Item 1. Description of Business.
(a) Overview
The terms "we", "Company"
and "CAT9" refer to CAT9 Group Inc. , a Delaware corporation, formerly known as ANDES 4 Inc. ("ANDES 4"), its wholly-owned
subsidiary, CAT9 Holdings Ltd, a company organized under the laws of the Cayman Islands, ("CAT9 Cayman"); CAT9 Cayman's wholly-owned
subsidiary, CAT9 Investment China Limited, a company organized under the laws of Hong Kong ("CAT9 HK"); and its wholly-owned
subsidiary, Chongqing CAT9 Industrial Company Ltd.(“Chongqing CAT9 or “CQC9”), a company organized under the laws of
the People's Republic of China.
(b) Business of Issuer
On December 27, 2016, CAT9 closed a share exchange
transaction pursuant to which CAT9 became the 100% parent of CAT9 Cayman, assumed the operations of CAT9 Cayman and its subsidiaries,
including CAT9 Investment China, and Chongqing CAT9 Industrial Company Ltd.
CAT9 Cayman is a holding company incorporated
on August 20, 2015, under the laws of the Cayman Islands. CAT9 Investment China Limited was incorporated on September 10, 2015, under
the laws of Hong Kong. CAT9 Investment China is a window for the group to handle the business operations outside of China.
Chongqing CAT9 Industrial Company Ltd., (“Chongqing
CAT9 or “CQC9”),fka Chongqing Field Industrial Company Ltd. is registered in Chongqing Province, PRC (People’s Republic
of China)and was incorporated under the laws of the PRC on June 26, 2014, and operates through strategic alliance and distribution rights
agreements in the PRC, the Company prior to early 2017 was previously engaged in the marketing and sales of (1) fresh fruits, vegetables
meats (including primarily organic and non-organic from both domestically grown and imported (2) Acquisition of land for the planting
of Acer truncatum trees and harvesting of Acer truncatum seeds to produce edible oil, (3) providing Hi-Tech cooperative farm management
services in the PRC and overseas and (4) farm machinery sales.
In
early 2017, management suspended its food and machinery sales business in favor of capitalizing on the growing Acer truncatum industry
within China and decided that it would direct efforts towards its Acer truncatum plantation operations during 2017.
As of the date of this Current Report on Form 10-K,
the Company employs a staff of 18, including 2 part time positions and is located in Chengdu at Room 2001, Dading Century Square, No 387,
Tianren Road, Wuhou District, Chengdu, Sichuan Province, China 610000.
Products and Market
Chongqing CAT9 operates Acer
truncatum plantations and operations in China. Acer truncatum is a maple tree known as the “Shangtung
maple” which is native to China that contains an extract from its leaves and seeds called Nervonic acid, or bunge seed oil. The
tree itself typically grows 20-25 feet tall, blooms in the month of April, and is primarily a full sun to part shade tree. It is the principal
extract of the Acer truncatum plant which Acer truncatum oil is derived. Nervonic acid is a rich omega-9 fatty acid that is known to be
beneficial to memory related brain health, anti-aging, blood lipid regulation, and anti-fatigue symptoms. There are a few alternate sources
where nervonic acid can be derived, however at much less yield than from an Acer truncatum plant.
Nervonic Acid content (mg/100g)
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Acer truncatum
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580
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Brassica Oil Seeds
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69-83
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Sesame Seeds
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35
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Macadamia Nuts
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18
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Tropaeolum Speciosum
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10
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Lunaria (Money Plant)
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8
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King Salmon (Chinook)
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140
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Sockeye Salmon
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40
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Nervonic
Acid has been researched and tested to provide improved brain cell activity and studies have shown it to improve and reduce the risks
of Alzheimer’s disease.
Source: Herb Nutritionals
Acer truncatum farm #1 Yunnan Province, China
Acer truncatum Tree
Factory floor Acer truncatum finished product
ready to ship
Factory floor bottle and assembly line
Suppliers
represented by CAT9
ShandongRun’an Biotech Co., Ltd.
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Acer truncatum oil,and sandwich gel candy
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HezeZonghooJianyuan Biotech Co., Ltd.
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Acer truncatum oil
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CAT9 also
seeks to establish five (5) additional planting bases of 350 acres each. These bases will become a CAT9 Group asset over years which we
will seek to manage and develop to include land acquisitions, planting, and maintenance. In addition, we are planning to contract approximately
17,000 acres of existing forestry with local individuals, organizations and or provincial governments to insure our supply of raw materials.
We are also planning to invest further into our research and development (R&D) to improve our processing yield of Acer truncatum and
nervonic acid. This includes the research and development of planting technology, products, and process technology. We also plan to increase
our spending on our information systems; we will seek to invest in a fully integrated information system to monitor crop production, fertilization,
irrigation, and harvesting yield. We will also add quality control measures, POS systems, packaging, logistics, and e-commerce systems.
A JIT (just in time) system to monitor inventory and critical path raw material requirements will also be implemented as well as a sourcing
and seasonal cost data base of all suppliers for efficient and cost effective purchasing.
Our funds are kept in both financial institutions
located in Hong Kong (“HK”) and the PRC, the latter does not provide insurance for amounts on deposit. Moreover, we are subject
to the regulations of the PRC, which restrict the transfer of cash from the PRC, except under certain specific circumstances. Accordingly,
such funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC.
We generally finance our operations through
operating profit and borrowings from our directors. As of the date of this Form 10-K Annual Report, we have not experienced any
difficulties due to a shortage of capital, we have not experienced any difficulty in raising funds through loans from banks, outside
parties and financial institutions, and we have not experienced any liquidity problems in settling our payables in the normal course
of business and repaying our loans when they come due. We believe that the level of financial resources is a significant factor for
our future development and accordingly, we may determine from time to time to raise capital through private debt or equity financing
to strengthen our financial position, to expand our facilities and to provide us with additional flexibility to take advantage of
business opportunities. No assurances can be given that we will be successful in raising such additional capital on terms acceptable
to us. However, due to potential ongoing COVID-19 risks in
China, we may encounter difficulties in the future if we are required to borrow funds or obtain a loan during such periods. We can
make no assurances that if we do require financing that we could do so at favorable rates or at all which may lead to economic
losses for our company. (See Special COVID risks within our Risk Factors section).
Our Products
Our finished
product gift box (Edible Vegetable Blending Oil added with Acer truncatum Seed Oil)
Our finished
product gift box (5L Rapeseed oil)
Our finished
product Acer truncatum (Acer truncatum Seed Oil In Present Box- 100% Acer truncatum
Seed Oil)
Our finished
product Acer truncatum (Edible Vegetable Blending Oil added with Acer truncatum Seed Oil
with Grape Seed Oil)
Our finished
product Acer truncatum (Acer truncatum Seed Oil Sandwich Gel Candy)
Our finished
product Acer truncatum (Acer truncatum Seed Oil Gel Candy)
Our finished
product Acer truncatum (Nervonic Acid Candy)
We have been granted multiple trademarks in China
and one trademark in the United States.
We have a total of 27 trademarks, 26 of them in China
with the National Intellectual Property Administration and 1 in the United States with the United States Patent and Trademark Office.
These trademark details range from food, drinks, satellite navigation instruments, mobile phones, edible oils, snacks, honey and cooking
oils. We are currently using 6 of the 27 trademarks for our products that we offer.
Risks Related to Our Business and Industry
We are a relatively new entrant in the Acer truncatum
industry. In early 2017, our management believed that economic opportunities for the Company were favorable in the Acer truncatum industry
and has established a presence with the signing of several plantation agreements. There is considerable risk in the Acer truncatum industry
and there can be no assurance that we will be successful in our endeavor to lease additional land, or purchase and harvest additional
Acer truncatum trees. There is also no assurances that if we are unsuccessful in our Acer truncatum business that we can pivot our company
and re-engage our food distribution and farm equipment sales business.
Acer truncatum is claimed to have nutritional and health benefits
but we cannot assure you that all or any of the claims made by others are accurate.
Acer truncatum’s health benefits are
claimed by studies and users of its extracted oil. These users generally use Acer truncatum products due to word of mouth or other advertising
by manufacturers of the product. Additionally, there are little to no restrictions or health regulations on Acer truncatum in China at
this time. The Chinese Food and Drug Administration or State Food and Drug Administration (SFDA) of China has not opined on Acer truncatum
at this time. While there are some resources that claim through abstract writings that there are health benefits that support brain health
by way of high levels of nervonic acid found in Acer truncatum oil, the Company cannot make any assurances that these claims are in any
way completely accurate. Claims have been made by various sources that Nervonic acid can repair damaged brain nerve pathways and promote
the regeneration of nerve cells, used to treat schizophrenia, psychosis, peroxisomal disorders, diabetes, alcoholism and other conditions.
Management has not commissioned any third party
reports to support any basis to these claims; however, it is management’s personal belief that the nature of these claims made by
independent studies is credible.
We are subject to natural disasters.
Acer truncatum trees are generally strong and
adaptable but can be damaged by harsh weather, diseases and crop pests. If our crops are damaged by natural disasters such as floods,
drought, storms, or other farming risks, our business may suffer, and our investors may lose their entire investment. Additionally, there
are no known serious insect or disease problems that afflict Acer truncatum trees.
Increased Chinese government regulation of our production capacity
and/or our sales and marketing operations could impact our business.
There are presently no significant Chinese
government regulations of the health claims made by the participants in the Acer truncatum business regarding their products. Additionally,
there are limited government regulations over the conditions under which we manufacture our products. While other countries such as the
United States and the European Union have extensive regulations of nutraceutical and plant-based products, including strict health-related
claims, there are no current regulations in China to the degree of these other countries.
Our business is reliant on retaining and hiring key personnel
that are in high demand in China.
We operate within an intensely competitive
environment for key personnel in such areas as biologists, chemists, technicians, production supervisors, and sales and marketing personnel.
If we are unable to fulfill these roles as we grow as a company, our future success will be severely impaired, and we will be unable to
implement our business plan.
We may have difficulty establishing adequate
management and financial controls in China.
We may have difficulty
in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls
that are expected for a United States public company. Despite our record as a fully-reporting company on EDGAR, if we cannot continue
to maintain such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet U.S. standards.
Our success depends on collaborative
partners, licensees and other third parties over whom we have limited control.
We have made a number
of agreements to lease land to develop plantations for our Acer truncatum trees with third parties. To the extent we enter into these
agreements, we cannot assure you that we will not encounter discourse or problems that may lead to loss of production. Additionally, due
to the nature of the process of developing these plantations, we require arrangements with manufacturing facilities, marketing and commercialization
partners of our products. There are no assurances that we will be able to establish or maintain collaborations that are important to our
business on favorable terms, or at all.
A number of risks may arise
from the Company's dependence on collaborative agreements with third parties. Product development and commercialization efforts could
be adversely affected if any collaborative partner:
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terminates or suspends its agreement with us;
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causes delays;
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fails to timely develop or manufacture in adequate quantities;
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otherwise fails to meet its contractual obligations.
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Our collaborative partners could pursue other technologies or develop alternative products that could compete with the products we are developing.
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We have limited
business insurance coverage.
We do not have any
business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster
may result in our incurring substantial costs and the diversion of our resources.
Price controls may affect both our revenues
and net income.
The laws of the PRC provide
for the government to fix and adjust prices. To the extent that we are subject to price control, our revenue, gross profit, gross margin
and net income will be affected since the revenue we derive from our sales will be limited and, unless there is also price control on
the products that we purchase from our suppliers, we may face no limitation on our costs. Further, if price controls affect both our revenue
and our costs, our ability to be profitable and the extent of our profitability will be effectively subject to determination by the applicable
regulatory authorities in the PRC.
Our operations may
not develop in the same way or at the same rate as might be expected if the PRC economy were similar to the totally market-oriented economies
of member countries of the Organization for Economic Cooperation and Development ("OECD").
The economy of the PRC has
historically been a nationalistic, "planned economy," meaning it functions and produces according to governmental plans and
pre-set targets or quotas. In certain aspects, the PRC's economy has been making a transition to a more market-oriented economy, although
the government imposes price controls on certain products and in certain industries. However, we cannot predict the future direction of
these economic reforms or the effects these measures may have. The economy of the PRC also differs from the economies of most countries
belonging to the OECD, an international group of member countries sharing a commitment to democratic government and market economy. For
instance:
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the level of state-owned enterprises in the PRC, as well as the level of governmental control over the allocation of resources is greater than in most of the countries belonging to the OECD;
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the level of capital reinvestment is lower in the PRC than in other countries that are members of the OECD;
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the government of the PRC has a greater involvement in general in the economy and the economic structure of industries within the PRC than other countries belonging to the OECD;
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the government of the PRC imposes price controls on certain products and our products may become subject to additional price controls; and
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the PRC has various impediments in place that make it difficult for foreign firms to obtain local currency, unlike other countries belonging to the OECD where exchange of currencies is generally free from restriction.
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As a result of these
differences, our business may not develop in the same way or at the same rate as might be expected if the economy of the PRC were similar
to those of the OECD member countries.
Our failure to effectively manage growth could
harm our business.
We have rapidly and significantly expanded our operations
since our inception and will endeavor to further expand our operations in the future. Any additional significant growth in the market
for our services or our entry into new markets may require and expansion of our employee base for managerial, operational, financial,
sales and marketing and other purposes.
During any growth, we may face problems related to
our operational and financial systems and controls, including quality control and service capacities. We would also need to continue to
expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of
management to identify, recruit, maintain, integrate, and motivate new employees.
Aside from increased difficulties in the management
of human resources, we may also encounter working capital issues, as we will need increased liquidity to hire additional employees. For
effective growth management, we will be required to continue improving our operations, management, and financial systems and controls.
Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our
profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards
required by our existing and potential customers.
We may pursue future growth through strategic acquisitions and
alliances which may not yield anticipated benefits and may adversely affect our operating results, financial condition and existing business.
We may seek to grow in the future through strategic acquisitions
in order to complement and expand our business. The success of our acquisition strategy will depend on, among other things:
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the availability of suitable candidates;
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competition from other companies for the purchase of available candidates;
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our ability to value those candidates accurately and negotiate favorable terms for those acquisitions;
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the availability of funds to finance acquisitions;
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the ability to establish new informational, operational and financial systems to meet the needs of our business;
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the ability to achieve anticipated synergies, including with respect to complementary products or services; and
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the availability of management resources to oversee the integration and operation of the acquired businesses.
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If we are not successful in integrating
acquired businesses and completing acquisitions in the future, we may be required to reevaluate our acquisition strategy. We also
may incur substantial expenses and devote significant management time and resources in seeking to complete acquisitions. Acquired
businesses may fail to meet our performance expectations. If we do not achieve the anticipated benefits of an acquisition as rapidly
as expected, or at all, investors or analysts may not perceive the same benefits of the acquisition as we do. If these risks
materialize, our stock price could be materially adversely affected.
We face risks related to natural disasters, terrorist attacks
or other unpredictable events in China which could have a material adverse effect on our business and results of operations.
Our business could be materially and adversely
affected by natural disasters, terrorist attacks or other events in China where all of our operations are located. For example, in early
2008, parts of China suffered a wave of strong snow storms that severely impacted public transportation systems. In May 2008, Sichuan
Province in China suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties.
The May 2008 Sichuan earthquake has had a material adverse effect on the general economic conditions in the areas affected by the earthquake.
The occurrence of any future disasters such as earthquakes, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters
or other events, or our information system or communications network breaks down or operates improperly as a result of such events, our
facilities may be seriously damaged, and we may have to stop or delay operations. We may incur expenses relating to such damages, which
could have a material adverse effect on our business and results of operations.
We may adopt an equity incentive plan under
which we may grant securities to compensate employees and other services providers, which would result in increased share-based compensation
expenses and, therefore, reduce net income.
We may adopt an equity incentive plan under
which we may grant shares or options to qualified employees. Under current accounting rules, we would be required to recognize share-based
compensation as compensation expense in our statement of operations, based on the fair value of equity awards on the date of the grant,
and recognize the compensation expense over the period in which the recipient is required to provide service in exchange for the equity
award. We have not made any such grants in the past, and accordingly our results of operations have not contained any share-based compensation
charges. The additional expenses associated with share-based compensation may reduce the attractiveness of issuing stock options under
an equity incentive plan that we may adopt in the future. If we grant equity compensation to attract and retain key personnel, the expenses
associated with share-based compensation may adversely affect our net income. However, if we do not grant equity compensation, we may
not be able to attract and retain key personnel or be forced to expend cash or other compensation instead. Furthermore, the issuance of
equity awards would dilute the shareholders’ ownership interests in our company.
If we are unable to maintain or expand our
sales and marketing capabilities, and attract and retain skilled personnel, we may not be able to generate anticipated revenues.
Increasing our customer base and penetrating
our target markets will depend to a significant extent on our ability to expand our sales and marketing operations and activities. We
expect to be largely dependent on our sales force to obtain new customers. We also expect to be highly dependent on skilled computer programmers.
Competition for both are intense, and we may not be able to attract, integrate sufficient highly qualified personnel.
Our failure to obtain capital may significantly
restrict our proposed operations.
We will need to raise more capital to expand our business.
Future sources of capital may not be available to us when we need it or may be available only on unacceptable terms.
We are subject to the risk that certain key personnel,
including key employees named below, on whom we depend, in part, for our operations, will cease to be involved with us. The loss
of any these individuals would adversely affect our financial condition and the results of our operations.
We are dependent on the experience, knowledge, skill
and expertise of our President, CEO, Chairman, Wenfa “Simon” Sun. We are also in large part dependent on Liangqin Yi, our
CFO and Secretary. The loss of any of the key personnel listed above could materially and adversely affect our future business efforts.
Our success depends in substantial part upon the services, efforts and abilities of Wenfa “Simon” Sun, due to his experience,
history and knowledge of the agricultural industry and his overall insight into our business direction. The loss or our failure to retain
Mr. Sun, or Ms. Yi, or to attract and retain additional qualified personnel, could adversely affect our operations. We do not currently
carry key-man life insurance on any of our officers and have no present plans to obtain this insurance. See “Management.”
The lack of public company experience of our management team may put
us at a competitive disadvantage.
As a company with a class of securities registered
under the Exchange Act, we are subject to reporting and other legal, accounting, corporate governance, and regulatory requirements imposed
by the Exchange Act and rules and regulations promulgated under the Exchange Act. Our President, Chairman and CEO has no public
company experience and under the Federal securities laws of the United States and rules and regulations of the U.S. Securities and Exchange
Commission, which could impair our ability to comply with these legal, accounting, and regulatory requirements. Such responsibilities
include complying with Federal securities laws and making required disclosures on a timely basis. Our senior management may not
be able to implement and effect programs and policies in an effective and timely manner that adequately responds to such increased legal
and regulatory compliance and reporting requirements. Our failure to do so could lead to the imposition of fines and penalties and further
result in the deterioration of our business.
If we fail to maintain
the adequacy of our internal controls, our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley
Act of 2002 could be impaired, which could cause our stock price to decrease substantially if we succeed in becoming a publicly-traded
company.
We have committed limited
personnel and resources to the development of the external reporting and compliance obligations that would be required for a public company.
Recently, we have taken measures to address and improve our financial reporting and compliance capabilities and we are in the process
of instituting changes to satisfy our obligations in connection with becoming a publicly-traded company. We plan to obtain additional
financial and accounting resources to support and enhance our ability to meet the requirements of being a publicly-traded company. We
will need to continue to improve our financial and managerial controls, reporting systems and procedures, and documentation thereof. If
our financial and managerial controls, reporting systems or procedures fail, we may not be able to provide accurate financial statements
on a timely basis or comply with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our internal controls or our ability
to provide accurate financial statements could cause the trading price of our common stock to decrease substantially upon trading as a
publicly-traded company. We have implemented, or plan to implement, the measures described below under the supervision and guidance of
our management to remediate the above control deficiencies and to strengthen our internal controls over financial reporting. Key elements
of the remediation effort include, but are not limited to, the following initiatives, which have been implemented, or are in the process
of implementation, as of the date of filing of this Annual Report:
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We have increased efforts to enforce internal control procedures. We have also reorganized the structure of our accounting department in China and clarified the responsibilities of each key personnel in order to increase communications and accountability.
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We have recruited and will continue to bring in additional qualified financial personnel for the accounting department to further strengthen our China financial reporting function.
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We continually review and improve our standardization of our monthly and quarterly data collection, analysis, and reconciliation procedures.
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We plan on significantly increasing the level of communication and interaction among our China management, independent auditors, our directors of the Board, and other external advisors.
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We are making progress on engaging qualified internal control consultants to help us comply with internal control obligations, including Section 404 of the Sarbanes-Oxley Act of 2002. We also plan to dedicate sufficient resources to implement required internal control procedures.
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If our financial and managerial controls, reporting
systems or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley
Act of 2002 as it applies to us. Any failure of our internal controls or our ability to provide accurate financial statements could cause
the trading price of our common stock to decrease substantially.
Competition
The Acer truncatum industry in China is highly
competitive with competitors from larger enterprises to smaller farmers. The company also competes with various distribution methods such
as online sales through mobile applications and internet websites.
Strategy
The long term strategy of the company is to
build and complete an industry chain of Acer truncatum seed oil for planting, production, research and developing, and sales by way of
being devoted to developing truncatum trees, developing technology of extracting planting nervonic acid, increasing sales of Acer truncatum
extract, integrating resources of national Acer truncatum planting base, and building our customer health database.
Risks Related To Us Doing Business in China
As substantially all of our assets are located
in the PRC and all of our revenues are derived from our operations in China, changes in the political and economic policies of the PRC
government could have a significant impact upon the business we may be able to conduct in the PRC and accordingly on the results of our
operations and financial condition.
Our business operations may be adversely affected
by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner
in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws
and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights,
property and other matters. Under the current government leadership, the government of the PRC has been pursuing economic reform policies
that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of
the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
Our operations are subject to PRC laws and regulations
that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof, may have a material
and adverse effect on our business.
The PRC’s legal system is a civil law
system based on written statutes. Decided legal cases do not have so much value as precedent in China as those in the common law system
prevalent in the United States. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations,
including but not limited to, governmental approvals required for conducting business and investments, laws and regulations governing
the advertising industry, as well as commercial, antitrust, patent, product liability, environmental laws and regulations, consumer protection,
and financial and business taxation laws and regulations.
The Chinese government has been developing
a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic
matters. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial
interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant
uncertainties.
Our PRC subsidiaries, CQC9, is considered a
foreign invested enterprise under PRC laws, and as a result is required to comply with PRC laws and regulations, including laws and regulations
specifically governing the activities and conduct of foreign invested enterprises. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations,
they would have broad discretion in dealing with such a violation, including, without limitation:
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levying fines;
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revoking our business license, other licenses or authorities;
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requiring that we restructure our ownership or operations; and
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requiring that we discontinue any portion or all of our business.
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Investors may experience difficulties in effecting service of
legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws, including the federal securities
laws or other foreign laws against us or our management.
All our current operations are conducted in
China. Moreover, all our directors and officers are nationals and residents of China. All or substantially all the assets of these persons
are located outside the United States and in the PRC. As a result, it may not be possible to effect service of process within the United
States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize
or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions
of the securities laws of the United States or any state thereof or be competent to hear original actions brought in China against us
or such persons predicated upon the securities laws of the United States or any state thereof.
Contract drafting, interpretation and
enforcement in China involves significant uncertainty.
We have entered into numerous contracts governed
by PRC law, many of which are material to our business. As compared with contracts in the United States, contracts governed by PRC law
tend to contain less detail and are not as comprehensive in defining contracting parties’ rights and obligations. As a result, contracts
in China are more vulnerable to disputes and legal challenges. In addition, contract interpretation and enforcement in China is not as
developed as in the United States, and the result of any contract dispute is subject to significant uncertainties. Therefore, we cannot
assure you that we will not be subject to disputes under our material contracts, and if such disputes arise, we cannot assure you that
we will prevail.
Recent PRC regulations relating to
acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate.
Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the CSRC, for our planned public offering and
the listing and trading of our common stock could have a material adverse effect on our business, operating results, reputation and trading
price of our common stock if and when we become trading.
The PRC State Administration of
Foreign Exchange, or “SAFE,” issued a public notice in November 2005, known as Circular 75, which has become null and
void and has been replaced by Circular (2014) 37, issued on 14 July, 2014, concerning the use of offshore holding companies
controlled by PRC residents in mergers and acquisitions in China. This circular requires that (1) a PRC resident shall register with
a local branch of the SAFE before he or she establishes or controls an overseas special purpose vehicle, or SPV, for the purpose of
overseas equity financing (including convertible debt financing);(2) when a PRC resident contributes the assets of or his or her
equity interests in a domestic enterprise to an SPV, or engages in overseas financing after contributing assets or equity interests
to an SPV, such PRC resident must register his or her interest in the SPV and any changes in such interest with a local branch of
the SAFE; and (3) when the SPV undergoes a material change regarding to PRC resident, such as a change in share capital or merger or
acquisition, the PRC resident shall, register such change with a local branch of the SAFE. In addition, SAFE issued updated internal
implementing rules, or the Implementing Rules in relation to Circular 37. However, there exist uncertainties regarding the SAFE
registration for PRC residents’ interests in overseas companies. If any PRC resident stockholder of a SPV fails to make the
required SAFE registration and amended registration, the onshore PRC subsidiaries of that offshore company may be prohibited from
distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore entity.
Failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws for
evasion of applicable foreign exchange restrictions. Because of uncertainty in how Circular 37 will be interpreted and enforced, we
cannot be sure how it will affect our business operations or future plans. For example, CQFI's ability to conduct foreign exchange
activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with
Circular 37 by our PRC resident beneficial holders over whom we have no control. In addition, we cannot assure you that such PRC
residents will be able to complete the necessary approval and registration procedures required by the SAFE regulations. Failure by
any PRC resident beneficial holder to register as required with the relevant branch of SAFE could subject these PRC resident
beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit CQFI's ability to
make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
On August 8, 2006, the PRC Ministry of
Commerce (“MOFCOM”), joined by the State-owned Assets Supervision and Administration Commission of the State Council, the
State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and SAFE,
released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises (the “Revised
M&A Regulations”), which took effect on September 8, 2006 and was further amended on June 22, 2009. These new rules significantly
revised China’s regulatory framework governing onshore-to -offshore restructurings and foreign acquisitions of domestic enterprises.
These new rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming
MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger,
acquisition and investment transactions. Further, the new rules establish reporting requirements for acquisition of control by foreigners
of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions
in key industries.
Among other things, the Revised M&A Regulations
include new provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled
directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s
securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures specifying documents
and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. However, the application of this
PRC regulation remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope and applicability
of the CSRC approval requirement. Our PRC counsel, Hubei Taoshi Law Firm, believes that it is uncertain whether the transaction is subject
to CSRC’s approval, and in reality, many other similar companies have completed similar transactions like the share exchange and
private placement contemplated under the Exchange Agreement without CSRC’s approval and our PRC legal counsel is not aware of any
situation in which the CSRC has imposed a punishment or penalty in connection with any such transactions. However, if the CSRC or other
PRC Government Agencies subsequently determine that CSRC approval is required for the share exchange and private placement contemplated
under the Exchange Agreement, we may face material regulatory actions or other sanctions from the CSRC or other PRC Government Agencies.
If the CSRC or another PRC regulatory agency subsequently
determines that CSRC approval was required for our restructuring, we may face regulatory actions or other sanctions from the CSRC or other
PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges
in the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our common stock.
According to the Revised M&A Regulations and other
PRC rules regarding foreign exchange, an offshore company’s shares can be used as consideration for the acquisition of a domestic
PRC company’s equity by foreign investors only under very limited circumstances. Prior approval from the MOFCOM must be obtained
before such a share exchange can be done. If relevant PRC government authorities deem a future acquisition of a domestic PRC company’s
equity by us or our offshore subsidiary using our common stock or other types of our securities as consideration to be a transaction subject
to the Revised M&A Regulations, complying with the requirements of this regulation to complete such transactions could be time- consuming
and any required approval processes, including obtaining approval from the MOFCOM, may delay or inhibit our ability to complete such transactions.
Any delay or inability to obtain applicable approvals to complete acquisitions could affect our ability to expand our business or maintain
our market share. However, the application of the Revised M&A Regulations remains unclear and it is uncertain whether a future acquisition
of a domestic PRC company’s equity by our domestic PRC subsidiaries using our common stock or other types of our securities as consideration
will be subject to such regulations.
Also, if later the CSRC requires that we obtain its
approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such
a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on
the trading price of our common stock. It is uncertain that CSRC is or will be curtailing or suspending overseas listings for Chinese
private companies.
It is uncertain how our business operations or future
strategy will be affected by the interpretations and implementation of Circular 37 and the Revised M&A Regulations. It is anticipated
that application of the new rules will be subject to significant administrative interpretation, and we will need to closely monitor how
MOFCOM, SAFE, CSRC and other ministries apply the rules to ensure that our domestic and offshore activities continue to comply with PRC
law. Given the uncertainties regarding interpretation and application of the new rules, we may need to expend significant time and resources
to maintain compliance with such rules.
If the land use rights of our landlord are revoked, we would be forced
to relocate operations.
Under Chinese law, land is owned by the state or rural
collective economic organizations. The state issues to the land users the land use right certificate. Land use rights can be revoked and
the land users could be forced to vacate at any time when redevelopment of the land is in the public interest. The public interest rationale
is interpreted quite broadly and the process of land appropriation may be less than transparent. We limited land use rights and each of
our facilities relies on land use rights of our landlords, and the loss of such rights would require us to identify and relocate our operations,
which could have a material adverse effect on our financial conditions and results of operations.
We will not be able to complete an acquisition of prospective acquisition
targets in the PRC unless their financial statements can be reconciled to U.S. generally accepted accounting principles in a timely manner.
Companies based in the PRC may not have properly kept
financial books and records that may be reconciled with U.S. generally accepted accounting principles. If we attempt to acquire a significant
PRC target company and/or its assets, we would be required to obtain or prepare financial statements of the target that are prepared in
accordance with and reconciled to U.S. generally accepted accounting principles. Federal securities laws require that a business combination
meeting certain financial significance tests require the public acquirer to prepare and file historical and/or pro forma financial statement
disclosure with the SEC. These financial statements must be prepared in accordance with, or be reconciled to U.S. generally accepted accounting
principles and the historical financial statements must be audited in accordance with the standards of the Public Company Accounting Oversight
Board (United States), or PCAOB. If a proposed acquisition target does not have financial statements that have been prepared in accordance
with, or that can be reconciled to, U.S. generally accepted accounting principles and audited in accordance with the standards of the
PCAOB, we will not be able to acquire that proposed acquisition target. These financial statement requirements may limit the pool of potential
acquisition targets with which we may acquire and hinder our ability to expand our retail operations. Furthermore, if we consummate an
acquisition and are unable to timely file audited financial statements and/or pro forma financial information required by the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), such as Item 9.01 of Form 8-K, we will be ineligible to use the SEC’s
short-form registration statement on Form S-3 to raise capital, if we are otherwise eligible to use a Form S-3. If we are ineligible to
use a Form S-3, the process of raising capital may be more expensive and time consuming and the terms of any offering transaction may
not be as favorable as they would have been if we were eligible to use Form S-3.
We face uncertainty from China’s Circular on Strengthening the
Administration of Enterprise Income Tax on Non-Resident Enterprises’ Share Transfer Income (“Circular 698”) that was
released in December 2009 with retroactive effect from January 1, 2008.
The Chinese State Administration of Taxation
(SAT) released a circular (Guoshuihan No. 698 – Circular 698) on December 10, 2009 that addresses the transfer of shares of
Chinese resident companies by nonresident companies. Circular 698, which is effective retroactively to January 1, 2008, may have a
significant impact on many companies that use offshore holding companies to invest in China. While, Circular 698 does not apply to
shareholders who are individuals, the PRC authority has the discretion to determine whether these enterprise shareholders are
treated as a resident enterprise. If such shareholders are recognized as non-resident enterprises, Circular 698 may have been
applicable to the Share Exchange due to the transfer of shares of CAT9 Cayman, which Wenfa "Simon" Sun indirectly via HK
CAT9, directly holds the equity interests of CQFI the Company by such enterprise shareholders. Circular 698 provides that where
a non-resident enterprise investor indirectly transfers the equity of a PRC resident enterprise, if the overseas intermediary
holding company being transferred by the non-resident enterprise is established in a country/region where the effective tax rate is
less than 12.5% or which does not tax the overseas income of its residents, the non-resident enterprise must submit the required
documents to the PRC tax authority in charge of the PRC resident enterprise within 30 days after the equity transfer agreement is
concluded. {This clause has been terminated by Bulletin (2013)72} However, there is uncertainty
as to the application of Circular 698. For example, while the term "indirectly transfer" is not defined, it is understood
that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities
having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally
declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the
disclosure to the tax authority in charge of that Chinese resident enterprise. We have not provided any information to the relevant
PRC tax authorities regarding the share exchange transaction.
We have sought the advice, but not an opinion, of
PRC legal counsel regarding the application of and the risks associated with Circular 698. Circular 698, which provides parties with a
short period of time to comply its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese
company. It further provides that where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through
an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided,
the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form”
principle and deny the existence of the offshore holding company that is used for tax planning purposes. However, there are no formal
declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,”
which can be utilized by us to balance if our company complies with the Circular 698.
Due to the short history of the New EIT law
and lack of applicable legal precedents, it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment
of our holding companies, CAT9 Cayman, a company organized under the laws of the Cayman Islands (“CAT9 Cayman”) and CAT9 China
Investment Limited, a company organized under the laws of Hong Kong (“CAT9 HK”). If we, CAT9 Cayman or CAT9 HK is determined
to be a PRC resident enterprise by PRC tax authorities, Circular 698 will not be applicable to any direct or indirect transfer of our
shareholdings in CQFI. If we, CAT9 Cayman or CAT9 HK is determined to be a non-resident enterprise by the PRC tax authorities and the
direct or indirect transfer of our shareholdings in CQFI, is recognized by the tax authority in charge as the transfer of shares of Chinese
resident companies by nonresident companies, we may become at risk of being taxed under Circular 698 and we may be required to expend
valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material
adverse effect on our financial condition and results of operations. Because CAT9 HK, a Hong Kong company owns 100% of CQFI; CAT9 Cayman,
a Cayman Islands company owns 100% of CAT9 HK; and the Company, a Delaware corporation, owns 100% of CAT9 Cayman, it is possible that
Circular 698 could apply to any transfer of shares of the Company, CAT9 Cayman or CAT9 HK, as an indirect transfer of the equity of CQFI,
if such transfers are not made through a public securities market or by individuals. If the PRC tax authority determines that Circular
698 applies to us, we will be obligated to make tax returns filings with the relevant PRC tax authority in accordance with PRC tax laws
and regulations. Failure to do so will subject us to fines up to RMB10,000 ($1,471). Furthermore, if the PRC tax authority determines
that our arrangement which resulted in the underpayment of taxes was done to evade taxation, in addition to paying all the underpaid taxes,
we may be subject to further penalties including late fees, fines ranging from 50% to 500% of the underpaid taxes, and even criminal liabilities
under grave circumstances.
The foreign currency exchange rate between U.S. Dollars and Renminbi
could adversely affect our financial condition.
Until 1994, the Renminbi experienced a gradual
but significant devaluation against most major currencies, including dollars, and there was a significant devaluation of the
Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate
foreign exchange system. Since 1994, the value of the Renminbi relative to the U.S. dollar has remained stable and has appreciated
slightly against the U.S. Dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued
due to China’s current monetary policies and have pressured China to allow the Renminbi to float freely in world markets. In
July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy the
Renminbi is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. While the
international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on
the PRC government to adopt an even more flexible currency policy, which could result in further and more significant appreciation
of the Renminbi against the U.S. dollar.
As we may rely on dividends and other fees paid to
us by our subsidiary and affiliated consolidated entities in China, any significant revaluation of the Renminbi may materially and adversely
affect our cash flows, revenues, earnings and financial position, and the amount of, and any dividends payable on, our shares in U.S.
dollars. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the
U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert
our Renminbi into U.S. dollars for the purpose of making payments for dividends on our shares or for other business purposes, appreciation
of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. In addition, since our
functional and reporting currency is the U.S. dollar while the functional currency of our subsidiary and affiliated consolidated entities
in China is Renminbi, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would have a positive or negative
effect on our reported financial results, which may not reflect any underlying change in our business, results of operations or financial
condition.
Governmental control of currency conversion may limit our ability to
utilize our revenues.
Substantially all of our revenues and expenses are
denominated in Renminbi. Under PRC laws, the Renminbi is currently convertible under a company’s “current account,”
which includes dividends, trade and service-related foreign exchange transactions, but not under the company’s “capital account,”
which includes foreign direct investment and loans, without the prior approval of SAFE. SAFE reserves the discretion to deny the conversion
of RMB into foreign currencies for capital account transactions. Currently our PRC subsidiary, CQC9, may purchase foreign currencies for
settlement of current account transactions, including payments of dividends to us, without the approval of SAFE. Therefore, CQC9may convert
the revenues it generates in RMB into other currencies, such as U.S. Dollars, for settlement of current account transactions without having
to obtain approval from SAFE. However, foreign exchange transactions by CQC9under the capital account continue to be subject to significant
foreign exchange controls and require the approval of or need to register with PRC governmental authorities, including SAFE. Therefore,
CQC9 may not convert its sales revenues from RMB into other currencies for capital account transactions, such as to repay a loan, without
first obtaining the approval of SAFE. If CQC9,borrows foreign currency loans from us or other foreign lenders, these loans must first
be registered with the SAFE. If CQC9, a wholly foreign-owned enterprise, borrows foreign currency, the accumulative amount of its foreign
currency loans shall not exceed the difference between the total investment and the registered capital of CQC9. If we finance CQC9, by
means of additional capital contributions, these capital contributions must be approved by certain government authorities such as the
Ministry of Commerce or its local counterparts. Additionally, the existing and future restrictions on currency exchange may affect the
ability of our PRC subsidiary or affiliated entities to obtain foreign currencies, limit our ability to meet our foreign currency obligations,
or otherwise materially and adversely affect our business.
Inflation in the PRC could negatively affect our profitability and growth.
While the PRC economy has experienced rapid growth,
such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth
can lead to growth in the money supply and rising inflation. According to the National Bureau of Statistics of China, the change in China’s
Consumer Price Index increased to 8.5% in April 2008. If prices for our products and services rise at a rate that is insufficient to compensate
for the rise in the costs of supplies such as raw materials, it may have an adverse effect on our profitability.
Furthermore, in order to control inflation in
the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank
lending. In January 2010, the Chinese government took steps to tighten the availability of credit including ordering banks to
increase the amount of reserves they hold and to reduce or limit their lending. The implementation of such policies may impede
economic growth. In October 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the
first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese
economy. In April 2006, the People’s Bank of China raised the interest rate again. Repeated rises in interest rates by the
central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand
for our products and services.
Our funds are held in banks that provide insurance limited to 500,000
RMB or $76,000 USD per depositor, the failure of any bank in which we deposit our funds could affect our ability to continue in business.
On May 1, 2015, China introduced the Deposit Insurance
Regulations. China began insuring deposits denominated in RMB and foreign currencies with the maximum payout amount per depositor at RMB
500,000 or $76,000 USD. A significant portion of our assets are in the form of cash deposited with banks in the PRC, and in the event
of a bank failure, and to the extent we hold more than the maximum amount covered, we will not (1) have access to our funds on deposit
and (2) our bank insurance coverage will not cover more than RMB 500,000 or $76,000 USD and we will realize a loss. Depending upon the
amount of money we maintain in a bank that fails, our inability to have access to our cash and the limited amount being covered by banks
will impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we will be unable
to continue in business.
Failure to comply with the United States Foreign Corrupt Practices Act
could subject us to penalties and other adverse consequences.
As our ultimate holding company is a Delaware corporation,
we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in
bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including
some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent
practices may occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage
in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices,
we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and
results of operations.
If we make equity compensation grants to persons
who are PRC citizens, they may be required to register with the State Administration of Foreign Exchange of the PRC, or SAFE. We may also
face regulatory uncertainties that could restrict our ability to adopt an equity compensation plan for our directors and employees and
other parties under PRC law.
On March 28, 2007, SAFE issued the “Operating
Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas
Listed Company, also known as “Circular 78.” It is not clear whether Circular 78 covers all forms of equity compensation plans
or only those which provide for the granting of stock options.
Domestic individuals who are granted shares or share
options by companies listed on overseas stock exchanges based on the employee share option or share incentive plan are required to register
with the State Administration of Foreign Exchange or its local counterparts. Pursuant to Circular 78, PRC individuals participating in
the employee stock option plans of the overseas listed companies shall entrust their employers, including the overseas listed companies
and the subsidiaries or branch offices of such offshore listed companies in China, or engage domestic agents to handle various foreign
exchange matters associated with their employee stock options plans. The domestic agents or the employers shall, on behalf of the domestic
individuals who have the right to exercise the employee stock options, apply annually to the State Administration of Foreign Exchange
or its local offices for a quota for the conversion and/or payment of foreign currencies in connection with the domestic individuals’
exercise of the employee stock options. The foreign exchange proceeds received by the domestic individuals from sale of shares under the
stock option plans granted by the overseas listed companies must be remitted into the bank accounts in China opened by their employers
or PRC agents. If we adopt an equity compensation plan in the future and make option grants to our officers and directors, most of whom
are PRC citizens, Circular 78 may require our officers and directors who receive option grants and are PRC citizens to register with SAFE.
We will comply with Circular 78 if we adopt an
equity incentive plan. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and
time consuming. If it is determined that any of our equity compensation plans are subject to Circular 78, failure to comply with
such provisions may subject our PRC subsidiary when it is deemed a domestic agent as defined under Circular 78 and participants of
our incentive plan who are PRC citizens to fines and legal sanctions and may prevent us from being able to grant equity compensation
to our PRC employees. If we are unable to compensate our PRC employees and directors through equity compensation, our business
operations may be adversely affected.
Under the New EIT Law, we, CAT9 Cayman and CAT9 HK may be classified
as “resident enterprises” of China for tax purposes, which may subject us, CAT9 Cayman and CAT9 HK to PRC income tax on taxable
global income.
Under the new PRC Enterprise Income Tax Law (the “New
EIT Law”) and its implementing rules, both of which became effective on January 1, 2008, enterprises are classified as resident
enterprises and non-resident enterprises. An enterprise established outside of China with its “de facto management bodies”
located within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese
domestic enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management body as a
managing body that in practice exercises “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. Due to the short history of the New EIT law and lack of applicable legal precedents,
it remains unclear how the PRC tax authorities will determine the PRC tax resident treatment of a foreign company such as us, CAT9 Cayman
and CAT9 HK. The Company has not sought the advice of PRC tax counsel regarding the risks associated with the New EIT Law. Because our
CAT9 Cayman and CAT9 HK's members of management are located in China, we believe it is likely that we, CAT9 Cayman and CAT9 HK meet the
qualifications of a “resident enterprise” and would be recognized as a Chinese “resident enterprise,” subject
to the ultimate judgment of the PRC tax authority, based on the standard of “de facto management body”. “Resident enterprise”
treatment would not have impacted the Company’s results since the New EIT Law’s effectiveness, as CAT9 Cayman and CAT9 HK
have no taxable income and no dividends were paid by any of our subsidiaries, including CAT9 Cayman and CAT9 HK, CQC9. If the PRC tax
authorities determine that we, CAT9 Cayman and CAT9 HK are collectively a “resident enterprise” for PRC enterprise income
tax purposes, a number of PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on
our worldwide taxable income, including interest income on the proceeds from this offering, as well as PRC enterprise income tax reporting
obligations. The failure to pay such taxes will subject us to fines up to RMB10,000 ($1,471), and furthermore, if the PRC tax authority
determines that our arrangement which resulted in the underpayment of taxes was done to evade taxation, in addition to paying all the
underpaid taxes, we may be subject to further penalties including late fees, fines ranging from 50% to 500% of the underpaid taxes, and
even criminal liabilities under grave circumstances. Second, the New EIT Law provides that dividend paid between “qualified resident
enterprises” is exempted from enterprise income tax. A recent circular issued by the State Administration of Taxation on April 22,
2010, regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group
enterprises and established outside of China as “resident enterprises” clarified that dividends and other income paid by such
“resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of
10%, when recognized by non-PRC shareholders. It is unclear whether the dividends that we, CAT9 Cayman and CAT9 HK receive from CQC9 will
constitute dividends between “qualified resident enterprises” and would therefore qualify for tax exemption, because the definition
of qualified resident enterprises is unclear and the relevant PRC government authorities have not yet issued guidance with respect to
the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. We
are actively monitoring the possibility of “resident enterprise” treatment for the applicable tax years and are evaluating
appropriate organizational changes to avoid this treatment, to the extent possible. As a result of the New EIT Law, our historical operating
results will not be indicative of our operating results for future periods and the value of our common stock may be adversely affected.
Dividends payable by us to our foreign investors and any gain on the
sale of our shares may be subject to taxes under PRC tax laws.
If dividends payable to our stockholders are treated as income derived
from sources within China, then the dividends that stockholders receive from us, and any gain on the sale or transfer of our shares, may
be subject to taxes under PRC tax laws. We have not consulted with PRC tax counsel regarding the taxes that may be associated with dividends
paid by us.
Under the New EIT Law and its implementing rules,
PRC enterprise income tax at the rate of 10% is applicable to dividends payable by us to our investors that are non-resident enterprises
so long as such non-resident enterprise investors do not have an establishment or place of business in China or, despite the existence
of such establishment of place of business in China, the relevant income is not effectively connected with such establishment or place
of business in China, to the extent that such dividends have their sources within the PRC. Similarly, any gain realized on the transfer
of our shares by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived from sources within
China and we are considered as a resident enterprise which is domiciled in China for tax purpose. Additionally, there is a possibility
that the relevant PRC tax authorities may take the view that the purpose of us, CAT9 Cayman and CAT9 HK is holding CQC9, and the capital
gain derived by our overseas shareholders or investors from the share transfer is deemed China-sourced income, in which case such capital
gain may be subject to a PRC withholding tax at the rate of up to 10%. If we are required under the New EIT Law to withhold PRC income
tax on our dividends payable to our foreign shareholders or investors who are non-resident enterprises, or if you are required to pay
PRC income tax on the transfer or our shares under the circumstances mentioned above, the value of your investment in our shares may be
materially and adversely affected.
In January, 2009, the State Administration of Taxation
promulgated the Provisional Measures for the Administration of Withholding of Enterprise Income Tax for Non-resident Enterprises (“Measures”),
pursuant to which, the entities which have the direct obligation to make the following payment to a non-resident enterprise shall be the
relevant tax withholders for such non-resident enterprise, and such payment includes: incomes from equity investment (including dividends
and other return on investment), interests, rents, royalties, and incomes from assignment of property as well as other incomes subject
to enterprise income tax received by non-resident enterprises in China. Further, the Measures provides that in case of equity transfer
between two non-resident enterprises which occurs outside China, the non-resident enterprise which receives the equity transfer payment
shall, by itself or engage an agent to, file tax declaration with the PRC tax authority located at place of the PRC company whose equity
has been transferred, and the PRC company whose equity has been transferred shall assist the tax authorities to collect taxes from the
relevant non-resident enterprise. However, it is unclear whether the Measures refer to the equity transfer by a non-resident enterprise
which is a direct or an indirect shareholder of the said PRC Company. Given these Measures, there is a possibility that we may have an
obligation to withhold income tax in respect of the dividends paid to non-resident enterprise investors. If we have such an obligation,
our omission or failure to fulfill such obligation may subject us to similar penalties to those applied to a taxpayer, including fines
up to RMB10,000, and in the case of being recognized as constituting evasion of taxation, other than making up for the underpaid taxes,
we may be subject to further penalties including late fees, fines ranging from 50% to 500% of the underpaid taxes, and even criminal liabilities
under grave circumstances.
SAFE rules and regulations may limit our ability to transfer the net
proceeds from this offering to our PRC subsidiaries, which may adversely affect the business expansion of our PRC subsidiaries, and we
may not be able to convert the net proceeds from this offering into Renminbi to invest in or acquire any other PRC companies.
On August 29, 2008, SAFE promulgated Circular 142,
a notice regulating the conversion by a foreign -invested company of foreign currency into Renminbi by restricting how the converted Renminbi
may be used. The notice requires that the registered capital of a foreign-invested company settled in Renminbi converted from foreign
currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used
for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of a
foreign-invested company settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without
SAFE’sapproval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Violations
of Circular 142 will result in severe penalties, such as heavy fines.
Special Risk Factor due to the Novel Coronavirus
(COVID-19)
During late 2019, a virus known as the
Novel Coronavirus or “COVID-19” appeared in Wuhan, China. By March 11, 2020, the WHO (World Health Organization) labeled
COVID-19 as a pandemic and China had taken steps to shelter-in-place and quarantine its population. Our Company and all of our
operations are located in China. We experienced a downturn in our business due to the mandatory quarantine and our employees and
staff worked from home as advised by the government. The negative effect of COVID-19 on our operations are no longer hypothetical
scenarios and during the quarantine period in early 2020, our sales declined as a result.
As of the date of this Form 10-K filing, China
has slowly begun to relax quarantine measures and allowed businesses to operate again. We cannot make any assurances that COVID-19 or
a variant of COVID-19 will not reappear with new infections and to the extent that COVID-19, a variant, we may encounter prolonged operational
lockdown measures which would disrupt our business operations.
In addition, if a renewed outbreak of
SARS (Severe Acute Respiratory Syndrome), Avian Flu or another widespread public health problem, such as the spread of H1N1 (“Swine”)
Flu, in China, where all of our operations are located and where all of our sales occur, will have a negative effect on our operations.
Such an outbreak will have an impact on our operations as a result of:
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quarantines or closures of our facilities, which will severely disrupt our business operations,
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the sickness or death of our key officers and employees, and
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a general slowdown in the Chinese economy.
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Any of the foregoing events or other unforeseen consequences of public health problems will adversely affect our operations.
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The market price and trading volume of shares
of our common stock may be volatile.
When and if a more robust market develops for
our securities, the market price of our common stock could fluctuate significantly for many reasons, including for reasons unrelated to
our specific performance, such as reports by industry analysts, investor perceptions, or negative announcements by customers, competitors
or suppliers regarding their own performance, as well as general economic and industry conditions. For example, to the extent that other
large companies within our industry experience declines in their share price, our share price may decline as well. In addition, when the
market price of a company’s shares drops significantly, shareholders could institute securities class action lawsuits against the
company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and
other resources.
Regulations, including those contained in and issued
under the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010
(“Dodd-Frank”), increase the cost of doing business and may make it difficult for us to retain or attract qualified officers
and directors, which could adversely affect the management of our business and our ability to obtain or retain listing of our Common Stock.
We are a public company. The current regulatory
climate for public companies, even small and emerging growth companies such as ours, may make it difficult or prohibitively expensive
to attract and retain qualified officers, directors and members of board committees required to provide for our effective management in
compliance with the rules and regulations which govern publicly-held companies, including, but not limited to, certifications from executive
officers and requirements for financial experts on boards of directors. The perceived increased personal risk associated with these recent
changes may deter qualified individuals from accepting these roles. For example, the enactment of the Sarbanes-Oxley Act of 2002
has resulted in the issuance of a series of new rules and regulations and the strengthening of existing rules and regulations by the SEC.
Further, recent and proposed regulations under
Dodd-Frank heighten the requirements for board or committee membership, particularly with respect to an individual’s independence
from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining
directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, the management of
our business could be adversely affected.
Our internal controls over financial reporting
may not be effective, and our independent auditors may not be able to certify as to their effectiveness, which could have a significant
and adverse effect on our business.
We are subject to various SEC reporting and
other regulatory requirements. We have incurred and will continue to incur expenses and, to a lesser extent, diversion of our management’s
time in our efforts to comply with SOX Section 404 regarding internal controls over financial reporting. Our management’s
evaluation over our internal controls over financial reporting may determine that material weaknesses in our internal control exist. If,
in the future, management identifies material weaknesses, or our external auditors are unable to attest that our management’s report
is fairly stated or to express an opinion on the effectiveness of our internal controls, this could result in a loss of investor confidence
in our financial reports, have an adverse effect on our stock price, and subject us to sanctions or investigation by regulatory authorities.
Limitations on director and officer liability
and our indemnification of our officers and directors may discourage stockholders from bringing suit against a director.
Our Certificate of Incorporation and By-Laws
provide, with certain exceptions as permitted by Delaware corporation law, that a director or officer shall not be personally liable to
us or our stockholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct,
fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit
against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our
behalf against a director. In addition, our Certificate of Incorporation and By-Laws provide for mandatory indemnification of directors
and officers to the fullest extent permitted by governing state law.
We may incur a variety of costs to engage
in future acquisitions of companies, products or technologies, to grow our business, to expand into new markets, or to provide new services.
As such, the anticipated benefits of those acquisitions may never be realized.
It is management’s intention to acquire
other businesses to grow our customer base, to expand into new markets, and to provide new product lines. We may make acquisitions
of, or significant investments in, complementary companies, products or technologies, although no additional material acquisitions or
investments are currently pending. Acquisitions may be accompanied by risks such as:
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difficulties in assimilating the operations and employees of acquired companies;
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diversion of our management’s attention from ongoing business concerns;
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our potential inability to maximize our financial and strategic position through the successful incorporation of acquired technology and rights into our products and services;
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additional expense associated with amortization of acquired assets;
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additional expense associated with understanding and development of acquired business;
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maintenance and implementation of uniform standards, controls, procedures and policies; and
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impairment of existing relationships with employees, suppliers and customers as a result of the integration of new management employees.
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Our failure to manage growth effectively
could harm our ability to attract and retain key personnel and adversely impact our operating results.
There can be no assurance that we will be able
to manage our expansion through acquisitions effectively. Our current and planned personnel, systems, procedures and controls may not
be adequate to support and effectively manage our future operations, especially as we employ personnel in multiple geographic locations.
We may not be able to hire, train, retain, motivate and manage required personnel, which may limit our growth, damage our reputation and
negatively affect our financial performance and harm our business.
The forecasts of market growth included in
this Offering may prove to be inaccurate, and even if the market in which we compete achieve the forecasted growth, we cannot assure you
our business will grow at similar rates, if at all.
Growth forecasts
are subject to significant uncertainty and are based on assumptions and estimates, which may not prove to be accurate. Forecasts relating
to the expected growth in the agricultural sector within China, including the forecasts or projections referenced in this Offering Memorandum,
may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or
at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks
and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future
growth.
We might require additional capital to support
business growth, and this capital might not be available on acceptable terms, if at all.
We intend to continue to
make investments to support our business growth and may require additional funds to respond to business challenges, including the need
to develop new features or enhance our existing products, improve our operating infrastructure or acquire complementary businesses and
technologies. Accordingly, we may need to engage in equity or debt financings to secure funds. If we raise funds through issuances of
equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue
could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the
future could involve restrictive covenants relating to our future capital raising activities and other financial and operational matters,
which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate
financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to
respond to business challenges could be significantly impaired.
If we obtain financing,
existing shareholder interests may be diluted.
If we raise additional funds
by issuing equity or convertible debt securities, the percentage ownership of our shareholders will be diluted. In addition, any new securities
could have rights, preferences and privileges senior to those of our common stock. Furthermore, we cannot assure you that additional financing
will be available when and to the extent we require or that, if available, it will be on acceptable terms.
The requirements of being a public company may
strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer
an “emerging growth company.”
We are required to comply with various regulatory
and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements are
time-consuming and expensive and could have a negative effect on our business, results of operations and financial condition.
As a public company, we are subject to the reporting
requirements of the Exchange Act, and requirements of SOX. The cost of complying with these requirements may place a strain on our systems
and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial
condition. SOX requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting.
To maintain and improve the effectiveness of our disclosure controls and procedures, we must commit significant resources, may be required
to hire additional staff and need to continue to provide effective management oversight.
We will be implementing additional procedures and
processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth also will
require us to commit additional management, operational and financial resources to identify new professionals to join the Company and
to maintain appropriate operational and financial systems to adequately support expansion.
These activities may divert management’s attention
from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and
cash flows.
As an “emerging growth company” as defined
in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) enacted on April 5, 2012, we may take advantage of certain
temporary exemptions from various reporting requirements including, but not limited to, not being required to comply with the auditor
attestation requirements of Section 404 of SOX (and rules and regulations of the SEC thereunder, which we refer to as Section 404) and
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
When these exemptions cease to apply, we expect
to incur additional expenses and devote increased management effort toward ensuring compliance with them. We will remain an “emerging
growth company” for up to five years, although we may cease to be an emerging growth company earlier under certain circumstances.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations –JOBS Act” for additional
information on when we may cease to be deemed to be an emerging growth company. We cannot predict or estimate the amount of additional
costs we may incur as a result of becoming a public company or the timing of such costs.
Our reported financial results may be adversely
affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles in
the United States are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC, and various bodies formed
to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant
effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.
Employment
Laws
We are
subject to laws and regulations governing our relationship with our employees, including: wage and hour requirements, working and safety
conditions, and social insurance, housing funds and other welfare that may be applicable. These include local labor laws and regulations,
which may require substantial resources for compliance.
China's
National Labor Law, which became effective on January 1, 1995, and China's National Labor Contract Law, which became effective on January
1, 2008, permits workers in both state and private enterprises in China to bargain collectively. The National Labor Law and the National
Labor Contract Law provide for collective contracts to be developed through collaboration between the labor union (or worker representatives
in the absence of a union) and management that specify such matters as working conditions, wage scales, and hours of work. The laws also
permit workers and employers in all types of enterprises to sign individual contracts, which are to be drawn up in accordance with the
collective contract. The National Labor Contract Law has enhanced rights for the nation's workers, including permitting open-ended labor
contracts and severance payments. The legislation requires employers to provide written contracts to their workers, restricts the use
of temporary labor and makes it harder for employers to lay off employees. It also requires that employees with fixed-term contracts be
entitled to an indefinite-term contract after a fixed-term contract is renewed twice or the employee has worked for the employer for a
consecutive ten-year period.
Foreign
Currency Exchange
The principal regulations governing foreign
currency exchange in China are the Foreign Exchange Administration Regulations promulgated by the State Council, as amended on August
5, 2008, or the Foreign Exchange Regulations. Under the Foreign Exchange Regulations, the RMB is freely convertible for current account
items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for
capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China,
unless prior approval of the PRC State Administration of Foreign Exchange, or SAFE is obtained and prior registration with the SAFE is
made. Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange
business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the
SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by
the Ministry of Commerce ("MOFCOM"), the SAFE and the State Reform and Development Commission.
Dividend Distributions
Under applicable PRC regulations, foreign-invested
enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards
and regulations. In addition, a foreign-invested enterprise in China is required to set aside at least 10% of its after-tax profit based
on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered
capital. These reserves are not distributable as cash dividends. The board of directors of a foreign-invested enterprise has the discretion
to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except
in the event of liquidation.
Item 1A. Risk Factors.
Risk Factors
Any investment in our common stock involves
a high degree of risk. Investors should carefully consider the risk described below and all of the information contained in this Current
Report on Form 10-K before deciding whether to purchase our common stock. Our business, financial condition or results of operations could
be materially adversely affected by these risks if any of them actually occur. Our shares of common stock are not currently listed or
quoted for trading on any national securities exchange or national quotation system. If and when our common stock is traded, the trading
price could decline due to any of these risks, and an investor may lose all or part of his or her investment. Some of these factors have
affected our financial condition and operating results in the past or are currently affecting us. This Current Report on Form 10-K also
contains forward-looking statements that involve risk and uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this Current
Report on Form 10-K.
In
early 2017, management suspended its food and machinery sales business in favor of capitalizing on the growing Acer truncatum industry
within China and decided that it would to direct efforts towards its Acer truncatum plantation operations during 2017. Management believes
that Acer truncatum plantation, harvesting, and production of edible oil is a more economically favorable direction for the company.
As of the date of this Current Report on Form 10-K,
the Company employs a staff of 18 including 2 part time employees located in Chengdu in Sichuan Province, China at Room 2001, Dading Century
Square, No 387, Tianren Road, Wuhou District, Chengdu, Sichuan Province, China 610000.
Products and Market
Chongqing CAT9 operates Acer
truncatum plantations and operations in China. Acer truncatum is a maple tree known as the “Shangtung
maple” which is native to China that contains an extract from its leaves and seeds called Nervonic acid, or bunge seed oil. The
tree itself typically grows 20-25 feet tall, blooms in the month of April, and is primarily a full sun to part shade tree. It is the principal
extract of the Acer truncatum plant which Acer truncatum oil is derived. Nervonic acid is a rich omega-9 fatty acid that is known to be
beneficial to memory related brain health, anti-aging, blood lipid regulation, and anti-fatigue symptoms. There are a few alternate sources
where nervonic acid can be derived, however at much less yield than from an Acer truncatum plant.
As
of early 2017, management directed efforts towards the Acer truncatum industry in China. Acer truncatum is a plant that produces an extract
from its leaves and seeds called Nervonic acid, or bunge seed oil. It is the principal extract of the Acer truncatum plant which
Acer truncatum oil is derived. Nervonic acid is a rich omega-9 fatty acid that is known to be beneficial to memory related brain health,
anti-aging, blood lipid regulation, and anti-fatigue symptoms. There are a few alternate sources where nervonic acid can be derived, however
at much less yield than from an Acer truncatum plant.
Nervonic Acid content (mg/100g)
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Acer truncatum
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580
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Brassica Oil Seeds
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69-83
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Sesame Seeds
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35
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Macadamia Nuts
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18
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TropaeolumSpeciosum
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10
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Lunaria (Money Plant)
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8
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King Salmon (Chinook)
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140
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Sockeye Salmon
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40
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Source: Herb Nutritionals
Nervonic Acid has been researched
and tested to provide improved brain cell activity and studies have shown it has the potential to reduce Alzheimer’s disease. It
is management’s belief that favorable claims regarding nervonic acid from several independent studies around the world by independent
sources are credible; we do to an extent rely on these independent studies for guidance, however, we cannot verify these claims with certain
accuracy. We did not compensate any party for any report or writing on nervonic acid or acer trunactum, we have no influence or made any
requests or demands for any party to produce any report on nervonic acid or acer truncatum.
Suppliers
represented by CAT9
Shandong Run’an BiotechCo., Ltd
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Acer truncatum oil, and sandwich gel candy
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Heze Zonghoo Jianyuan Biotech Co.,Ltd.
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Acer truncatum oil
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We are also planning to invest
further into our research and development (R&D) to improve our processing yield of Acer truncatum and nervonic acid. This includes
the research and development of planting technology, products, and process technology. We also plan to increase our spending on our information
systems; we will seek to invest in a fully integrated information system to monitor crop production, fertilization, irrigation, and harvesting
yield. We will also add quality control measures, POS systems, packaging, logistics, and e-commerce systems. A JIT (just in time) system
to monitor inventory and critical path raw material requirements will also be implemented.
Changes in Chinese environmental regulations and enforcement policies
could subject us to additional liability and adversely affect our ability to continue certain operations.
In regards to our farm management and equipment
operations, the Chinese environmental regulations continue to develop and evolve rapidly; therefore, we cannot predict the extent to
which our operations may be affected by future enforcement policies as applied to existing laws, by changes to current environmental
laws and regulations, or by the enactment of new environmental laws and regulations. There are numerous Chinese provincial and local
laws and regulations relating to the protection of the environment and the ultimate impact of complying with such laws and
regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated
or are undergoing revision. Our business and operating results could be materially and adversely affected if we were required to
increase expenditures to comply with any new environmental regulations affecting our operations. We may, in the future, receive
citations or notices from governmental authorities that our operations are not in compliance with our permits or certain applicable
regulations, including various transportation, environmental or land use laws and regulations. Should we receive such citations or
notices, we would generally seek to work with the authorities to resolve the issues raised by such citations or notices. There can
be no assurance, however, that we will always be successful in this regard, and the failure to resolve a significant issue could
result in adverse consequences to us. As a result, we could incur material liabilities resulting from the costs of complying with
environmental laws, environmental permits or any claims concerning noncompliance, or liability from contamination.
We cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental
conditions may be found to exist at our facilities or at third-party sites for which we are liable. Enactment of stricter laws or regulations,
stricter interpretations of existing laws and regulations or the requirement to undertake the investigation or remediation of currently
unknown environmental contamination at our own or third-party sites may require us to make additional material expenditures, which would
adversely affect our profitability.
We do not carry any business interruption or liability
insurance. As a result, we may incur uninsured losses, increasing the possibility that you would lose your entire investment
in our company.
We could be exposed to liabilities or other claims
for which we would have no insurance protection. We do not currently maintain any business interruption insurance or any other comprehensive
insurance policy. As a result, we may incur uninsured liabilities and losses as a result of the conduct of our business. Business disruption
insurance is available to a limited extent in China, but we have determined that the risks of disruption, the cost of such insurance and
the difficulties associated with acquiring such insurance make it impractical for us to have such insurance. Should uninsured losses occur,
any purchasers of our common stock could lose their entire investment.
Our business is affected by competition and substantial
technological change.
We currently face competition from many other companies
that offer farm food products that may be lower than the prices we charge. Many of these companies have substantially greater financial
and other resources than us and, therefore, are able to spend more than us in areas such as product development and marketing. Additionally,
if our suppliers increase prices on Acer truncatum oil, or if there is a shortage, or if they refuse to sell to us, our business may be
negatively affected by such actions.
Competitors may develop, use, create alternative innovative
methods to sell, market and distribute farm food products that render our products or proposed products uneconomical or that may be superior
to our products. In addition, farm management and equipment has its own set of risks related to competition and substantial technological
changes. If our suppliers of farm management and equipment fail to deliver or we fail to secure product at favorable pricing, if our suppliers
fail to create innovative products that customers demand, and we are unable to meet our end customer's demands, all of which would have
a material adverse effect on us.
Our business may be adversely affected by a global
economic downturn, in addition to any uncertainties in the financial markets.
Although we believe that global financial markets
have recovered from an economic downturn, we cannot make any assurances that we will not experience disruptions, or loss due to the possibility
of another negative global event whereby severely diminished liquidity and credit availability, declines in consumer confidence, declines
in economic growth, increases in unemployment rates, and uncertainty about economic stability occurs Any economic downturn generally or
any decrease in consumer spending in the PRC, could cause advertisers to reduce their spending on advertisements, would have a material
adverse effect on our business, cash flows, financial condition and results of operations. The inability to obtain adequate financing
from debt or capital sources could force us to self-fund strategic initiatives or even forego certain opportunities, which in turn could
potentially harm our performance.
We will need additional capital to successfully
implement our current business strategy, which may not be available to us, and if we raise additional capital, it may dilute your ownership
in us.
Our continued growth is dependent upon our ability
to generate increased revenue from our existing customers, obtain new customers and raise capital from outside sources. An important element
of our growth strategy is our Acer truncatum sales and our development of land leases to grow our own Acer truncatum plants. We believe
that in order to continue to operate additional market share and general additional revenue, we will have to raise more capital to fund
our business.
In the future, we may be unable to obtain the necessary
financing for our capital requirements on a timely basis and on acceptable terms, and our failure to do so may adversely affect our financial
position, competitive position, growth and profitability. Our ability to obtain acceptable financing at any time may depend on a number
of factors, including: our financial condition and results of operations; the condition of the PRC economy and the Acer truncatum industry,
and conditions in relevant financial markets in the United States, PRC and elsewhere in the world.
Our failure to effectively manage growth
could harm our business.
We have rapidly and significantly expanded our operations
since our inception and will endeavor to further expand our operations in the future. Any additional significant growth in the market
for our services or our entry into new markets may require and expansion of our employee base for managerial, operational, financial,
sales and marketing and other purposes.
During any growth, we may face problems related to
our operational and financial systems and controls, including quality control and service capacities. We would also need to continue to
expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of
management to identify, recruit, maintain, integrate, and motivate new employees.
Aside from increased difficulties in the management
of human resources, we may also encounter working capital issues, as we will need increased liquidity to hire additional employees. For
effective growth management, we will be required to continue improving our operations, management, and financial systems and controls.
Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our
profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards
required by our existing and potential customers.
We may pursue future growth through strategic acquisitions
and alliances which may not yield anticipated benefits and may adversely affect our operating results, financial condition and existing
business.
We may seek to grow in the future through strategic
acquisitions in order to complement and expand our business. The success of our acquisition strategy will depend on, among other things:
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the availability of suitable candidates;
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competition from other companies for the purchase of available candidates;
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our ability to value those candidates accurately and negotiate favorable terms for those acquisitions;
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the availability of funds to finance acquisitions;
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the ability to establish new informational, operational and financial systems to meet the needs of our business;
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the ability to achieve anticipated synergies, including with respect to complementary products or services; and
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the availability of management resources to oversee the integration and operation of the acquired businesses.
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If we are not successful in integrating acquired businesses
and completing acquisitions in the future, we may be required to reevaluate our acquisition strategy. We also may incur substantial expenses
and devote significant management time and resources in seeking to complete acquisitions. Acquired businesses may fail to meet our performance
expectations. If we do not achieve the anticipated benefits of an acquisition as rapidly as expected, or at all, investors or analysts
may not perceive the same benefits of the acquisition as we do. If these risks materialize, our stock price could be materially adversely
affected.
We face risks related to natural disasters, terrorist
attacks or other unpredictable events in China which could have a material adverse effect on our business and results of operations.
Our business could be materially and adversely affected
by natural disasters, terrorist attacks or other events in China where all of our operations are located. For example, in early 2008,
parts of China suffered a wave of strong snow storms that severely impacted public transportation systems. In May 2008, Sichuan Province
in China suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. The
May 2008 Sichuan earthquake has had a material adverse effect on the general economic conditions in the areas affected by the earthquake.
The occurrence of any future disasters such as earthquakes, fires, floods, wars, terrorist attacks, computer viruses, transportation disasters
or other events, or our information system or communications network breaks down or operates improperly as a result of such events, our
facilities may be seriously damaged, and we may have to stop or delay operations. We may incur expenses relating to such damages, which
could have a material adverse effect on our business and results of operations.
We may adopt an equity incentive plan under which
we may grant securities to compensate employees and other services providers, which would result in increased share-based compensation
expenses and, therefore, reduce net income.
We may adopt an equity incentive plan under which
we may grant shares or options to qualified employees. Under current accounting rules, we would be required to recognize share-based compensation
as compensation expense in our statement of operations, based on the fair value of equity awards on the date of the grant, and recognize
the compensation expense over the period in which the recipient is required to provide service in exchange for the equity award. We have
not made any such grants in the past, and accordingly our results of operations have not contained any share-based compensation charges.
The additional expenses associated with share-based compensation may reduce the attractiveness of issuing stock options under an equity
incentive plan that we may adopt in the future. If we grant equity compensation to attract and retain key personnel, the expenses associated
with share-based compensation may adversely affect our net income. However, if we do not grant equity compensation, we may not be able
to attract and retain key personnel or be forced to expend cash or other compensation instead. Furthermore, the issuance of equity awards
would dilute the shareholders’ ownership interests in our company.
We have no plans of paying dividends
on our Common Stock.
We have never paid dividends on our Common
Stock and do not presently intend to pay any dividends in the foreseeable future. We anticipate that any funds available for payment of
dividends will be re-invested into the Company to further its business strategy.
Special Risk Factor due to the Novel Coronavirus
(COVID-19)
During late 2019, a virus known as the Novel
Coronavirus or “COVID-19” appeared in Wuhan, China. By March 11, 2020, the WHO (World Health Organization) labeled COVID-19
as a pandemic and China had taken steps to shelter-in-place and quarantine its population. Our Company and all of our operations are located
in China. We experienced a downturn in our business due to the mandatory quarantine and our employees and staff worked from home as advised
by the government. The negative effect of COVID-19 on our operations are no longer hypothetical scenarios and during the quarantine period
in early 2020, our sales declined as a result.
As of the date of this Form 10-K filing,
China has slowly begun to relax quarantine measures and allowed businesses to operate again. We cannot make any assurances that
COVID-19 or a variant of COVID-19 will not reappear with new infections and to the extent that COVID-19, a variant, we may encounter
prolonged operational lockdown measures which would disrupt our business operations.
In addition, if a renewed outbreak of SARS
(Severe Acute Respiratory Syndrome), Avian Flu or another widespread public health problem, such as the spread of H1N1 (“Swine”)
Flu, in China, where all of our operations are located and where all of our sales occur, will have a negative effect on our operations.
Such an outbreak will have an impact on our operations as a result of:
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quarantines or closures of our facilities, which will severely disrupt our business operations,
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the sickness or death of our key officers and employees, and
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a general slowdown in the Chinese economy.
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Any of the foregoing events or other unforeseen consequences of public health problems will adversely affect our operations.
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Authorization of Preferred Stock
Our Certificate of Incorporation authorizes
the issuance of up to 5,000,000 shares of preferred stock with designations, rights and preferences determined from time to time by its
Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the common
stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the Company. Although we have no present intention to issue any shares of its authorized preferred
stock, there can be no assurance that we will not do so in the future.
Control by Management
The officers and directors of the Company currently own 77% of all
the issued and outstanding capital stock of the Company. Consequently, these individual share the ability to control the operations of
the Company and will have the ability to control substantially all matters submitted to stockholders for approval, including:
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Election of the board of directors;
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Removal of any directors;
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Amendment of the Company’s certificate of incorporation or bylaws; and
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Adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination.
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This Report Contains Forward-Looking Statements
And Information Relating To Us, Our Industry And To Other Businesses
These forward-looking statements are based
on the beliefs of our management, as well as assumptions made by and information currently available to our management. When used in this
prospectus, the words “estimate,” “project,” “believe,” “anticipate,” “intend,”
“expect” and similar expressions are intended to identify forward-looking statements. These statements reflect our current
views with respect to future events and are subject to risks and uncertainties that may cause our actual results to differ materially
from those contemplated in our forward-looking statements. We caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this prospectus. We do not undertake any obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.
Risks Related to Our Capital Structure
Our trading symbol is CATN, however, at the this time
there is a limited trading market for our common stock, and there can be no assurances made of an established, robust public trading market,
which if we were unable to accomplish, may adversely affect the ability of our investors to sell their securities in the public market.
The market price and trading volume of shares of
our common stock may be volatile.
If and when a market develops for our securities,
the market price of our common stock could fluctuate significantly for many reasons, including for reasons unrelated to our specific performance,
such as reports by industry analysts, investor perceptions, or negative announcements by customers, competitors or suppliers regarding
their own performance, as well as general economic and industry conditions. For example, to the extent that other large companies within
our industry experience declines in their share price, our share price may decline as well. In addition, when the market price of a company’s
shares drops significantly, shareholders could institute securities class action lawsuits against the company. A lawsuit against us could
cause us to incur substantial costs and could divert the time and attention of our management and other resources.