock because it will be subject to these penny stock rules. Therefore, shareholders may have difficulty selling their securities.
Reports
We are subject to certain filing requirements and will furnish annual financial reports to our shareholders, audited by our independent registered public accounting firm, and will furnish un-audited quarterly financial reports in our quarterly reports filed electronically with the SEC. All reports and information filed by us can be found at the SEC website, www.sec.gov.
Transfer Agent
The Company has retained Security Transfer Corporation, 2901 N. Dallas Parkway, Suite 380, Plano, Texas, 75093, as its transfer agent.
| 19 |
Number of Equity Security Holders
As of January 22, 2019, we had 183 holders of record of our common stock. This does not include beneficial owners holding common stock in street name. As such, the number of beneficial holders of our shares could be substantially larger than the number of shareholders of record.
Dividend Policy
We have never paid dividends and have no current plans to do so. We currently anticipate that we will retain all of our future earnings, if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our Board and will depend upon our results of operations, financial condition, and other factors that the Board, in its discretion, may deem relevant. There are no restrictions, other than applicable law, on the ability of the Board to declare and pay dividends.
Recent Sales of Unregistered Securities
On or around April 20, 2018, the Company issued 2,778,000,000 shares of its common stock to Houyu Huang as compensation for services rendered as president and director of the Company. The issuance was exempt under Section 4(a)(2) of the Securities Act.
Repurchase of Equity Securities
None.
Information About Our Equity Compensation Plans
The information required under this heading is incorporated herein by reference to the applicable information set forth in Item 12 of this Annual Report on Form 10-K.
| ITEM 6. | SELECTED FINANCIAL DATA. |
As a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis of the results of operations and financial condition for the fiscal years ended March 31, 2018 and 2017 should be read in conjunction with our financial statements, and the notes to those financial statements that are included elsewhere in this Annual Report.
All references to “Fuquan”, “we”, “our,” “us” and the “Company” in this Item 7 refer to Fuquan Financial Company.
The discussion in this section contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “would” or “will” or the negative of these terms or other comparable terminology, but their absence does not mean that a statement is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which could cause our actual results to differ from those projected in any forward-looking statements we make. Several risks and uncertainties we face are discussed in more detail under “Risk Factors” in Part I, Item 1A of this Annual Report or in the discussion and analysis below. You should, however, understand that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential risks or uncertainties that could materially affect us. You should not place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We undertake no obligation to update any of the forward-looking statements contained herein to reflect future events and developments, except as required by law. The following discussion should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K.
| 20 |
PLAN OF OPERATION
Our plan of operations is to raise debt and/or equity to meet our ongoing operating expenses and attempt to merge with another entity with experienced management and opportunities for growth in return for shares of our common stock to create value for our shareholders. There can be no assurance that we will successfully complete this series of transactions. In particular, there is no assurance that any such business will be located or that any stockholder will realize any return on their shares after such a transaction. Any merger or acquisition completed by us can be expected to have a significant dilutive effect on the percentage of shares held by our current stockholders.
At this time, we have no cash on hand or committed resources of debt or equity to fund these losses and will reliant, potentially, on advances from our principal shareholder or our directors and officers. There can be no guarantee that we will be able to obtain sufficient funding these sources.
RESULTS OF OPERATIONS FOR THE TWELVE MONTH PERIOD ENDED MARCH 31, 2018 COMPARED TO THE TWELVE MONTH PERIOD ENDED MARCH 31, 2017
Revenue
We recognized no revenue during the twelve months ended March 31, 2018 and 2017. We currently have no business from which to generate revenues.
Cost of Revenue
We recognized no cost of revenue during the twelve months ended March 31, 2018 and 2017.
Gross Profit / (Loss)
We recognized no gross profit / (loss) during the twelve months ended March 31, 2018 and 2017.
General and Administrative Expenses
During the twelve months ended March 31, 2018, we incurred $26,756 in general and administrative expenses compared to $56,200 during the twelve months ended March 31, 2017. The decrease was due largely from the fact that during the twelve months ended March 31, 2017, we accrued $55,000 in directors and officer’s fees. Following the resignation of our former sole director and officer, Mr. Cutler, in February 2017, no director’s or officer’s fees were further accrued. The general and administrative expenses incurred during the twelve months ended March 31, 2018 related to audit and review fees, accounting fees, EDGAR filing fees, tax return preparation fees, share transfer fees and other general office expenses. The balance of general and administrative expenses incurred during the twelve months ended March 31, 2017 related to share transfer agent fees.
| 21 |
Operating Loss
During the twelve months ended March 31, 2018, we incurred an operating loss of $26,756 compared to an operating loss of $56,200 for the twelve months ended March 31, 2017, a decrease of $29,444 due to the factors discussed above.
Interest and Other Income / (Expenses) Net
During the twelve months ended March 31, 2018 and 2017, we recognized no interest or other income/(expense).
Loss before Income Tax
During the twelve months ended March 31, 2018, we incurred a loss before taxes of $26,756 compared to a loss before taxes of $56,200 for the twelve months ended March 31, 2017, a decrease of $29,444 due to the factors discussed above.
Provision for Income Tax
No provision for income taxes was recorded in either the twelve months ended March 31, 2018 or 2017, as we have incurred taxable losses in both periods.
Net Loss
During the twelve months ended March 31, 2018, we incurred a net loss of $26,756 compared to a net loss of $56,200 for the twelve months ended March 31, 2017, a decrease of $29,444 due to the factors discussed above.
CASH FLOW FOR THE TWELVE MONTHS ENDED MARCH 31, 2018 COMPARED TO THE TWELVE MONTHS ENDED MARCH 31, 2017
At March 31, 2018, we did not have any cash or cash equivalents, no assets, no operating business or other source of income and outstanding liabilities and a stockholders’ deficit of $324,033.
Consequently, we are now dependent on raising additional equity and/or debt to meet our ongoing operating expenses. There is no assurance that we will be able to raise the necessary equity and/or debt that we will need to fund our ongoing operating expenses.
It is our current intention to seek to raise debt and/or equity financing to meet ongoing operating expenses and attempt to merge with another entity with experienced management and opportunities for growth in return for shares of our common stock to create value for our shareholders. There is no assurance that this series of events will be satisfactorily completed.
Future losses are likely to occur as, until we are able to merge with another entity with experienced management and opportunities for growth in return for shares of our common stock to create value for our shareholders as we have no sources of income to meet our operating expenses. As a result of these, among other factors, we received from our registered independent public accountants in their report for the financial statements for the years ended March 31, 2018 and 2017, an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going concern.
We are now focused raising debt and/or equity financing to meet ongoing operating expenses and attempting to merge with another entity with experienced management and opportunities for growth in return for shares of our common stock to create value for our shareholders. There is no assurance that this series of events will be satisfactorily completed.
| 22 |
|
Twelve Months
Ended March 31, 2018 |
Twelve Months
Ended March 31, 2017 |
|||||||
| Net Cash Used in Operating Activities | $ | - | $ | - | ||||
| Net Cash Provided (Used In) by Investing Activities | - | - | ||||||
| Net Cash Provided by Financing Activities | - | - | ||||||
| Net Movement in Cash and Cash Equivalents | $ | - | $ | - | ||||
Operating Activities
During the twelve months ended March 31, 2018, we incurred a net loss of $26,756 which, we received $26,756 by way of loan advance from our controlling shareholder, that represented the net cash used in operating activities during the period. By comparison, during the twelve months ended March 31, 2017, we incurred a net loss of $56,200 which, we received $56,200 by way of loan advance from our controlling shareholder, that represented the net cash used in operating activities during the period.
Investing Activities
We neither generated nor used funds in investing activities during the twelve months ended March 31, 2018 and 2017.
Financing Activities
We neither generated nor used funds in financing activities during the twelve months ended March 31, 2018 and 2017.
We are dependent upon the receipt of capital investment or other financing to fund our ongoing operations and to execute our business plan of seeking a combination with a private operating company. In addition, we are dependent upon our controlling shareholder to provide continued funding and capital resources. If continued funding and capital resources are unavailable at reasonable terms, we may not be able to implement our plan of operations.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
| 23 |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
INDEX TO FINANCIAL STATEMENTS AND NOTES
| 24 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MICHAEL GILLESPIE & ASSOCIATES, PLLC
CERTIFIED PUBLIC ACCOUNTANTS
10544 ALTON AVE NE
SEATTLE, WA 98125
206.353.5736
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Southwestern Water Exploration Co.
We have audited the accompanying balance sheet of Southwestern Water Exploration Co. as of March 31, 2017 and the related statements of operations, changes in stockholder’s deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of Southwestern Water Exploration Co. as of March 31, 2017 and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note #2 to the financial statements the Company has limited operations and has yet to attain profitability. This raises substantial doubt about its ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note #2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /S/ MICHAEL GILLESPIE & ASSOCIATES, PLLC | |
| Seattle, Washington | |
| November 6, 2017 |
| 25 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Fuquan Financial Company
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Fuquan Financial Company (the “Company”), as of March 31, 2018 and the related statements of operations, changes in stockholder’s deficit and cash flows for the year then ended. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and the results of its operations and its cash flows for the year ended March 31, 2018, in conformity with generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of the Company. as of March 31, 2018 and the results of their operations and cash flows for the years then ended in conformity with generally accepted accounting principles in the United States of America.
Matter of Emphasis
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note #2 to the financial statements the Company has limited operations and has yet to attain profitability. This raises substantial doubt about its ability to continue as a going concern. Management’s plan in regard to these matters is also described in Note #2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ Thayer O’Neal Company, LLC
Thayer O’Neal Company, LLC
Houston, Texas
January 22, 2019
| 26 |
(FORMERLY SOUTHWESTERN WATER EXPLORATION CO.)
BALANCE SHEETS
The accompanying notes are an integral part of these audited financial statements
| 27 |
(FORMERLY SOUTHWESTERN WATER EXPLORATION CO.)
STATEMENTS OF OPERATIONS
| For the Year Ended | ||||||||
| March 31 | ||||||||
| 2018 | 2017 | |||||||
| REVENUE | $ | - | $ | - | ||||
| COST OF REVENUE | - | - | ||||||
| GROSS PROFIT | - | - | ||||||
| EXPENSES | ||||||||
| General and administrative | 26,756 | 56,200 | ||||||
| Total Expenses | 26,756 | 56,200 | ||||||
| OPERATING LOSS | (26,756 | ) | (56,200 | ) | ||||
| OTHER INCOME/ (EXPENSE) | - | - | ||||||
| LOSS BEFORE TAXES | (26,756 | ) | (56,200 | ) | ||||
| TAXES | - | - | ||||||
| NET LOSS | (26,756 | ) | (56,200 | ) | ||||
| Net Loss per Common Share: Basic and Diluted | $ | (0.00 | ) | $ | (0.00 | ) | ||
| Weighted Average Common Shares Outstanding: Basic and Diluted | 122,164,114 | 122,164,114 | ||||||
The accompanying notes are an integral part of these audited financial statements
| 28 |
(FORMERLY SOUTHWESTERN WATER EXPLORATION CO.)
STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
| Additional | ||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance - March 31, 2016 | 122,164,114 | $ | 122,164 | $ | 5,673,913 | $ | (6,037,154 | ) | $ | (241,077 | ) | |||||||||
| Loss for the year | - | - | - | (56,200 | ) | (56,200 | ) | |||||||||||||
| Balance - March 31, 2017 | 122,164,114 | $ | 122,164 | $ | 5,673,913 | $ | (6,093,354 | ) | $ | (297,277 | ) | |||||||||
| Loss for the year | - | - | - | (26,756 | ) | (26,756 | ) | |||||||||||||
| Balance - March 31, 2018 | 122,164,114 | $ | 122,164 | $ | 5,673,913 | $ | (6,120,110 | ) | $ | (324,033 | ) | |||||||||
The accompanying notes are an integral part of these audited financial statements
| 29 |
(FORMERLY SOUTHWESTERN WATER EXPLORATION CO.)
STATEMENTS OF CASH FLOWS
|
For the Year Ended
March 31 |
||||||||
| 2018 | 2017 | |||||||
| Cash Flows (Used In) Operating Activities: | ||||||||
| Net Loss | $ | (26,756 | ) | $ | (56,200 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | - | - | ||||||
| Changes in working capital items: | - | - | ||||||
| Shareholder loan payable - advances |
26,756 |
56,200 |
||||||
| Net Cash (Used In) Operating Activities | - | - | ||||||
| Cash Flows From (Used In) Investing Activities: | - | - | ||||||
| Cash Flows From Financing Activities: | - | - | ||||||
| Net Change in Cash: | - | - | ||||||
| Beginning Cash | - | - | ||||||
| Ending Cash | $ | - | $ | - | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for interest: | $ | - | $ | - | ||||
| Cash paid for tax: | $ | - | $ | - | ||||
The accompanying notes are an integral part of these audited financial statements
| 30 |
FUQUAN FINANCIAL COMPANY
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2018
NOTE 1. NATURE OF OPERATIONS
Nature of Business
Fuquan Financial Company, a Nevada corporation, (“Fuquan”, “We” or “Us”) is a publicly quoted shell company seeking to create value for our shareholders by merging with another entity with experienced management and opportunities for growth in return for shares of our common stock. No potential merger candidate has been identified at this time.
Our mailing address is 23 Corporate Plaza, Suite 150, Newport Beach, California 92660. We currently have no operations.
History
Southwestern Water, formerly Star Acquisitions Corporation, was incorporated in the State of Colorado on July 10, 1987.
On November 12, 1993, we changed our name to Southwestern Water Exploration Co.
On February 27, 2018, a change in control of Southwestern Water Exploration Co. occurred in which the sole officer and board member resigned and new officers and board members were appointed. On March 15, 2018, the Company filed Articles of Amendment with the Colorado Secretary of State whereby it changed its name to “Fuquan Financial Company.” On March 29, 2018, the Company filed Articles of Conversion to change its domicile from Colorado to Nevada. On March 29, 2018, the Company filed an Issuer Company-Related Action Notification with FINRA requesting that the aforementioned name change be effective in the market and that the Company’s ticker symbol be changed to “FQFC.”
NOTE 2. GOING CONCERN
Our financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We have no ongoing business or income and for the twelve months ended March 31, 2018, we reported a net loss of $26,756 and an accumulated deficit of $6,120,110 as of March 31, 2018. These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. Our ability to continue as a going concern is dependent upon our ability to raise additional debt or equity funding to meet our ongoing operating expenses and ultimately in merging with another entity with experienced management and profitable operations. No assurances can be given that we will be successful in achieving these objectives.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The summary of significant accounting policies is presented to assist in the understanding of the financial statements. These policies conform to accounting principles generally accepted in the United States of America and have been consistently applied.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
As of March 31, 2018 and 2017, we did not maintain any cash or bank balances.
| 31 |
FUQUAN FINANCIAL COMPANY
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2018
Financial Instruments
The estimated fair values for financial instruments were determined at discrete points in time based on relevant market information. These estimates involved uncertainties and could not be determined with precision. The carrying amounts of accounts payable, accrued liabilities and loans payable approximate fair value because of the short-term maturities of these instruments. The fair value of our shareholder loan payable approximates to its carrying value due to its short-term maturity.
Fair Value Measurements:
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines the hierarchy as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange.
Level 2 – Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs.
Level 3 – Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights.
Our financial instruments consist of a single loan payable from one of our shareholders. The carrying values the loan payable - shareholder approximates its fair value due to its short maturity.
Related Party Transactions:
A related party is generally defined as (i) any person that holds 10% or more of our membership interests including such person’s immediate families, (ii) our management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with Aquarius, or (iv) anyone who can significantly influence the financial and operating decisions of Aquarius. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
Fixed Assets:
As of March 31, 2018 and 2017, we did not maintain any fixed assets.
Impairment of Long-Lived and Intangible Assets:
We had no long-lived or intangible assets as of March 31, 2018 or 2017.
Deferred Costs and Other:
Offering costs with respect to issue of debt or equity by us are initially deferred and ultimately offset against the proceeds from these debt or equity transactions if successful or expensed if the proposed debt or equity transaction is unsuccessful.
Income Taxes:
The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
| 32 |
FUQUAN FINANCIAL COMPANY
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2018
Uncertain Tax Positions:
We evaluate tax positions in a two-step process. Wee first determines whether it is more likely than not that a tax position will be sustained upon examination, based on the technical merits of the position. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We classify gross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as long-term liabilities in the financial statements.
Revenue Recognition:
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied, generally this occurs with the transfer of control of our product. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
During the twelve months ended March 31, 2018 and 2017, we did not recognize any revenue.
Advertising Costs:
No advertising costs were incurred during the twelve months ended March 31, 2018 and 2017.
Stock Based Compensation:
The cost of equity instruments issued to non-employees in return for goods and services is measured by the fair value of the goods or services received or the measurement date fair value of the equity instruments issued, whichever is the more readily determinable. Measurement date for non-employees is the earlier of performance commitment date or the completion of services. The cost of employee services received in exchange for equity instruments is based on the grant date fair value of the equity instruments issued.
Net Loss per Share Calculation:
Basic net loss per common share (“EPS”) is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average shares outstanding, assuming all dilutive potential common shares were issued. Dilutive loss per share excludes all potential common shares if their effect is anti-dilutive.
As of December 31, 2017, we stated that throughout the three and nine-month periods ended of September 30, 2017 and 2016, 200,000 stock options with an exercise price of $0.001 and that did not expire were issued and fully vested. That authorization has been rescinded and as of March 31, 2018, no stock options were issued.
Subsequent Events:
We have evaluated all transactions from April 1, 2018 through January 17, 2019 for subsequent event disclosure consideration.
Recently Accounting Pronouncements:
We have reviewed all the recently issued, but not yet effective, accounting pronouncements and do not believe any of these pronouncements will have a material impact on our financial statements.
| 33 |
FUQUAN FINANCIAL COMPANY
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2018
NOTE 4. FORMER SHAREHOLDER LOAN PAYABLE
During the twelve months ended March 31, 2018 and 2017, we received $26,756 and $56,200, respectively, by way of loan from our principal shareholder, a former officer and director of ours, to fund our working capital requirements such as the compensation to the former officer and director, accounting, auditing, SEC filings, tax preparation, share transfer agent fees and certain legal fees.
The loan is interest free, unsecured and due on demand.
The balance due to our principal shareholder as of March 31, 2017 and March 31, 2018 was $297,277 and $324,033, respectively.
NOTE 5. INCOME TAXES
We did not provide any current or deferred US federal income tax provision or benefit for any of the periods presented in these financial statements because we have experienced losses since Inception. When it is more likely than not, that a tax asset cannot be realized through future income, we must record an allowance against any future potential future tax benefit. We have provided a full valuation allowance against the net deferred tax asset, consisting of net operating loss carry forwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carry forward periods.
The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the twelve months ended March 31, 2018 and 2017 as defined under ASC 740, “Accounting for Income Taxes.” We did not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of the accumulated deficit on the balance sheet.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes.
The sources and tax effects of the differences for the periods presented are as follows:
|
Twelve-month periods
Ended March 31, |
||||||||
| 2018 | 2017 | |||||||
| Statutory U.S. Federal Income Tax Rate | 21 | % | 21 | % | ||||
| State Income Taxes | 4 | % | 4 | % | ||||
| Change in Valuation Allowance | (25 | )% | (25 | )% | ||||
| Effective Income Tax Rate | 0 | % | 0 | % | ||||
A reconciliation of the income taxes computed at the statutory rate is as follows:
|
Twelve-month periods
Ended March 31, |
||||||||
| 2018 | 2017 | |||||||
| Tax at statutory rate (21%) | $ | 5,619 | $ | 11,802 | ||||
| Increase in valuation allowance | $ | (5,619 | ) | $ | (11,802 | ) | ||
| Net deferred tax assets | $ | - | $ | - | ||||
The Company underwent a change of control during the year ended March 31, 2018; accordingly, the utilization of this net operating loss will be limited in future periods.
| 34 |
FUQUAN FINANCIAL COMPANY
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 2018
N OTE 6. COMMITMENTS & CONTINGENCIES
Legal Proceedings
We were not subject to any legal proceedings for the twelve months ended March 31, 2018 and 2017 and, to the best of our knowledge, no legal proceedings are pending or threatened.
NOTE 7. SHAREHOLDERS’ DEFICIT
Preferred Stock
As of December 31, 2017, we stated that we were authorized to issue 50,000,000 shares of preferred common stock with a par value of $0.001. That authorization has been rescinded and as of March 31, 2018, no shares of preferred stock were authorized to be issued.
No shares of preferred stock were issued and outstanding during the twelve months ended March 31, 2018 and 2017.
Common Stock
As of March 31, 2018, we were authorized to issue 200,000,000 shares of common stock with a par value of $0.001. As of March 31, 2018, and March 31, 2017, 122,164,114 and 122,164,114 shares of common stock were issued and outstanding, respectively.
No shares of common stock were issued during the twelve months ended March 31, 2018 and 2017.
Warrants
No warrants were issued or outstanding during the twelve months ended March 31, 2018 and 2017.
Stock Options
The Corporation has an incentive stock option plan, which provides for the granting by the Board of Directors of stock options to directors and officers for the purchase of authorized but unissued common shares.
As of December 31, 2017, we stated that throughout the three and nine-month periods ended of September 30, 2017 and 2016, 200,000 stock options with an exercise price of $0.001 and that did not expire were issued and fully vested. That authorization has been rescinded and as of March 31, 2018, no stock options were issued.
NOTE 8. SUBSEQUENT EVENTS
On or around April 20, 2018, the Company issued 2,778,000,000 shares of its common stock to Houyu Huang as compensation for services rendered as president and director of the Company. The issuance was exempt under Section 4(a)(2) of the Securities Act.
On or around April 23, 2018 the Company increased its number of authorized shares of common stock to three billion shares, $0.001 par value.
In or around April 2018 the Company entered into a Convertible Loan Agreement with its majority shareholder, Houyu Huang (the “ Loan Agreement ”). Under the terms of the Loan Agreement, Mr. Huang agreed to provide financing to the Company up to a maximum of $500,000. The Company will issue to Mr. Huang an advance request each time it requires funding under the Loan Agreement. All amounts so advanced will be covered under a Convertible Promissory Note (the “ Note ”). All amounts under the Note accrue interest at the rate of 10% per annum; are due and payable in 24-months; and, can be converted at the option of Mr. Huang into shares of our common stock at a 20% discount to the market price of our shares.
Through January 22, 2019 the Company has borrowed a total of $259,358.00 under the Loan Agreement. The entire amount was paid to Fuquan Investment Management (USA) Company (“ FIM USA ”), which is owned by our CFO, Hua Huang. The amounts were paid directly to FIM USA as payment for management services provided by FIM USA to the Company. These services were provided under the MSA, discussed below.
In or around June 2018 the Company entered into a Management Services Agreement (the “ MSA ”) FIM USA. Under the MSA, FIM USA provides all necessary management services to the Company, which includes the payment by FIM USA of all professional fees and expenses and filings fee incurred by the Company.
On around September 26, 2018 the Company filed with the State of Nevada to effect a reverse stock split. The reverse stock split has not yet been implemented and effected. When implemented and effected, one (1) share of common stock will be issued for every four (4) shares of common stock issued and outstanding. The number of authorized shares of common stock will be reduced by the same 1:4 ratio, resulting in 750,000,000 shares of common stock being authorized.
| 35 |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
There were no disagreements with our accountants on accounting or financial disclosure matters during 2018 and 2017, respectively. Gillespie & Associates, PLLC (“ Gillespie ”) was appointed as our independent auditors on September 8, 2017 and issued audited consolidated financial statements for the Company as of March 31, 2017 and 2016, and the results of our operations, cash flows, and stockholder’s equity (deficit) for each of the years then ended. On September 04 2018 the Company dismissed Gillespie as its independent registered public accounting firm. There were no “disagreements” (as such term is defined in Item 304 of Regulation S-K) with Gillespie on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to the satisfaction of Gillespie would have caused them to make reference thereto in their reports on the financial statements for such periods. In addition, during that time there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
On September 04, 2018 the Company’s Board of Directors approved the engagement of Thayer O’Neal Company, LLC (“ Thayer ”) as its independent registered public accounting firm for the Company’s fiscal year ended 31 March 2018. During the fiscal years ended March 31, 2016, March 31, 2017, and March 31, 2018, and the subsequent interim period through 04 September 2018, the date of engagement of Thayer, the Company did not consult with Thayer regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements; or, (ii) any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K and the related instructions thereto) or a reportable event (as described in paragraph (a)(1)(v) of Item 304 of Regulation S-K).
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
Meihua Li, our Chief Executive Officer and Principal Executive Officer (“ Li ”), and Hua Huang, our Chief Financial Officer and Principal Financial Officer (“Huang”), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2018. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on its evaluation, management concluded as of March 31, 2018 that our disclosure controls and procedures were not effective because of material weaknesses in our internal control over financial reporting, described below in Management’s Report on Internal Control Over Financial Reporting. Notwithstanding the identified material weaknesses, management believes the financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Management’s Report on Internal Control Over Financial Reporting
Li, as our Principal Executive Officer, and Huang, as our Principal Financial Officer, are responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. An evaluation was performed of the effectiveness of the Company’s internal control over financial reporting. The evaluation was based on the framework in 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
| 36 |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the criteria set forth in 2013 Internal Control — Integrated Framework , our management concluded that, as of March 31, 2018 our internal control over financial reporting was not effective because of the identification of material weaknesses described as follows:
| ● | We did not have controls designed to validate the completeness and accuracy of underlying data used in the determination of accounting transactions. Accordingly, we believe we have a material weakness because there is a reasonable possibility that a material misstatement to the interim or annual financial statements would not be prevented or detected on a timely basis. | |
| ● | We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. | |
| ● | We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. | |
| ● | We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting. | |
| ● | We do not have a functioning audit committee or outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. |
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
Management of the Company is committed to improving its internal controls and will (i) continue to use third party specialists to address shortfalls in staffing and to assist the Company with accounting and finance responsibilities; (ii) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel; and, (iii) may consider appointing outside directors and audit committee members in the future.
Management has discussed the material weaknesses noted above with our independent registered public accounting firm. Due to the nature of these material weaknesses, it is reasonably possible that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected during our financial close and reporting process.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.
| 37 |
Changes in Internal Controls Over Financial Reporting
In March 2018 our majority shareholder, Houyu Huang, acquired majority control of the Company. At that time a new Board of Directors was elected, and new officer were appointed. The control over financial reporting was transferred from the prior Board and officers to the new Board and new officers, who assumed responsibility for internal controls over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
None.
| 38 |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Information Regarding Our Board of Directors
Pursuant to our bylaws, the number of directors is fixed and may be increased or decreased from time to time by resolution of our Board of Directors (the “Board”). The Company currently has one individual serving on the Board. The Company will seek to fill vacancies on the Board as it executes on its business plan and is able to fund the cost of errors and omissions insurance coverage for the Board.
Information with respect to our current directors is shown below.
| Name | Age | Director Since | Position(s) Held | ||||
| Meihua Li | 38 | 2018 | Chief Executive Officer; Chairman | ||||
| Hua Huang | 32 | 2018 | Chief Financial Officer; Secretary; Director |
Set forth below is a brief description of the background and business experience of our executive officers and directors for the past five years.
Meihua Li : Ms. Meihua Li was born in 1980 in Jilin Province, China. She graduated from Art Institute of Yanbian University, majored in Film and Television. Since 1999 Ms. Li has worked in various industries such as international trade, leisure and holiday industry, health education industry, studying abroad service industry, Traditional Chinese Medicine and science industry, advertising and media industry, warehousing and logistics industry, investment and consulting industry. In 2009, Ms. Li founded Beijing Longrun Tangdu Culture Communication Co., Ltd. and serves as the CEO. The company provides world-class advertising planning, film and television products, project planning, event undertaking and other cultural services.
Hua Huang : Ms. Hua Huang was born in China. Early in her career, Ms. Huang founded and invested in the retail, new energy, health, and ecological food companies. She is well regarded as a successful female entrepreneur in China. In 2012, Ms. Huang founded Anhui Fuquan Investment Management Co., Ltd. (“FIM”). Through FIM, Ms. Huang created and integrated the “ICGPS” -circular economy eco-industry financial model and “I2C” -consumer financial asset securitization model. The production and financing platform of FIM has opened up a positive interaction channel among consumers, producers, investors, securities trading and global credit consumption cooperation platforms. In 2017, FIM was awarded the “Top 10 Innovative Enterprises in China’s Best Business Model of 2017”. In addition, Ms. Huang won the “Top Ten Reformers in the Promotion of Industrial Economic Development of 2017” award and “China Economic Top 10 News Personalities of 2017” award. Ms. Huang currently serves as executive directors and senior consultants in dozens of domestic and international companies.
Family Relationships
Our majority and controlling shareholder, Houyu Huang, is the father of Hua Huang, our chief financial officer and a director of the Company.
Information Regarding Our Executive Officers
Hua Huang, our chief financial officer and a director of the Company, is also the owner of FIM USA, which executed the MSA with the Company.
| 39 |
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
| ● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| ● | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; | |
| ● | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; | |
| ● | been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| ● | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| ● | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. Based solely upon our review of the Forms 3, 4 and 5 filed during fiscal year ended March 31, 2018, we believe that as of March 31, 2018 our executive officers, directors and greater than 10 percent beneficial owners have complied on a timely basis with all Section 16(a) filing requirements.
| 40 |
Corporate Governance
Board Committees and Charters
Audit Committee
We do not currently have a separately constituted audit committee. We will consider forming an Audit Committee in fiscal 2019 and if appropriate will commence a search for new qualified board members, one of whom will meet the definition of an “audit committee financial expert”. The board of directors will also consider adopting a written audit committee charter.
Compensation Committee
We do not currently have a separately constituted compensation committee. Our board of directors has not yet determined whether to create a compensation committee.
Nominating Committee
We do not currently have a separately constituted nominating committee. Our board of directors has not yet determined whether to create a nominating committee.
Code of Business Conduct
We have not yet adopted a Code of Business Conduct, which would apply to our chief executive officer and chief financial officer, or to all directors and employees. Our board of directors plans to adopt a Code of Business Conduct as soon as practicable.
Board Diversity
While we do not have a formal policy on diversity, our board of directors considers diversity to include the skill set, background, reputation, type and length of business experience of our board of directors members, as well as, a particular nominee’s contributions to that mix. Our board of directors believes that diversity brings a variety of ideas, judgments, and considerations that can benefit our shareholders and us.
Stockholder Communications
We do not have a formal policy regarding communications with our board of directors, or for the consideration of director candidates recommended by shareholders. To date, no shareholders have made any such recommendations.
| ITEM 11. | EXECUTIVE COMPENSATION |
There was no executive compensation for the fiscal years ended March 31, 2018 and 2017, respectively.
Outstanding Equity Awards At Fiscal Year-End
As of March 31, 2018 and 2017, respectively, there were no outstanding equity awards. At this time we have no plans to adopt any equity award program, though that could change in the future.
| 41 |
Director Compensation
For the years ended March 2018 and 2017, respectively, there was no director compensation. Subsequent to March 31, 2018, the Company issued 2,778,000,000 shares of our common stock to Houyu Huang as compensation for his services as director and an officer of the Company. At this time we have no plans to compensate our directors any further, though that could change in the future.
Executive Employment Agreements and Change-in-Control Arrangements
We have not entered into employment agreements or change-in-control arrangements with any of our executive officers. Each of our executive officers is an at-will employee and their employment relationship with us may be terminated at any time.
Ms. Li and Ms. Huang have agreed to work with no remuneration until such time as the Company receives sufficient revenues necessary to provide management salaries. At this time, we cannot accurately estimate when sufficient revenues will occur to implement this compensation, or what the amount of the compensation will be.
There are no annuity, pension or retirement benefits proposed to be paid to officers, directors or employees in the event of retirement at normal retirement date pursuant to any presently existing plan provided or contributed to by the Company or any of its subsidiaries, if any.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER MATTERS. |
The following table provides information regarding the beneficial ownership of our common stock as of January 22, 2019, which is also referred to herein as the “Evaluation Date”, by: (i) each person or group who is known by us to beneficially own more than 5% of our common stock; (ii) each of our current directors; (iii) each of our named executive officers as set forth in Item 11 of this Annual Report; and, (iv) all such directors and executive officers as a group. The table is based upon information supplied by our officers, directors and principal shareholders and a review of Schedules 13D and 13G, if any, filed with the SEC. Unless otherwise indicated in the footnotes to the table and subject to community property laws where applicable, we believe that each of the shareholders named in the table has sole voting and investment power with respect to the shares indicated as beneficially owned.
Applicable percentages are based on 2,900,164,114 shares outstanding as of the Evaluation Date, adjusted as required by rules promulgated by the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of our common stock issuable pursuant to the exercise of stock options or warrants that are either immediately exercisable or exercisable within 60 days of the Evaluation Date. These shares are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
| Name and Address of Beneficial Owner |
Shares
Beneficially Owned (1) |
Percentage of
Total Voting Power |
||||||
| Directors and Named Executive Officers: | ||||||||
| Hua Huang | 2,862,237,269 | (2) | 98.7 | % | ||||
| All executive officers and directors as a group ( persons) | ||||||||
| Hua Huang | 2,862,237,269 | 98.7 | % | |||||
| 5% Shareholders | ||||||||
| Houyu Huang | 2,862,237,269 | 98.7 | % | |||||
| 42 |
| (1) | Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding. |
| (2) | Shares are deemed owned by Hua Huang as result of ownership of the shares by Hua Huang’s father, Houyu Huang. |
Changes in Control
We are not aware of any arrangements that may result in “changes in control” as that term is defined by the provisions of Item 403 of Regulation S.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
Certain Relationships and Related Transactions
Our chief financial officer and director, Hua Huang, is the daughter of our majority shareholder, Houyu Huang. Ms. Huang is also the owner and director of FIM USA. The Company has entered into the MSA with FIM USA.
In or around April 2018 the Company entered into a Convertible Loan Agreement with its majority shareholder, Houyu Huang (the “ Loan Agreement ”). Under the terms of the Loan Agreement, Mr. Huang agreed to provide financing to the Company up to a maximum of $500,000. The Company will issue to Mr. Huang an advance request each time it requires funding under the Loan Agreement. All amounts so advanced will be covered under a Convertible Promissory Note (the “ Note ”). All amounts under the Note accrue interest at the rate of 10% per annum; are due and payable in 24-months; and, can be converted at the option of Mr. Huang into shares of our common stock at a 20% discount to the market price of our shares.
Through January 22, 2019 the Company has borrowed a total of $199,372.40 under the Loan Agreement. The entire amount was paid to Fuquan Investment Management (USA) Company (“ FIM USA ”), which is owned by our CFO, Hua Huang. The amounts were paid directly to FIM USA as payment for management services provided by FIM USA to the Company.
In or around June 2018 the Company entered into a Management Services Agreement (the “ MSA ”) FIM USA. Under the MSA, FIM USA provides all necessary management services to the Company, which includes the payment by FIM USA of all professional fees and expenses and filings fee incurred by the Company.
Director Independence
We are not currently subject to listing requirements of any national securities exchange or inter-dealer quotation system which has requirements that a majority of the board of directors be “independent” and, as a result, we are not at this time required to have our Board of Directors comprised of a majority of “independent directors”.
| 43 |
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
The following table provides information regarding the fees billed to us by Gillespie & Associates, PLLC in the years ended March 31, 2018 and 2017. All fees described below were approved by Board:
| For the years ended March 31 | ||||||||
| 2018 | 2017 | |||||||
| Audit Fees (1) | $ | 8,300 | $ | -0- | ||||
| Audit Related Fees (2) | -0- | -0- | ||||||
| Tax Fees (3) | - 0- | - 0- | ||||||
| All Other Fees (4) | -0- | -0- | ||||||
| Total Fees: | $ | 8,300 | $ | -0- | ||||
| (1) | Audit Fees include fees for services rendered for the audit of our financial statements, included in our Annual Report on Form 10-K. |
| (2) | Audit Related Fess consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting. |
| (3) | Tax Fees consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice. |
| (4) | All Other Fees consists of fees for other miscellaneous items. |
Pre-Approval Policies and Procedures
The policy of our Board is to pre-approve all audit and permissible non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The independent auditor and management are required to periodically report to the Board regarding the extent of services provided by the independent auditor in accordance with this pre-approval. Any proposed services not included within the list of pre-approved services or any proposed services that will cause the Company to exceed the pre-approved aggregate amount requires specific pre-approval by the Board.
| 44 |
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENTS SCHEDULES |
| (a) | (1) | The Company’s financial statements and related notes thereto are listed and included in this Annual Report (Item 8). | |
| (2) | Schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. | ||
| (3) | The following exhibits are filed as part of this Annual Report pursuant to Item 601 of Regulation S-K: |
| (*) | Filed herewith. |
| 45 |
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DATED: January 22, 2019 | FUQUAN FINANCIAL COMPANY | |
| BY: | /S/ MEIHUA LI | |
| Meihua Li, | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| NAME | TITLE | DATED | ||
| /s/ Meihua Li | Chairman of the Board; | January 22, 2019 | ||
| Chief Executive Officer | ||||
| /s/ Hua Huang | Director; | January 22, 2019 | ||
| Chief Financial Officer |
| 46 |
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS NOTE, NOR THE SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ ACT ”), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, OR ASSIGNED (i) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT; OR, (ii) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
| Principal Amount: Up to US $500,000.00 | Issue Date: __ April 2018 |
CONVERTIBLE PROMISSORY NOTE
FOR VALUE RECEIVED , FUQUAN FINANCIAL COMPANY, a Nevada corporation (“ Borrower ” or “ Company ”), hereby promises to pay to the order of HOUYU HUANG , an individual residing in the People’s Republic of China, or his registered assigns (“ Holder ”) the sum of up to US $500,000.00, together with any interest as set forth herein, on or before __ April 2020 (the “ Maturity Date ”), and to pay interest on the unpaid principal balance hereof at the rate of ten percent (10%) (the “ Interest Rate ”) per annum from the date of each Advance, until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise.
This Convertible Promissory Note (the “ Note ”) may not be prepaid in whole or in part except as otherwise explicitly set forth herein. Any amount of principal or interest on this Note which is not paid when due shall bear an additional interest at the rate of ten percent (10%) per annum from the due date thereof until the same is paid (the “ Default Interest ”). All interest charged hereunder shall be computed on the basis of a 360-day year and the actual number of days elapsed. All payments due hereunder, to the extent not converted into Company common stock, $0.001 par value per share (the “ Common Stock ”) in accordance with the terms hereof, shall be made in lawful money of the United States of America.
All payments shall be made at such address as Holder shall hereafter give to Borrower by written notice made in accordance with the provisions of this Note. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business day and, in the case of any interest payment date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. As used in this Note, the term “ business day ” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain closed. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Convertible Loan Agreement dated the date hereof, pursuant to which this Note was originally issued (the “ Loan Agreement ”). This Note is subject to all terms and conditions of the Loan Agreement.
This Note is free from all taxes, liens, claims, and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of Borrower and will not impose personal liability upon the holder thereof.
| 1 |
The following additional terms and conditions shall apply to this Note:
Article I. CONVERSION RIGHTS
1.1 Conversion Right . Holder shall have the right, in its sole and absolute discretion, from time to time, and at any time following 90-days after the Issue Date, to convert all or any part of the outstanding and unpaid principal amount of this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of Borrower into which such Common Stock shall hereafter be changed or reclassified at the Conversion Price (as defined below) determined as provided herein (a “ Conversion ”). The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in the Notice of Conversion, in the form attached hereto as Exhibit “A” (the “ Notice of Conversion ”), delivered to Borrower by Holder in accordance with Section 1.4 below; provided that the Notice of Conversion is submitted by Fax or E-Mail (or by other means resulting in, or reasonably expected to result in, notice) to Borrower before 11:59 p.m., New York, New York time on such conversion date (the “ Conversion Date ”).
The term “ Conversion Amount ” means, with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such conversion, plus (2) at Holder’s option, accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Note to the Conversion Date, provided however, that Borrower shall have the right to pay any or all interest in cash, plus (3) at Holder’s option, Default Interest, if any, on the amounts referred to in the immediately preceding clauses (1) and/or (2), plus (4) any Additional Principal for such Conversions, plus (5) at Holder’s option, any amounts owed to Holder pursuant to any other provision of this Note.
1.2 Conversion Price .
(a) Calculation of Conversion Price . Subject to the adjustments described herein, the conversion price (the “ Conversion Price ”) shall equal the lesser of (i) 80% multiplied by the lowest Trading Price (as defined below) (representing a discount rate of 20%) during the previous twenty (20) Trading Day period ending on the latest complete Trading Day prior to the Issue Date; and, (ii) the Alternate Conversion Price (as defined herein)(subject to equitable adjustments for stock splits, stock dividends or rights offerings by Borrower relating to Borrower’s securities or the securities of any subsidiary of Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The “ Alternate Conversion Price ” shall mean 80% multiplied by the Market Price (as defined herein) (representing a discount rate of 20%). “ Market Price ” means the lowest Trading Price (as defined below) for the Common Stock during the twenty (20) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “ Trading Price ” means, for any security as of any date, the lesser of: (i) the lowest trade price on the OTC Pink, OTCQB, or applicable trading market (the “ OTC Market ”) as reported by a reliable reporting service (“ Reporting Service ”) designated by Holder or, if the OTC Market is not the principal trading market for such security, the trading price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no trading price of such security is available in any of the foregoing manners, the average of the trading prices of any market makers for such security that are listed in the “pink sheets” by the National Quotation Bureau, Inc.; or, (ii) the lowest closing bid price on the OTC Market as reported by a Reporting Service designated by Holder or, if the OTC Market is not the principal trading market for such security, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no closing bid price of such security is available in any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in the “pink sheets” by the National Quotation Bureau, Inc. If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by Borrower and the holders of a majority in interest of the Notes being converted for which the calculation of the Trading Price is required in order to determine the Conversion Price of such Notes. “ Trading Day ” shall mean any day on which the Common Stock is tradable for any period on the OTC Market or on the principal securities exchange or other securities market on which the Common Stock is then being traded. Borrower shall be responsible for the fees of its transfer agent and all DTC fees associated with any such issuance. In the event of any dispute or discrepancy, the records of Holder shall be controlling and determinative in the absence of manifest error.
| 2 |
(b) Adjustment to Conversion Price . At any time after the Issue Date, (i) if in the case that Borrower’s Common Stock is not deliverable by DWAC (including if Borrower’s transfer agent has a policy prohibiting or limiting delivery of shares of Borrower’s Common Stock specified in a Notice of Conversion) within 90-days after the Issue Date; (ii) if Borrower ceases to be a reporting company pursuant or subject to the Exchange Act; (iii) if Borrower loses a market (including the OTCBB, OTCQB or an equivalent replacement exchange) for its Common Stock; (iv) if Borrower fails to maintain its status as “DTC Eligible” for any reason within 90-days after the Issue Date; (v) if the Note cannot be converted into free trading shares on or after six months from the Issue Date; (vi) if at any time Borrower does not maintain or replenish the Reserved Amount within three (3) business days of the request of Holder; (vii) if Borrower fails to maintain the listing of the Common Stock on at least one of the OTC Markets or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq Small Cap Market, the New York Stock Exchange, or the NYSE MKT; (viii) if Borrower fails to comply with the reporting requirements necessary to satisfy the availability of Rule 144 to Holder or its assigns, including but not limited to the timely fulfillment of its filing requirements as a fully-reporting issuer registered with the SEC, the requirements for XBRL filings and , the requirements for disclosure of financial statements on its website, within 90-days after the Issue Date; (ix) if Borrower effectuates a reverse split of its Common Stock without ten (10) days prior written notice to Holder; (x) the restatement of any financial statements filed by Borrower with the SEC for any date or period from two years prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by comparison to the unrestated financial statement, have constituted a material adverse effect on the rights of Holder with respect to this Note or the Loan Agreement; (xi) any cessation of trading of the Common Stock on at least one of the OTC Markets or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq Small Cap Market, the New York Stock Exchange, or the NYSE MKT, and such cessation of trading shall continue for a period of five consecutive (5) Trading Days; and/or, (xii) Borrower loses the “bid” price for its Common Stock ($0.0001 on the “Ask” with zero market makers on the “Bid” per Level 2), then Holder shall be entitled to increase, by 10% for each occurrence, cumulative or otherwise, the discount to the Conversion Price for all future conversions under the Note. Holder maintains the option and sole discretion to increase by Five Thousand and No/100 United States Dollars ($5,000) per each occurrence described above (under Holder’s and Borrower’s expectation that any principal amount increase will tack back to the Issue Date) the principal amount of the Note instead of applying further discounts to the Conversion Price. Under no circumstances shall the principal amount exceed an additional Twenty Five Thousand and No/100 United States Dollars ($25,000) or the Conversion Price be less than 30% multiplied by the Market Price due to cumulative effect.
(c) DTC Chill . If in the case that the Common Stock is “chilled” for deposit into the DTC system and only eligible for clearing deposit, then an additional 15% discount to the Conversion Price shall apply for all future conversions under all Notes while the “chill” is in effect.
(d) Certain Other Conversions . Each time, while this Note is outstanding, and with regard only to any transaction entered into by Borrower after the Issue Date, Borrower enters into a Section 3(a)(9) transaction (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, in which any 3 rd party has the right to convert monies owed to that 3 rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Alternate Conversion Price in effect at that time (prior to all other applicable adjustments in the Note), then the Alternate Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding. Each time, while this Note is outstanding, Borrower enters into a Section 3(a)(9) transaction (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, in which any 3 rd party has a look back period greater than the look back period in effect under the Note at that time (a fifteen (15) Trading Day look back period is contained in Section 1.2(a)), then Holder’s look back period shall automatically be adjusted to such greater number of days until this Note is no longer outstanding. Borrower shall give written notice to Holder, with the adjusted Alternate Conversion Price and/or adjusted look back period (each adjustment that is applicable due to the triggering event), within one (1) business day of an event that requires any adjustment described in the two immediately preceding sentences.
| 3 |
(e) Par Value Adjustments . To the extent the Conversion Price of Borrower’s Common Stock closes below the par value per share, Borrower will take all steps necessary to solicit the consent of the stockholders to reduce the par value to the lowest value possible under law. Borrower agrees to honor all conversions submitted pending this adjustment unless Holder, in its sole and absolute discretion elects instead to set the Conversion Price to par value for such Conversion(s) and the Conversion Amount for such Conversion(s) shall be increased to include Additional Principal, where “Additional Principal” means such additional amount to be added to the Conversion Amount to the extent necessary to cause the number of Conversion Shares issuable upon such Conversion(s) to equal the same number of Conversion Shares as would have been issued had the Conversion Price not been subject to the minimum price set forth in this Section 1.2(e).
(f) Conversion Price During Major Announcements . Notwithstanding anything contained in the preceding section to the contrary, in the event Borrower (i) makes a public announcement that it intends to consolidate or merge with any other corporation (other than a merger in which Borrower is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of Borrower or (ii) any person, group or entity (including Borrower) publicly announces a tender offer to purchase 50% or more of Borrower’s Common Stock (or any other takeover scheme) (the date of the announcement referred to in clause (i) or (ii) is hereinafter referred to as the “ Announcement Date ”), then the Conversion Price shall, effective upon the Announcement Date and continuing through the Adjusted Conversion Price Termination Date (as defined below), be equal to the lower of (x) the Conversion Price which would have been applicable for a Conversion occurring on the Announcement Date and (y) the Conversion Price that would otherwise be in effect. From and after the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined as set forth in this Section. For purposes hereof, “ Adjusted Conversion Price Termination Date ” shall mean, with respect to any proposed transaction or tender offer (or takeover scheme) for which a public announcement as contemplated by this Section has been made, the date upon which Borrower (in the case of clause (i) above) or the person, group or entity (in the case of clause (ii) above) consummates or publicly announces the termination or abandonment of the proposed transaction or tender offer (or takeover scheme) which caused this Section 1.2(f) to become operative.
(g) Pro Rata Conversion; Disputes . In the event of a dispute as to the number of shares of Common Stock issuable to Holder in connection with a conversion of this Note, Borrower shall issue to Holder the number of shares of Common Stock not in dispute and resolve such dispute in accordance with Section 4.13.
1.3 Authorized Shares . Borrower covenants that during the period the conversion right exists, Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Note. Borrower is required at all times to have authorized and reserved three (3) times the number of shares that is actually issuable upon full conversion of the Note (based on the Conversion Price of the Notes in effect from time to time) (the “ Reserved Amount ”). Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which the Notes shall be convertible at the then current Conversion Price, Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Notes.
Borrower (i) acknowledges that it has irrevocably instructed its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Note. Notwithstanding the foregoing, in no event shall the Reserved Amount be lower than the initial Reserved Amount, regardless of any prior conversions.
| 4 |
1.4 Method of Conversion .
(a) Mechanics of Conversion . Subject to Section 1.1, this Note may be converted by Holder in whole or in part at any time following 90-days after the Issue Date, by (A) submitting to Borrower a Notice of Conversion (by Fax, E-Mail, or other reasonable means of communication dispatched on the Conversion Date prior to 11:59 p.m., New York, New York time) and (B) subject to Section 1.4(b), surrendering this Note at the principal office of Borrower.
(b) Surrender of Note Upon Conversion . Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance with the terms hereof, Holder shall not be required to physically surrender this Note to Borrower unless the entire unpaid principal amount of this Note is so converted. Holder and Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to Holder and Borrower, so as not to require physical surrender of this Note upon each such conversion. In the event of any dispute or discrepancy, such records of Borrower shall, prima facie, be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Note is converted as aforesaid, Holder may not transfer this Note unless Holder first physically surrenders this Note to Borrower, whereupon Borrower will forthwith issue and deliver upon the order of Holder a new Note of like tenor, registered as Holder (upon payment by Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid principal amount of this Note. Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note represented by this Note may be less than the amount stated on the face hereof.
(c) Payment of Taxes . Borrower shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock or other securities or property on conversion of this Note in a name other than that of Holder (or in street name), and Borrower shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than Holder or the custodian in whose street name such shares are to be held for Holder’s account) requesting the issuance thereof shall have paid to Borrower the amount of any such tax or shall have established to the satisfaction of Borrower that such tax has been paid.
(d) Delivery of Common Stock Upon Conversion . Upon receipt by Borrower from Holder of a Fax or E-Mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 1.4, Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of Holder certificates for the Common Stock issuable upon such conversion within three (3) business days after such receipt (the “ Deadline ”) (and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Loan Agreement.
(e) Obligation of Borrower to Deliver Common Stock . Upon receipt by Borrower of a Notice of Conversion, Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If Holder shall have given a Notice of Conversion as provided herein, Borrower’s obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of Borrower to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by Holder of any obligation to Borrower, and irrespective of any other circumstance which might otherwise limit such obligation of Borrower to Holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of Conversion is received by Borrower before 11:59 p.m., New York, New York time, on such date.
| 5 |
(f) Delivery of Common Stock by Electronic Transfer . In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided Borrower is participating in the Depository Trust Company (“ DTC ”) Fast Automated Securities Transfer (“ FAST ”) program, upon request of Holder and its compliance with the provisions contained in Section 1.1 and in this Section 1.4, Borrower shall use its commercially reasonable best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit Withdrawal At Custodian (“ DWAC ”) system.
(g) Failure to Deliver Common Stock Prior to the Deadline . Without in any way limiting Holder’s right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered by the Deadline Borrower shall pay to Holder $2,000 per day in cash, for each day beyond the Deadline that Borrower fails to deliver such Common Stock until Borrower issues and delivers a certificate to Holder or credit Holder’s balance account with OTC for the number of shares of Common Stock to which Holder is entitled upon such Holder’s conversion of any Conversion Amount (under Holder’s and Borrower’s expectation that any damages will tack back to the Issue Date). Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of Holder (by written notice to Borrower by the first day of the month following the month in which it has accrued), shall be added to the principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Note. Borrower agrees that the right to convert is a valuable right to Holder. The damages resulting from a failure, attempt to frustrate, and interference with such conversion right are difficult if not impossible to qualify. Accordingly the parties acknowledge that the liquidated damages provision contained in this Section 1.4(g) are justified.
(h) Rescindment of a Notice of Conversion . If (i) Borrower fails to respond to Holder within one (1) business day from the Conversion Date confirming the details of Notice of Conversion; (ii) Borrower fails to provide any of the shares of Borrower’s Common Stock requested in the Notice of Conversion within three (3) business days from the Conversion Date specified therein; (iii) Holder is unable to procure a legal opinion required to have the shares of Borrower’s Common Stock issued unrestricted and/or deposited to sell for any reason related to Borrower’s standing; (iv) Holder is unable to deposit the shares of Borrower’s Common Stock requested in the Notice of Conversion for any reason related to Borrower’s standing; (v) at any time after a missed Deadline, at Holder’s sole discretion; or, (vi) if, within three (3) business days of the transmittal of the Notice of Conversion to Borrower, the Common Stock has a closing bid which is 5% or lower than that set forth in the Notice of Conversion, then Holder maintains the option and sole discretion to rescind the applicable Notice of Conversion (“ Rescindment ”) pursuant to which such Conversion Shares were issuable with a “Notice of Rescindment”. This Note shall remain convertible before and after the Maturity Date hereof until this Note is repaid or converted in full.
1.5 Concerning the Shares . The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless (i) such shares are sold pursuant to an effective registration statement under the Act or (ii) Borrower or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule) (“ Rule 144 ”) or (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an accredited investor, as defined under the Act. Except as otherwise provided in the Loan Agreement (and subject to the removal provisions set forth below), until such time as the shares of Common Stock issuable upon conversion of this Note have been registered under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Note that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:
| 6 |
“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”
The legend set forth above shall be removed and Borrower shall issue to Holder a new certificate therefore free of any transfer legend if (i) Borrower or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under the Act, which opinion shall be reasonably accepted by Borrower so that the sale or transfer is effected or (ii) in the case of the Common Stock issuable upon conversion of this Note, such security is registered for sale by Holder under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold. In the event that Borrower does not accept the opinion of counsel provided by the Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or Regulation S, at the Deadline, it will be considered an Event of Default pursuant to Section 3.1 of the Note.
1.6 Effect of Certain Events .
(a) Effect of Merger, Consolidation, Etc . At the option of Holder, the sale, conveyance or disposition of all or substantially all of the assets of Borrower, the effectuation by Borrower of a transaction or series of related transactions in which more than 50% of the voting power of Borrower is disposed of, or the consolidation, merger or other business combination of Borrower with or into any other Person (as defined below) or Persons when Borrower is not the survivor shall either: (i) be deemed to be an Event of Default (as defined in Article III) pursuant to which Borrower shall be required to pay to Holder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof. “ Person ” shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization.
(b) Adjustment Due to Merger, Consolidation, Etc . If, at any time when this Note is issued and outstanding and prior to conversion of all amounts owed under the Note, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of Borrower shall be changed into the same or a different number of shares of another class or classes of stock or securities of Borrower or another entity, or in case of any sale or conveyance of all or substantially all of the assets of Borrower other than in connection with a plan of complete liquidation of Borrower, then Holder of this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which Holder would have been entitled to receive in such transaction had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of Holder of this Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion hereof. Borrower shall not affect any transaction described in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but in any event at least fifteen (15) days prior written notice) of the record date of the special meeting of shareholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time Holder shall be entitled to convert this Note) and (b) the resulting successor or acquiring entity (if not Borrower) assumes by written instrument the obligations of this Section 1.6(b). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers, or share exchanges.
| 7 |
(c) Adjustment Due to Distribution . If Borrower shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to Borrower’s shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a “ Distribution ”), then Holder of this Note shall be entitled, upon any conversion of this Note after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.
(d) Adjustment Due to Dilutive Issuance . If, at any time when any Notes are issued and outstanding, Borrower issues or sells, or in accordance with this Section 1.6(d) hereof is deemed to have issued or sold, except for shares of Common Stock issued directly to vendors or suppliers of Borrower in satisfaction of amounts owed to such vendors or suppliers (provided, however, that such vendors or suppliers shall not have an arrangement to transfer, sell or assign such shares of Common Stock prior to the issuance of such shares), any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “ Dilutive Issuance ”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the consideration per share received by Borrower in such Dilutive Issuance.
Borrower shall be deemed to have issued or sold shares of Common Stock if Borrower in any manner issues or grants any warrants, rights or options (not including employee stock option plans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock (“ Convertible Securities ”) (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as “ Options ”) and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon the exercise of such Options” is determined by dividing (i) the total amount, if any, received or receivable by Borrower as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to Borrower upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options.
| 8 |
Additionally, Borrower shall be deemed to have issued or sold shares of Common Stock if Borrower in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options), and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share. For the purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon such conversion or exchange” is determined by dividing (i) the total amount, if any, received or receivable by Borrower as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to Borrower upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.
(e) Purchase Rights . If, at any time when this Note remains issued and outstanding, Borrower issues any convertible securities or rights to purchase stock, warrants, securities or other property (the “ Purchase Rights ”) pro rata to the record holders of any class of Common Stock, then Holder of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(f) Notice of Adjustments . Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described in this Section 1.6, Borrower, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. Borrower shall, upon the written request at any time of Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of the Note.
1.7 Status as Shareholder . Upon submission of a Notice of Conversion by Holder, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such Holder’s allocated portion of the Reserved Amount or Maximum Share Amount) shall be deemed converted into shares of Common Stock and (ii) Holder’s rights as a Holder of such converted portion of this Note shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by Borrower to comply with the terms of this Note. Notwithstanding the foregoing, if a Holder has not received certificates for all shares of Common Stock prior to the third (3rd) business day after the expiration of the Deadline with respect to a conversion of any portion of this Note for any reason, then (unless Holder otherwise elects to retain its status as a holder of Common Stock by so notifying Borrower) Holder shall regain the rights of a Holder of this Note with respect to such unconverted portions of this Note and Borrower shall, as soon as practicable, return such unconverted Note to Holder or, if the Note has not been surrendered, adjust its records to reflect that such portion of this Note has not been converted. In all cases, Holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Section 1.3) for Borrower’s failure to convert this Note.
| 9 |
1.8 Repayment . Notwithstanding anything to the contrary contained in this Note, subject to the terms of this Section 1.8, at any time Borrower shall have the right, exercisable on not less than five (5) Trading Days prior written notice to the Holder of this Note, to repay the outstanding balance on this Note (principal, accrued interest, and all other amounts due hereunder), in full. Any notice of repayment hereunder (a “ Repayment Notice ”) shall be delivered to the Holder and shall state: (1) that the Borrower is exercising its right to repay the Note; and (2) the date of repayment which shall be not more than ten (10) Trading Days from the date of the Repayment Notice. On the date fixed for repayment (the “ Repayment Date ”), the Borrower shall make payment of the Repayment Amount (as defined below) to or upon the order of the Holder as specified by the Holder in writing to the Borrower at least one (1) business day prior to the Repayment Date. If the Borrower exercises its right to repay the Note, the Borrower shall make payment to the Holder of an amount in cash (the “ Repayment Amount ”) equal to the Repayment Factor (as defined below), multiplied by the sum of: (i) the then outstanding principal amount of this Note; (ii) accrued and unpaid interest on the unpaid principal amount of this Note to the Repayment Date; (iii) Default Interest, if any, on the amounts referred to in clauses (i) and (ii); and, (iv) all other amounts owed to Holder under this Note. For purposes hereof, the “ Repayment Factor ” shall equal the percentage set forth below with respect to each Repayment Date beside such Repayment Factor:
| The Repayment Factor is: | If the Optional Repayment Date occurs: | |
| 100% | 1-360 days after the Issue Date | |
| 110% | 361 days and beyond after the Issue Date |
Article II. CERTAIN COVENANTS
2.1 Distributions on Capital Stock . So long as Borrower shall have any obligation under this Note, Borrower shall not without Holder’s written consent (a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock; or, (b) directly or indirectly or through any subsidiary make any other payment or distribution in respect of its capital stock except for distributions pursuant to any shareholders’ rights plan which is approved by a majority of Borrower’s disinterested directors.
2.2 Restriction on Stock Repurchases . So long as Borrower shall have any obligation under this Note, Borrower shall not without Holder’s written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of Common Stock or any warrants, rights or options to purchase or acquire any such shares.
2.3 Borrowings; Liens . So long as Borrower shall have any obligation under this Note, Borrower shall not, without Holder’s written consent, create, incur, assume guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any person, firm, partnership, joint venture or corporation, except by the endorsement of negotiable instruments for deposit or collection, or suffer to exist any liability for borrowed money, except (a) borrowings in existence or committed on the date hereof; (b) indebtedness to trade creditors financial institutions or other lenders incurred in the ordinary course of business; (c) borrowings, the proceeds of which shall be used to repay this Note; or, (d) enter into, create or incur any liens, claims or encumbrances of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom, securing any indebtedness occurring after the date hereof.
2.4 Sale of Assets . So long as Borrower shall have any obligation under this Note, Borrower shall not, without Holder’s written consent, sell, lease, or otherwise dispose of any significant portion of its assets outside the ordinary course of business. Any consent to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition.
2.5 Advances and Loans . So long as Borrower shall have any obligation under this Note, Borrower shall not, without Holder’s written consent, lend money, give credit or make advances to any person, firm, joint venture or corporation, including, without limitation, officers, directors, employees, subsidiaries and affiliates of Borrower, except loans, credits or advances (a) in existence or committed on the date hereof; (b) made in the ordinary course of business; or, (c) not in excess of $10,000.
| 10 |
2.6 Preservation of Existence, etc . Borrower shall maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, its existence, rights and privileges, and become or remain, and cause each of its Subsidiaries (other than dormant Subsidiaries that have no or minimum assets) to become or remain, duly qualified and in good standing in each jurisdiction in which the character of the properties owned or leased by it or in which the transaction of its business makes such qualification necessary.
2.7 Non-circumvention . Borrower hereby covenants and agrees that Borrower will not, by amendment of its Articles of Incorporation or Bylaws, or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all the provisions of this Note and take all action as may be required to protect the rights of Holder.
2.8 Charter . So long as Borrower shall have any obligations under this Note, Borrower shall not amend its charter documents, including without limitation its certificate of incorporation and bylaws, in any manner that materially and adversely affects any rights of Holder hereunder.
Article III. EVENTS OF DEFAULT
3.1 Event of Default . Any of the following events shall constitute an event of default hereunder (each, an “ Event of Default ”):
(a) Failure to Pay Principal or Interest . Borrower fails to pay the principal hereof or interest thereon when due on this Note, whether at maturity, upon acceleration or otherwise. Any amount of principal on this Note which is not paid when due shall bear additional interest at the Default Interest rate.
(b) Conversion and the Shares . Borrower fails to reserve the Reserved Amount required for Holder at all times, issue shares of Common Stock to Holder (or announces or threatens in writing that it will not honor its obligation to do so) upon exercise by Holder of the conversion rights of Holder in accordance with the terms of this Note, fails to transfer or cause its transfer agent to transfer (issue) (electronically or in certificated form) any certificate for shares of Common Stock issued to Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, Borrower directs its transfer agent not to transfer or delays, impairs, and/or hinders its transfer agent in transferring (or issuing) (electronically or in certificated form) any certificate for shares of Common Stock to be issued to Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, or fails to remove (or directs its transfer agent not to remove or impairs, delays, and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note (or makes any written announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any written announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for three (3) business days after Holder shall have delivered a Notice of Conversion. It is an obligation of Borrower to remain current in its obligations to its transfer agent. It shall be an event of default of this Note, if a conversion of this Note is delayed, hindered, or frustrated due to a balance owed by Borrower to its transfer agent. If at the option of Holder, Holder advances any funds to Borrower’s transfer agent in order to process a conversion, such advanced funds shall be paid by Borrower to Holder within forty eight (48) hours of a demand from Holder.
(c) Breach of Covenants . Borrower breaches any material covenant or other material term or condition contained in this Note and any collateral documents including but not limited to the Loan Agreement.
| 11 |
(d) Breach of Representations and Warranties . Any representation or warranty of Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Loan Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of Holder with respect to this Note or the Loan Agreement.
(e) Receiver or Trustee . Borrower or any subsidiary of Borrower shall make an assignment for the benefit of creditors or commence proceedings for its dissolution, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed for Borrower or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment.
(f) Bankruptcy . Bankruptcy, insolvency, reorganization, or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Borrower or any subsidiary of Borrower, or Borrower admits in writing its inability to pay its debts generally as they mature, or have filed against it an involuntary petition for bankruptcy relief, all under federal or state laws as applicable or Borrower admits in writing its inability to pay its debts generally as they mature, or have filed against it an involuntary petition for bankruptcy relief, all under international, federal or state laws as applicable.
(g) Liquidation . Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.
(h) Maintenance of Assets . The failure by Borrower to maintain any material intellectual property rights, personal, real property or other assets which are necessary to conduct its business (whether now or in the future).
(i) Cross-Default . Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default by Borrower of any covenant or other term or condition contained in any of the Other Agreements (as defined herein), after the passage of all applicable notice and cure or grace periods, shall, at the option of Holder, be considered a default under this Note and the Other Agreements, in which event Holder shall be entitled (but in no event required) to apply all rights and remedies of Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder. “ Other Agreements ” means, collectively, all agreements and instruments between, among or by: (i) Borrower, and (ii) Holder or any other third party, including, without limitation, promissory notes; provided, however, the term “Other Agreements” shall not include this Note. Each of the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future debt of Borrower to Holder.
(j) Judgments . Any money judgment, writ or similar process shall be entered or filed against Borrower or any subsidiary of Borrower or any of its property or other assets for more than $100,000.00, and shall remain unvacated, unbonded or unstayed for a period of twenty (20) days unless otherwise consented to by Holder, which consent will not be unreasonably withheld.
(k) Replacement of Transfer Agent . In the event that Borrower proposes to replace its transfer agent and Borrower fails to provide, prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered pursuant to the Loan Agreement (including but not limited to the provision to irrevocably reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer agent to Borrower and Borrower.
(l) Bid Price . If Borrower loses the “bid” price for its Common Stock ($0.0001 on the “Ask” with zero market makers on the “Bid” per Level 2) and/or a market (including the OTCBB, OTCQB or an equivalent replacement exchange) for its Common Stock.
| 12 |
(m) SEC Filing Obligations . If at any time after the Issue Date Borrower, for any reason, is delinquent in its filing obligations with SEC.
3.2 Result of Event of Default . Upon the occurrence and during the continuation of any Event of Default specified in Section 3.1, above:
(a) Amount Due . The Note shall become immediately due and payable, and Borrower shall pay to Holder, in full satisfaction of its obligations hereunder, an amount equal to one hundred fifty percent (150%) times the sum of (i) the then outstanding principal amount of this Note; (ii) accrued and unpaid interest on the unpaid principal amount of this Note to the date of payment (the “ Mandatory Prepayment Date ”); (iii) Default Interest, if any, on the amounts referred to in clauses (i) and/or (ii); (iv) and, all costs, including, without limitation, legal fees and expenses, of collection; and, (v) any and all other amounts owed to Holder hereunder, collectively referred to herein as “ Default Amount ”. All amounts shall be due without demand, presentment, or notice, all of which hereby are expressly waived.
(b) Conversion Price . If Borrower fails to pay the Default Amount within two (2) business days of written notice that such amount is due and payable, then Holder shall have the right at any time, so long as Borrower remains in default to require Borrower, upon written notice, to immediately issue, in lieu of the Default Amount, the number of shares of Common Stock of Borrower equal to the Default Amount divided by the Conversion Price or Alternate Conversion Price, as chosen by Holder, by applying a discount rate of eighty percent (80%).
(c) Other Remedies . Holder shall be entitled to exercise all other rights and remedies available at law or in equity.
Article IV. MISCELLANEOUS
4.1 Failure or Indulgence Not a Waiver . No failure or delay on the part of Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
4.2 Notices .
(a) Method and Delivery . All notices, requests and demands hereunder shall be in writing and delivered by hand, by Electronic Transmission, by mail, or by recognized commercial over-night delivery service (such as Federal Express or UPS), and shall be deemed given (a) if by hand delivery, upon such delivery; (b) if by Electronic Transmission, twenty-four (24) hours after transmission; (c) if by mail, forty-eight (48) hours after deposit in the United States mail, first class, registered or certified mail, postage prepaid; or, (d) if by recognized commercial over-night delivery service, upon such delivery.
(b) Consent to Electronic Transmission . Each party hereby expressly consents to the use of Electronic Transmission for communications and notices under this Note. For purposes of this Note, “Electronic Transmission” means a communication (i) delivered by Fax or E-Mail when directed to the Fax number or E-Mail address, respectively, for that recipient on record with the sending party; and, (ii) that creates a record that is capable of retention, retrieval, and review, and that may thereafter be rendered into clearly legible tangible form.
(c) Address Changes . Any Party may alter the Fax number, E-Mail address, physical address, or postage address to which communications or copies are to be sent by giving notice of such change of address to the other party in accordance with the provisions of this Section 4.2.
| 13 |
4.3 Amendments . This Note and any provision hereof may only be amended by an instrument in writing signed by Borrower and Holder.
4.4 Assignability . Holder may assign or transfer this Note to any transferee at its sole discretion. This Note shall be binding upon Borrower and its successors and assigns, and shall inure to be the benefit of Holder and its successors and assigns. Each transferee of this Note must be an “accredited investor” (as defined in Rule 501(a) of the Act). Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with a bona fide margin account or other lending arrangement. Holder and any assignee, by acceptance of this Note, acknowledge and agree that following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note represented by this Note may be less than the amount stated on the face hereof.
4.5 Cost of Collection . Upon an Event of Default, Borrower shall pay Holder hereof reasonable costs of collection, including reasonable attorneys’ fees.
4.6 Governing Law . This Note shall be governed by and construed in accordance with the laws of the State of Nevada without regard to principles of conflicts of laws. The parties hereby warrant and represent that the selection of Nevada law as governing under this Note (i) has a reasonable nexus to each of the parties and to the transactions contemplated by the Note; and (ii) does not offend any public policy of Nevada. Any action brought by either party against the other arising out of or related to this Note, or any other agreements between the parties, shall be commenced only in the state or federal courts of general jurisdiction located in Orange County, California. The parties to this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens .
BORROWER AND HOLDER EACH HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY .
The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Note or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Note or any other related transaction document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
4.7 Certain Amounts . Whenever pursuant to this Note Borrower is required to pay an amount in excess of the outstanding principal amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest plus Default Interest on such interest, Borrower and Holder agree that the actual damages to Holder from the receipt of cash payment on this Note may be difficult to determine and the amount to be so paid by Borrower represents stipulated damages and not a penalty and is intended to compensate Holder in part for loss of the opportunity to convert this Note and to earn a return from the sale of shares of Common Stock acquired upon conversion of this Note at a price in excess of the price paid for such shares pursuant to this Note. Borrower and Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to Holder from the receipt of a cash payment without the opportunity to convert this Note into shares of Common Stock.
| 14 |
4.8 Loan Agreement . By its acceptance of this Note, each party agrees to be bound by all terms and conditions of the Loan Agreement.
4.9 Notice of Corporate Events . Except as otherwise provided below, Holder shall have no rights as a shareholder of Borrower unless and only to the extent that it converts this Note into Common Stock. Borrower shall provide Holder with prior notification of any meeting of Borrower’s shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by Borrower of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of Borrower or any proposed liquidation, dissolution or winding up of Borrower, Borrower shall mail a notice to Holder, at least twenty (20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. Borrower shall make a public announcement of any event requiring notification to Holder hereunder substantially simultaneously with the notification to Holder in accordance with the terms of this Section 4.9 including, but not limited to, name changes, recapitalizations, etc. as soon as possible under law.
4.10 Usury . Notwithstanding any provision in this Note or the related transaction documents to the contrary, the total liability for payments of interest and payments in the nature of interest, including, without limitation, all charges, fees, exactions, or other sums which may at any time be deemed to be interest, shall not exceed the limit imposed by the usury laws of the jurisdiction governing this Note or any other applicable law. In the event the total liability of payments of interest and payments in the nature of interest, including, without limitation, all charges, fees, exactions or other sums which may at any time be deemed to be interest, shall, for any reason whatsoever, result in an effective rate of interest, which for any month or other interest payment period exceeds the limit imposed by the usury laws of the jurisdiction governing this Note, all sums in excess of those lawfully collectible as interest for the period in question shall, without further agreement or notice by, between, or to any party hereto, be applied to the reduction of the outstanding principal balance due hereunder immediately upon receipt of such sums by Holder hereof, with the same force and effect as though the Company had specifically designated such excess sums to be so applied to the reduction of the principal balance then outstanding, and Holder hereof had agreed to accept such sums as a penalty-free payment of principal; provided, however, that Holder may, at any time and from time to time, elect, by notice in writing to the Company, to waive, reduce, or limit the collection of any sums in excess of those lawfully collectible as interest, rather than accept such sums as a prepayment of the principal balance then outstanding. It is the intention of the parties that the Company does not intend or expect to pay, nor does Holder intend or expect to charge or collect any interest under this Note greater than the highest non-usurious rate of interest which may be charged under applicable law.
4.11 Remedies . Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, Borrower acknowledges that the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by Borrower of the provisions of this Note, that Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required. No provision of this Note shall alter or impair the obligation of Borrower, which is absolute and unconditional, to pay the principal of, and interest on, this Note at the time, place, and rate, and in the form, herein prescribed.
| 15 |
4.12 Severability . In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform to such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.
4.13 Specific Dispute Resolution . In the case of a dispute as to the determination of the Conversion Price, Conversion Amount, any prepayment amount or Default Amount, Default Sum, Issue, Closing or Maturity Date, the closing bid price, or fair market value (as the case may be) or the arithmetic calculation of the Conversion Price or the applicable prepayment amount(s) (as the case may be), Borrower or Holder shall submit the disputed determinations or arithmetic calculations via Fax or E-Mail (i) within two (2) Business Days after receipt of the applicable notice giving rise to such dispute to Borrower or Holder or (ii) if no notice gave rise to such dispute, at any time after Holder learned of the circumstances giving rise to such dispute. If Holder and Borrower are unable to agree upon such determination or calculation within two (2) Business Days of such disputed determination or arithmetic calculation (as the case may be) being submitted to Borrower or Holder, then Borrower shall, within two (2) Business Days, submit via Fax or E-Mail (a) the disputed determination of the Conversion Price, the closing bid price, the or fair market value (as the case may be) to an independent, reputable investment bank selected by Borrower and approved by Holder or (b) the disputed arithmetic calculation of the Conversion Price, Conversion Amount, any prepayment amount or Default Amount, Default Sum to an independent, outside accountant selected by Holder that is reasonably acceptable to Borrower. Borrower shall cause at its expense the investment bank or the accountant to perform the determinations or calculations and notify Borrower and Holder of the results no later than ten (10) Business Days from the time it receives such disputed determinations or calculations. Such investment bank’s or accountant’s determination or calculation shall be binding upon all parties absent demonstrable error.
4.14 Terms of Future Financings . So long as this Note is outstanding, upon any issuance by Borrower or any of its subsidiaries of any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to Holder in this Note, then Borrower shall notify Holder of such additional or more favorable term and such term, at Holder’s option, shall become a part of the transaction documents with Holder. The types of terms contained in another security that may be more favorable to the holder of such security include, but are not limited to, terms addressing conversion discounts, prepayment rate, conversion lookback periods, interest rates, original issue discounts, stock sale price, private placement price per share, and warrant coverage.
4.15 Disclosure . Upon receipt or delivery by the Company of any notice in accordance with the terms of this Note, unless the Company has in good faith determined that the matters relating to such notice do not constitute material, non-public information relating to the Company or any of its Subsidiaries, the Company shall within one (1) Trading Day after any such receipt or delivery, publicly disclose such material, non-public information on a Current Report on Form 8-K or otherwise. In the event that the Company believes that a notice contains material, non-public information relating to the Company or any of its Subsidiaries, the Company so shall indicate to such Holder contemporaneously with delivery of such notice, and in the absence of any such indication, Holder shall be allowed to presume that all matters relating to such notice do not constitute material, non-public information relating to the Company or its Subsidiaries.
[EXECUTION APPEARS ON NEXT PAGE]
| 16 |
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer as of the date first above written.
| FUQUAN FINANCIAL COMPANY | ||
| By: | ||
| Name: | ||
| Title: | ||
| 17 |
EXHIBIT A
NOTICE OF CONVERSION
The undersigned hereby elects to convert $_________________principal amount of the Note (defined below) together with $________________ of accrued and unpaid interest thereto, totaling $_____________ into that number of shares of Common Stock to be issued pursuant to the conversion of the Note (“Common Stock”) as set forth below, of Waterside Capital Corporation, a Nevada corporation (the “Borrower”), according to the conditions of the convertible note of Borrower dated as of 19 September 2017 (the “Note”), as of the date written below. No fee will be charged to Holder for any conversion, except for transfer taxes, if any.
Box Checked as to applicable instructions:
| [ ] | Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal At Custodian system (“DWAC Transfer”). | |
| Name of DTC Prime Broker: | ||
| Account Number: | ||
| [ ] | The undersigned hereby requests that Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on Holder’s calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto: | |
| Name: | |||
| Address: | |||
| Date of Conversion: | |||
| Applicable Conversion Price: | $ | ||
| Shares of Common Stock to be Issued: | |||
| Amount of Principal Balance Remaining after conversion: | |||
| Accrued and unpaid interest remaining: | |||
| Default Amounts & Penalties remaining: | |||
| HOUYU HUANG |
| Date: | |||
| 18 |
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Meihua Li, Chief Executive Officer of Fuquan Financial Company, certify that:
1. I have reviewed this annual report on Form 10-K of Fuquan Financial Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: January, 22, 2019 | By: | /s/ Meihua Li |
| MEIHUA LI, | ||
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Hua Huang, Chief Financial Officer of Fuquan Financial Company, certify that:
1. I have reviewed this annual report on Form 10-K of Fuquan Financial Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: January 22, 2019 | By: | /s/ Hua Huang |
| HUA HUANG, | ||
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and 18 U.S.C. § 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Fuquan Financial Company (the “Company”) hereby certifies, to such officer’s knowledge, that:
| (i) | the accompanying report on Form 10-K of the Company for the fiscal year ended March 31, 2018, to which this Certificate is attached (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and | |
| (ii) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: January 22, 2019 | By: | /s/ Meihua Li |
| MEIHUA LI, | ||
| Chief Executive Officer |
A signed original of this written statement required by Section 906 has been provided to Fuquan Financial Company and will be retained by Fuquan Financial Company and furnished to the Securities and Exchange Commission or its staff upon request.
This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Fuquan Financial Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and 18 U.S.C. § 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Fuquan Financial Company (the “Company”) hereby certifies, to such officer’s knowledge, that:
| (i) | the accompanying report on Form 10-K of the Company for the fiscal year ended March 31, 2018, to which this Certificate is attached (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and | |
| (ii) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: January 22, 2019 | By: | /s/ Hua Huang |
| HUA HUANG, | ||
| Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to Fuquan Financial Company and will be retained by Fuquan Financial Company and furnished to the Securities and Exchange Commission or its staff upon request.
This certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Fuquan Financial Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.