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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(Amendment No. 1)

 

(RULE 14a-101)

 

SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

 

Filed by the Registrant ☐

 

Filed by a Party other than the Registrant ☐

 

Check the appropriate box:

 

Preliminary Proxy Statement
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to Section 240.14a-12

 

iFresh Inc.

(Exact name of registrant as specified in its charter)

 

N/A

(Name of person(s) filing proxy statement, if other than the registrant)

 

Payment of Filing Fee (check the appropriate box):

 

No fee required.

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies: Common Stock, par value $0.0001, of iFresh, Inc. “Common Stock”)

 

  (2)  Aggregate number of securities to which transaction applies: iFresh will issue 254,813,383 shares of Common Stock in connection with the acquisition of Xiaotai International Investment Inc. (“Xiaotai”)

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):  The maximum aggregate value was determined based upon (A) the total valuation of Xiaotai ($293,035,390) and (B) the amount received by the Company in exchange for selling NYM Holding Inc. ($9.1 million)

 

  (4) Proposed maximum aggregate value of transaction: $302,135,390

 

  (5) Total fee paid: $36,618.81

 

Fee paid previously with preliminary materials.

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

 

  (2) Form, Schedule or Registration Statement No.:

 

  (3) Filing Party:

 

  (4) Date Filed:

  

 

 

 

 

 

IFRESH INC.

2-39 54th Avenue

Long Island City, New York 10016

 

TO THE STOCKHOLDERS OF iFRESH INC.:

 

You are cordially invited to attend a special meeting of the stockholders of iFresh Inc., a Delaware corporation (referred to herein as “IFMK,” “iFresh,” the “Company,” “we,” “us” or “our”), which will be held on ____, 2019 at 10:00 a.m., local time, at the offices of Hunter Taubman Fischer & Li, LLC, 1450 Broadway, 26th Floor, New York, NY 10018.

 

At the special meeting, our shareholders will be asked to consider and vote upon a proposal, which we refer to as the “Acquisition Proposal,” to approve that certain Share Exchange Agreement dated June 7, 2019 (the “Exchange Agreement”) pursuant to which we shall acquire all of the outstanding issued shares of Xiaotai International Investment Inc. from certain shareholders of Xiaotai International Investment Inc. (collectively, the “Sellers”). We refer to Xiaotai International Investment Inc. as “Xiaotai” and Xiaotai and its consolidated subsidiaries collectively as “Xiaotai Group” and we refer to such acquisition by us hereafter as the “Acquisition.” Pursuant to the Exchange Agreement, in exchange for 100% of the equity interests of Xiaotai, we agreed to issue to the Sellers an aggregate of 254,813,383 shares of the Company’s common stock, par value $0.0001 (the “Exchange Shares”).

 

It is anticipated that, following completion of the Acquisition, IFMK’s existing shareholders will retain an ownership interest of approximately 6% of the Company, and Sellers will own approximately 94% of the Company. A copy of the Exchange Agreement is attached to the accompanying proxy statement as Annex A.

 

Our shareholders will also be asked to consider and vote upon a proposal, which we refer as the “Spin-off Proposal”, to approve that certain share purchase agreement, dated June 7, 2019 (the “Purchase Agreement”) and related transactions providing for the sale by us of our existing business and operations to Go Fresh 365, Inc. (“Go Fresh”), an affiliate of our Chairman, Mr. Long Deng, in exchange for cash consideration of $9.1 million (the “Spin-off”), so that our only business upon completion of the Acquisition and the Spin-off will be that of Xiaotai and its subsidiaries. A copy of the Purchase Agreement is attached to the accompanying proxy statement as Annex B. We refer to the Acquisition and Spin-off as (the “Restructure”).

 

In connection with its evaluation of the Restructure, the board of directors of IFMK (the “Board”) engaged The Benchmark Company, LLC (“Benchmark”) to act as its financial advisor. Benchmark has rendered its opinions stating that, based upon and subject to the assumptions, limitations and qualifications set forth in their opinions, the consideration to be paid by the Company in connection with the Acquisition and the consideration to be received by the Company in connection with the Spin-off were both fair, from a financial point of view, to IFMK’s stockholders. The written opinions of Benchmark relating to the Acquisition and Spin-off are attached respectively as Annex C and Annex D to this proxy statement, and you should read it carefully.

 

In addition, in connection with the Restructure, we are soliciting your consent to:

 

1) approve and adopt an amendment to the Company’s Certificate of Incorporation (the “Charter Amendment”) to change the Company’s corporate name to “Terran Financial Services Group Inc.”  (the “Name Change” and the “Name Change Proposal”) to better reflect the combined business upon completion of the Acquisition;

 

2) approve and adopt the Charter Amendment to affect a reverse stock split of the Company’s issued and outstanding common stock, par value $0.0001 (“Common Stock”) by a ratio of not less than one-for-two and not more than one-for-ten and then a forward stock split of our then issued and outstanding common stock by a ratio of not less than one-for-two and not more than one-for-ten immediately following the reverse split (the “Reverse Split”) at any time prior to [__________], 2019, with the exact ratios to be set at a whole number within this range, as determined by the Board in its sole discretion (the “Reverse Split Proposal”);

 

3) approve and adopt the Charter Amendment to increase the number of shares of Common Stock that the Company has authority to issue from 100,000,000 to 1,000,000,000 and the number of shares of preferred stock of the Company, par value $0.0001 (“Preferred Stock”) has authority to issue from 1,000,000 to 10,000,000; and consequently, to increase the total number of shares of all classes of capital stock that the Company has authority to issue from 101,000,000 to 1,010,000,000 (the “Capital Increase” and “Capital Increase Proposal”). A copy of the Charter Amendment is attached to the accompanying proxy as Annex E; and

 

4) elect Baofeng Pan, [ ], [ ], [ ] and [ ] (the “Director Nominees”) to serve on the Board (the “Election of Directors” and “Election of Directors Proposal”) until the next annual shareholders meeting or until their successors are duly elected and qualified.

 

 

 

  

The Acquisition, the Spin-off, the Name Change, the Reverse Split, the Capital Increase and the Election of Directors proposals are conditioned upon the adoption of each other.

 

Although a shareholder meeting may be adjourned without further notice by the chairperson of the meeting pursuant to our Bylaws, our shareholders will also be asked to consider and vote upon the proposal to adjourn the special meeting to a later date, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the meeting, there are not sufficient votes to approve the Acquisition Proposal and the Spin-off Proposal, which we refer to as the “Adjournment Proposal”.

 

Each of these proposals is more fully described in the accompanying proxy statement, which each shareholder is encouraged to review carefully. 

 

We are providing this proxy statement and accompanying proxy card to our shareholders in connection with the solicitation of proxies to be voted at the special meeting and at any adjournments or postponements of the special meeting. Whether or not you plan to attend the special meeting, we urge you to read this proxy statement carefully. Please pay particular attention to the section entitled “Risk Factors” commencing on page 18. 

 

Whether or not you plan to attend a special meeting, please take the time to vote by completing and mailing the enclosed proxy card in the enclosed envelope. YOUR VOTE IS VERY IMPORTANT.

 

NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE IFMK COMMON STOCK TO BE ISSUED IN THE RESTRUCTURE OR DETERMINED IF THIS PROXY STATEMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

Thank you for your participation. We look forward to your continued support.

 

  Sincerely,
   
June 7, 2019 /s/ Long Deng
 

Long Deng

Chief Executive Officer

 

The accompanying proxy statement is dated [   ], 2019 and was first mailed to IFMK stockholders on or about [   ], 2019.

 

 

 

 

IFRESH INC.

2-39 54th Avenue

Long Island City, New York 10016

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS.

To Be Held on [●], 2019

YOUR VOTE IS VERY IMPORTANT.

PLEASE VOTE YOUR SHARES PROMPTLY.

 

NOTICE IS HEREBY GIVEN, that you are cordially invited to attend a special meeting (the “Special Meeting”) of stockholders of iFresh Inc., to be held at [10:00] a.m., local time, on [  ], 2019, at the offices of counsel for IFMK, Hunter Taubman Fischer & Li, LLC, 1450 Broadway, 26th Floor, New York, NY 10018, in order to consider and vote upon: 

 

  1) The Acquisition Proposal --- to adopt the Exchange Agreement and to approve the Acquisition of Xiaotai contemplated by such agreement;

 

  2) The Spin-off Proposal --- to adopt the Purchase Agreement and to approve the Spin-off of Company’s existing assets contemplated by such agreement;

 

  3) The Reverse Split Proposal --- to approve and adopt an amendment to our Certificate of Incorporation (“Charter Amendment”) to affect the Reverse Split of our issued and outstanding Common Stock by a ratio of not less than one-for-two and not more than one-for-ten at any time prior to [_______], 2019, with the exact ratio to be set at a whole number within this range, as determined by the Board in its sole discretion;  

 

  4) The Capital Increase Proposal --- to approve and adopt an amendment to the Company’s Certificate of Incorporation to increase the number of shares of common stock that the Company has authority to issue from 100,000,000 to 1,000,000,000 and the number of shares of Preferred Stock that the Company has authority to issue from 1,000,000 to 10,000,000; and consequently, to increase the total number of shares of all classes of capital stock that the Company has authority to issue from 101,000,000 to 1,010,000,000;

 

  5) The Name Change Proposal --- to approve the Charter Amendment to change the Company’s corporate name to “Terran Financial Services Group.”;

 

  6) The Election of Directors Proposal --- to elect [ ] the Director Nominees to serve on the Company’s Board until the next annual shareholders meeting or until their successors are duly elected and qualified; and

 

  7) The Adjournment Proposal --- to approve the adjournment of the special meeting by the chairman thereof to a later date, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the special meeting, there are not sufficient votes to approve the Acquisition Proposal and Spin-off Proposal.

 

These items of business are described in the attached proxy statement, which we encourage you to read in its entirety before voting. Only holders of record of the Company’s common stock at the close of business on [______], 2019 are entitled to notice of the Special Meeting and to vote and have their votes counted at the Special Meeting and any adjournments or postponements of the Special Meeting.

 

The affirmative vote of the holders of a majority of the outstanding shares of our Common Stock is required to approve the Reverse Split Proposal. The affirmative vote of the holders of a majority of votes cast by our shareholders that are present in person or by proxy at the Special Meeting is required to approve both the Acquisition Proposal and the Spin-off Proposal. Election of the director’s proposal requires the affirmative vote of a plurality of the shares of Common Stock represented in person or by proxy and who are entitled to vote in the election of directors at the Special Meeting. Approval of the Adjournment Proposal whether or not a quorum is present, requires the affirmative vote of a majority of the votes cast by the holders of shares of IFMK’s common stock entitled to vote.

 

 

 

 

Although the Name Change Proposal and Capital Increase Proposal in themselves do not need stockholder vote, the Charter Amendment which includes the reverse split will require approval of majority of the outstanding shares of our common stock.

 

After careful consideration, the Board has determined that the Reverse Split Proposal, the Capital Increase Proposal, the Name Change Proposal, the Acquisition Proposal, the Spin-off Proposal, the Election of Directors Proposal, and the Adjournment Proposal are fair to and in the best interests of the Company and its stockholders and unanimously recommends that you vote or give instruction to vote:

 

  FOR” the Acquisition Proposal;
  FOR” the Spin-off Proposal;
  FOR” the Reverse Split Proposal;
  FOR” the Capital Increase Proposal;
  FOR” the Election of Directors Proposal;
  FOR” the Name Change Proposal; and
  FOR” the Adjournment Proposal, if presented.

 

 

 

 

YOUR VOTE IS IMPORTANT

 

WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, WE ENCOURAGE YOU TO SUBMIT YOUR PROXY AS PROMPTLY AS POSSIBLE (1) BY TELEPHONE, (2) THROUGH THE INTERNET OR (3) BY MARKING, SIGNING AND DATING THE ENCLOSED PROXY CARD AND RETURNING IT IN THE POSTAGE-PAID ENVELOPE PROVIDED. You may revoke your proxy or change your vote at any time before the Special Meeting. If your shares are held in the name of a bank, broker or other nominee, please follow the instructions on the voting instruction card furnished to you by such bank, broker or other nominee, which is considered the stockholder of record, in order to vote. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. Your broker or other agent cannot vote on any of the proposals, including the proposal to approve the Reverse Split Proposal, the Capital Increase Proposal, the Election of Directors Proposal, the Name Change Proposal, the Acquisition Proposal, and the Spin-off Proposal without your instructions.

 

If you fail to return your proxy card, grant your proxy electronically over the Internet, or by telephone, or vote by ballot in person at the Special Meeting, your shares will not be counted for purposes of determining whether a quorum is present at the Special Meeting. If you are a stockholder of record, voting in person by ballot at the Special Meeting will revoke any proxy that you previously submitted. If you hold your shares through a bank, broker or other nominee, you must obtain from the record holder a valid “legal” proxy issued in your name in order to vote in person at the Special Meeting.

 

We encourage you to read the accompanying proxy statement carefully and in its entirety, as well as the documents we file from time to time with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 31, 2018. If you have any questions concerning the Acquisition, the Spin-off, the Special Meeting or the accompanying proxy statement, would like additional copies of the accompanying proxy statement or need help voting your shares of common stock, please contact Long Deng at (718) 628 6200.

 

Thank you for your participation. We look forward to your continued support.

 

  By Order of the Board of Directors,
   
  iFresh Inc.
     
By: /s/ Long Deng
  Name: Long Deng
  Title: Chief Executive Officer

  

 

 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE PROPOSAL 1
   
FORWARD-LOOKING STATEMENTS 10
   
SUMMARY 11
   
The Parties to the Exchange Agreement 11
The Acquisition 11
Pre-Acquisition Structure  
Post-Acquisition Structure  
Conditions to Closing of the Acquisition 12
Termination 12
Fees and Expenses 13
Board of Directors and Management Following the Acquisition 13
Opinion of Benchmark to the Board of Directors of IFMK 13
Interests of IFMK’s Directors and Officers in the Acquisition 14
Regulatory Approvals Required for the Acquisition 14
The Reverse Split 16
The Name Change 16
The Capital Increase 16
The Election of Directors 17
Risk Factors 17
Appraisal Rights 17
The Special Meeting 17
Recommendation to Stockholders 17
   
RISK FACTORS 18
   
Risks Related to the Acquisition 18
Risks Related to IFMK 23
Risks Relating to IFMK’s Corporate Structure  
Risks Relating to Our Securities  
Risks Related to Xiaotai Group 30
   
THE SPECIAL MEETING 63
   
Date, Time and Place of the Special Meeting 63
Purpose of the Special Meeting 63
Record Date; Shares Entitled to Vote; Quorum 64
Vote Required; Abstentions and Broker Non-Votes 64
Shares Held by IFMK’s Directors and Executive Officers 64
Voting of Proxies 64
Revocability of Proxies 65
Board of Directors’ Recommendation 65
Solicitation of Proxies 66
Anticipated Date of Completion of the Acquisition 66
Other Matters 66
Householding of Special Meeting Materials 66
Who Can Answer Your Questions About Voting Your Shares 66
 
THE ACQUISITION 66
   
Parties Involved in the Acquisition 66
The Exchange Agreement 67
The Related Agreements 73
Effect of the Acquisition 74
Effect if the Acquisition is Not Completed 74
Background of the Acquisition 76
Opinion of Benchmark to the Board of Directors of IFMK 78
Interests of IFMK’s Directors and Officers in the Acquisition 82
Closing and Effective Time of the Acquisition 82
Appraisal Rights 82
Accounting Treatment 82
Regulatory Approvals Required for the Acquisition 82

 

i

 

 

THE REVERSE SPLIT 91
   
Procedure for Implementing the Reverse Stock Split 91
Effect of the Reverse Split on holders of IFMK common stock 92
Beneficial Holders of Common Stock (i.e. stockholders who hold in street name) 92
Registered “Book-entry” Holders of Common Stock (i.e. stockholders that are registered on the transfer agent’s books and records but do not hold stock certificates) 92
Holders of Certificated Shares of Common Stock 92
Fractional Shares 93
Accounting Matters 93
Federal Income Tax Consequences of the Reverse Split 93
U.S. Holders 93
No Appraisal Rights 94
Required Vote 94
   
THE CAPITAL INCREASE 94
   
The Capital Increase 94
Purpose and Effects of the Capital Increase 94
Effective Date 94
Required Vote 94
   
THE NAME CHANGE 95
   
The Name Change 95
Required Vote 95
   
THE ELECTION OF DIRECTORS 95
   
The Directors Election 95
Required Vote 98
   
DESCRIPTION OF IFMK SECURITIES 103
   
General 103
Common Stock 103
Preferred Stock 103
Stock Transfer Agent 104
   
DESCRIPTION OF XIAOTAI SECURITIES 104
Common Shares  
Preferred shares  
Certain provisions of Xiaotai’s Memorandum and Articles of Association  
   
INFORMATION WITH RESPECT TO IFMK 109
   
General  
IFMK Management’s Discussion and Analysis of Financial Condition and Results of Operations 123
Certain Relationships and Related Party Transactions of IFMK  
   
INFORMATION WITH RESPECT TO XIAOTAI GROUP 137
   
Overview 137
Xiaotai Group Management’s Discussion and Analysis of Financial Condition and Results of Operations 174
Quantitative and Qualitative Disclosures about Market Risk 200
Related Party Transactions 201
   
MANAGEMENT FOLLOWING THE ACQUISITION 204
   
Security Ownership of Certain Beneficial Owners and Management Upon Consummation of the Acquisition 208

 

ii

 

 

PROPOSAL 1: APPROVAL OF THE ACQUISITION 208
   
PROPOSAL 2: APPROVAL OF THE REVERSE SPLIT 210
   
PROPOSAL 3: APPROVAL OF THE CAPITAL INCREASE 210
   
PROPOSAL 4: APPROVAL OF THE NAME CHANGE 211
   
PROPOSAL 5: APPROVAL OF THE ELECTION OF DIRECTORS 212
   
PROPOSAL 6: THE ADJOURNMENT PROPOSAL 213
   
OTHER MATTERS 214
   
LEGAL MATTERS 214
   
EXPERTS 214
   
FUTURE STOCKHOLDER PROPOSALS 214
   
WHERE YOU CAN FIND MORE INFORMATION 215
   
MISCELLANEOUS 215
   
INDEX TO FINANCIAL STATEMENTS F-1

 

ANNEXES

 

Annex A Share Exchange Agreement dated June 7, 2019 between the Company and Xiaotai
   
Annex B Share Purchase Agreement dated June 7, 2019 between the Company and Go Fresh 365 Inc.
   
Annex C Opinion of Benchmark, the Company’s Financial Advisor for the Acquisition
   
Annex D Opinion of Benchmark, the Company’s Financial Advisor for the Spin-off
   
Annex E Certificate of Amendment of Certificate of Incorporation

 

iii

 

 

QUESTIONS AND ANSWERS ABOUT THE PROPOSALS

 

The following are answers to some questions that you, as a stockholder of IFMK, may have regarding the Name Change, Reverse Split, the Acquisition, the Spin-off and the other matters being considered at IFMK’s Special Meeting, which is referred to herein as the “Special Meeting.” We urge you to read carefully the remainder of this proxy statement because the information in this section does not provide all the information that might be important to you with respect to the Acquisition and the other matters being considered at the Special Meeting. Additional important information is also contained in the annexes to and the documents incorporated by reference into this proxy statement.

 

Q: Why am I receiving this proxy statement?

 

A: The Board is soliciting your proxy to vote at the Special Meeting because you owned shares of IFMK common stock at the close of business on [_______], 2019 (the “Record Date”) for the Special Meeting, and are therefore entitled to vote at the Special Meeting. This proxy statement, along with a proxy card or a voting instruction card, is being mailed to stockholders on or about [_______], 2019. IFMK has made these materials available to you on the Internet, and IFMK has delivered printed proxy materials to you or sent them to you by email. This proxy statement summarizes the information that you need to know in order to cast your vote at the Special Meeting. You do not need to attend the Special Meeting in person to vote your shares of IFMK common stock.

 

Q: When and where will the Special Meeting be held?

 

A: The Special Meeting will be held at 10:00 a.m., local time, on [__________, _______], 2019 at the offices of counsel for IFMK, Hunter Taubman Fischer & Li, LLC, 1450 Broadway, 26th Floor, New York, NY 10018.

 

Q: On what matters will I be voting?

 

A:

IFMK and Xiaotai have entered into an Exchange Agreement dated as of June 7, 2019 by and among Xiaotai, IFMK and certain shareholders of Xiaotai as named on Annex I thereto (the “Seller’). A copy of the Exchange Agreement, is attached to this proxy statement as Annex A, and IFMK encourages its stockholders to read it in its entirety.

 

IFMK and Go Fresh 365 Inc. have entered into a Purchase Agreement dated as of June 7, 2019 by and among [ ], [ ], and [ ]. A copy of the Purchase Agreement is attached to this proxy statement as Annex B, and IFMK encourages its stockholders to read it in its entirety.

 

IFMK’s stockholders are being asked to consider and vote upon proposals relating to the Exchange Agreement, and the Purchase Agreement and specifically to adopt and approve the Reverse Split Proposal, the Capital Increase Proposal, the Name Change Proposal, the Election of Directors Proposal, the Acquisition Proposal and the Spin-off Proposal, which, among other things, provide for: (a) the Reverse Split of our issued outstanding stock by a ratio of not less than one-for-two and not more than one-for-ten at any time prior to [ ], 2019, with the exact ratio to be set at a whole number within this range as determined by the Board in its sole discretion; (b) the Company’s name to “Terran Financial Services Group, Inc.”; (c) the Capital Increase of Common Stock that the Company has authority to issue to 1,000,000,000 and the Preferred Stock that the Company has authority to issue to 10,000,000; (d) the Acquisition of Xiaotai contemplated by the Exchange Agreement; and (e) the Spin-off of NYM Holding, Inc. contemplated by the Purchase Agreement.

 

IFMK’s stockholders may also be asked to consider and vote upon a proposal to adjourn the meeting to a later date or dates to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the Special Meeting, IFMK would not have been authorized to consummate neither the Acquisition nor the Spin-off. IFMK will hold the Special Meeting to consider and vote upon these proposals. This proxy statement contains important information about matters to be acted upon at the Special Meeting. Stockholders should read it carefully. The vote of stockholders is important.

 

In order to complete the Acquisition, IFMK stockholders must vote to approve the Acquisition Proposal, the Spin-off Proposal, the Capital Increase Proposal, the Reverse Split Proposal, the Election of Directors Proposal, and the Name Change Proposal, all other conditions to the Acquisition and Spin-off must be satisfied or waived.

 

1

 

 

Stockholders are encouraged to vote as soon as possible after carefully reviewing this proxy statement. If IFMK stockholders fail to adopt the Reverse Split Proposal, the Capital Increase Proposal, the Name Change Proposal, the Election of Directors Proposal, the Spin-off Proposal or the Acquisition Proposal, the Acquisition and the Spin-off cannot be completed. 

 

Q: Why is IFMK proposing the Acquisition?

 

A: Xiaotai, through its subsidiaries, operates and controls Zhejiang Xiaotai Technology Co., Ltd (“Xiaotai Technology Co.”). Based on its due diligence investigations of Xiaotai and the industry in which it operates, including the financial and other information provided by Xiaotai in the course of their negotiations, Board of IFMK believes that a business combination with Xiaotai as contemplated by the Exchange Agreement described below will provide IFMK stockholders with an opportunity to participate in a company with significant growth potential. However, there is no assurance we will be able to integrate the businesses successfully and to achieve anticipated synergies.

 

Q: What will the business of the Company be if the Restructure is consummated?

 

A: Upon consummation of the Restructure, the Company will be a financial services group operating an Internet platform specializing in providing efficient and optimized financial solutions, online investment and peer to peer lending facilitation services to individuals and small business owners and providing direct loans to small-to-medium sized businesses (“SMEs”), farmers and individuals in China.

 

Q: Who will be the directors of the Company following the Restructure?

 

A: Following the Restructure, Board will be as follows:

 

  Name Position
  Baofeng Pan Chairman of the Board and Director
 

[ ]

Executive Director
    Independent Director
    Independent Director
    Independent Director 

  

Q: Who will be the executive officers of the Company immediately following the Restructure?

 

A: Immediately following the Restructure, the executive management team of the combined organization is expected to be as set forth below:

 

  Name Position
  Fan Guo Chief Executive Officer
  Hailun Liu Chief Financial Officer

 

Q: Will the Company continue operations after the closing of the Restructure?

 

A: Yes, the Company will continue operations but will operate in financial technology business after consummation of the Restructure.

 

Q: What material negative factors did the boards of IFMK and Xiaotai consider in connection with the Acquisition?

 

A: By and large, the Board did not view the Acquisition and proposed transactions with Xiaotai as negative. Upon deliberation, the Board has determined that the potential positive value of the successful completion of the transactions with Xiaotai distinctly outweighed any negative factor. If the Exchange Agreement is not approved by IFMK stockholders or if the Acquisition is not completed for any other reason, IFMK stockholders will not receive any payment or other compensation for their shares of common stock. Instead, IFMK will remain an independent public company, its common stock will continue to be listed and traded on NASDAQ, if eligible, and registered under the Exchange Act and IFMK will continue to file periodic reports with the SEC. In addition, if the Acquisition is not completed, IFMK expects that management will operate the business in a manner similar to that in which it is being operated today and that IFMK’s stockholders will continue to be subject to the same risks and opportunities to which they are currently subjects including, without limitation, risks related to the highly competitive industry in which IFMK operates, the potential of NASDAQ delisting, and the adverse economic conditions it faces.

 

2

 

 

The primary negative consequence of the transaction that the Board considered was the likely decline in the liquidity of IFMK’s common stock. Another negative factor that the board considered was that, following the Acquisition, the IFMK shareholders would own a relatively small percentage of post-Restructure company’s common stock. Because IFMK had already faced the possibility that the common stock had not experienced an active trading market and would ultimately be delisted from NASDAQ, the Board did not believe that such negative factors outweighed the positive impact of the transaction to IFMK’s shareholders.

 

Furthermore, if the Acquisition is not completed, and depending on the circumstances that would have caused the Acquisition not to be completed, the price of IFMK’s common stock may decline significantly. If that were to occur, it is uncertain when, if ever, the price of IFMK’s common stock would return to the price at which it traded as of the date of this proxy statement.

 

Accordingly, if the Acquisition is not completed, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of IFMK’s common stock. If the Acquisition is not completed, the Board will continue to evaluate and review the Company’s business operations, properties, dividend policy and capitalization, among other things, make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance stockholder value. If the Exchange Agreement is not approved by IFMK’s stockholders or if the Acquisition is not completed for any other reason, there can be no assurance that any other transaction acceptable to IFMK will be offered or that IFMK’s business, prospects or results of operation will not be adversely impacted.

 

In addition, under specified circumstances, IFMK may be required to reimburse Xiaotai’s expenses or pay Xiaotai a termination fee, upon the termination of the Exchange Agreement, as described under “Fees and Expenses” beginning on page 13.

 

The board of directors of Xiaotai considered the significant additional legal, accounting and other transaction expenses that it would incur, including costs associated with its future public company reporting requirements, as well as the amount of management’s time that will be required to implement required new or improved controls over financial reporting as the material negative factors in connection with the Acquisition.

 

Please read with particular care the detailed description of the risks described in “Risk Factors” beginning on page 18 of this proxy statement.

 

Q: Why is IFMK proposing the Spin-off?

 

A: The Board is submitting the Spin-off Proposal to our stockholders for approval with the intent of focusing the Company’s limited resources and better manage the acquired business that has more long-term potential. The Spin-off also enables the Company to streamline its operations by removing the less productive grocery store businesses.

 

Q: Why is IFMK proposing the Reverse Split?

 

A: The Board is submitting the Reverse Split Proposal to our stockholders for approval with the intent of increasing the market price of our common stock to ensure that IFMK will be able to meet the listing requirements of Nasdaq Capital Market that the bid price shall be at least $4.00 immediately after consummation of Restructure.

 

Q: What is the effect of the Reverse Split on holders of IFMK common stock?

 

A: Depending on the ratio for the Reverse Split determined by the Board, a minimum of two and a maximum of ten shares of existing common stock will be combined into one new share of common stock. The actual number of shares issued after giving effect to the Reverse Split, if implemented, will depend on the reverse stock split ratio that is ultimately determined by the Board.

 

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The Reverse Split will affect all holders of our common stock uniformly and will not affect any stockholder’s percentage ownership interest in the Company, except that as described below in “Fractional Shares,” record holders of common stock otherwise entitled to a fractional share as a result of the Reverse Split will be rounded up to the next whole number. In addition, the Reverse Split will not affect any stockholder’s proportionate voting power.

 

The Reverse Split may result in some stockholders owning “odd lots” of less than 100 shares of common stock. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in “round lots” of even multiples of 100 shares.

 

Q: Why is IFMK proposing the Name Change?

 

A: The Board is submitting the Name Change Proposal to our stockholders for approval to better reflect the future business of the combined organization. Although the Company intend to continue its direct lending and guarantee business currently conducted in Zhejiang province, the Board believes the majority of the future growth will come from the online consumer financing operations conducted by Xiaotai.

  

Q: Why is IFMK proposing the Capital Increase?

 

A: The Board is submitting the Capital Increase Proposal to our stockholders for approval to give the Company more flexibility for future capital raising, incentivize directors, officers and employees, strategic acquisitions and other corporate actions.

 

Q: Why is IFMK proposing the Election of Directors?
   
A:  The Board is submitting the Election of Directors Proposal to our stockholders for approval to elect Mr. Pan, [  ], [  ], [  ] and [  ] to serve on the Company’s Board until .Mr. Pan is nominated to join the board since he is both the Xiaotai Group and Xiaotai’s Chairman and founder. We believe [   ]’s tremendous experience and acute business judgment in the smart finance industry is instrumental to our future growth upon closing of the Restructure. He is, therefore, well qualified to serve on our board.  

 

Q: With regard to the Reverse Split, what if I hold my shares in street name?

 

A:  Upon the implementation of the Reverse Split, we intend to treat shares held by stockholders through a bank, broker, custodian or other nominee in the same manner as registered stockholders whose shares are registered in their names. Banks, brokers, custodians or other nominees will be instructed to affect the Reverse Split for their beneficial holders holding our common stock in street name. However, these banks, brokers, custodians or other nominees may have different procedures than registered stockholders for processing the Reverse Split. Stockholders who hold shares of our common stock with a bank, broker, custodian or other nominee and who have any questions in this regard are encouraged to contact their banks, brokers, custodians or other nominees. 

 

Q: With regard to the Reverse Split, what if I am a “book entry” holder of common stock (i.e. a stockholder that is registered on the transfer agent’s books and records but does not hold stock certificates)?

 

A:  A certain number of our registered holders of common stock may hold some or all of their shares electronically in book-entry form with the transfer agent. These stockholders do not have stock certificates evidencing their ownership of the common stock. They are, however, provided with a statement reflecting the number of shares registered in their accounts. 

 

Stockholders who hold shares electronically in book-entry form with the transfer agent will not need to take action (the exchange will be automatic) to receive whole shares of post-Reverse Split common stock, subject to adjustment for treatment of fractional shares. We do not currently intend to issue fractional shares in connection with the Reverse Split. Therefore, we will not issue certificates representing fractional shares. In lieu of issuing fractions of shares, we will round up to the next whole number.

 

Q: What happens if I sell my shares after the Record Date, but before the Special Meeting?

 

A:  The Record Date is earlier than the date of the Special Meeting. If you transfer your shares of the Company after the Record Date but before the Special Meeting, you will retain your right to vote at the Special Meeting, but will transfer ownership of the shares and will not hold an interest in the Company with respect to such shares after the Reverse Split, the Name Change and the Restructure are completed. 

 

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Q: What Voting Stock will current IFMK shareholders hold in the Company after the consummation of the Restructure?

 

A:

 

 

It is anticipated that, upon the consummation of the Restructure, based upon the number of outstanding shares of IFMK common stock as of the record date for the Special Meeting, and upon the issuance of the Exchange Shares to Sellers in connection with the Exchange Agreement, current IFMK shareholders will own approximately 6% and the former shareholders of Xiaotai will own 94% of the outstanding voting power of the Company, assuming an issuance of additional 254,813,383 million shares by IFMK prior to closing of the Acquisition.

 

Q: Will there be any controlling shareholder after the consummation of the Restructure?
   
A: Upon the consummation of the Restructure, Mr. Baofeng Pan, our chairman and director upon closing of the Restructure, will own approximately 53.2% of the then issued and outstanding shares of common stock. Accordingly, Mr. Pan, by virtue of his beneficial ownership of these shares, will be able to exercise substantial influence over our operations. It is possible that her interest and decisions may materially differ from those of the other shareholders.

  

Q: What conditions must be satisfied to complete the Acquisition?

 

A: There are a number of closing conditions in the Exchange Agreement, including that IFMK’s shareholders have approved and adopted the Acquisition Proposal, satisfaction of NASDAQ listing requirements, satisfaction of all closing conditions for the Purchase Agreement, KeyBank National Association’s (“KeyBank”) unconditional written consent approving the Acquisition, and the satisfaction of other customary closing condition. For a summary of the conditions that must be satisfied or waived prior to completion of the Acquisition, see the section entitled “The Exchange Agreement.”

  

Q: Will the shares of Company common stock received by Sellers in the Acquisition be subject to any transfer restrictions?

 

A:  Yes. At closing, each seller will enter into a “lock-up” agreement provided that the seller will not, from the closing until the six-month or first anniversary of the closing (or if earlier, the date on which the Company consummates a liquidation, acquisition or other similar transaction with an unaffiliated third party that results in all of the Company’s shareholders having the right to exchange either equity holdings with us for cash, securities or other property) sell, pledge or otherwise dispose of or encumber any of the Exchange Shares received in the Acquisition. See “The Exchange Agreement—Lock-up Agreements.” 

 

Q: What conditions must be satisfied to complete the Spin-off?

 

A: There are a number of closing conditions in the Purchase Agreement, including that IFMK’s shareholders have approved and adopted the Spin-off Proposal, KeyBank’s unconditional written consent approving the Spin-off, satisfaction of all closing conditions for the Exchange Agreement and the satisfaction of other customary closing condition. For a summary of the conditions that must be satisfied or waived prior to completion of the Acquisition, see the section entitled “The Purchase Agreement.”

  

Q: What is the recommendation of the Board?

 

A: The Board has approved the Exchange Agreement, the Purchase Agreement and the other transactions contemplated thereby and determined that the Acquisition,  the Spin-off, the Name Change and the Reverse Split are advisable and in the best interests of the Company’s shareholders. The Board unanimously recommends that the Company’s shareholders vote in favor of each of the proposals described in this proxy statement. The Acquisition, the Spin-off, the Name Change, the Reverse Split, the Capital Increase, and the Election of Directors proposals are conditioned upon the adoption of each other.

 

Q: When is the Acquisition expected to be completed?

 

A: It is currently anticipated that the Acquisition will be consummated promptly following the Special Meeting, provided that all other conditions to the consummation of the Acquisition have been satisfied or waived. For a description of the conditions to the completion of the Acquisition, see the section entitled “The Exchange Agreement.”

 

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Q: What will happen to IFMK if, for any reason, the Acquisition does not close?

 

A: If, for any reason, the Acquisition does not close, the Board may elect to, among other things, attempt to complete another strategic transaction like the Acquisition, or attempt to organically grow its existing business with equity financing.

 

Q: When is the Spin-off expected to be completed?

 

A: It is currently anticipated that the Spin-off will be consummated promptly following the Special Meeting, provided that all other conditions to the consummation of the Spin-off have been satisfied or waived. For a description of the conditions to the completion of the Spin-off, see the section entitled “The Purchase Agreement.”

 

Q: What will happen to IFMK if, for any reason, the Spin-off does not close?

 

A: If, for any reason, the Spin-off does not close, the Board may elect to, among other things, attempt to complete another strategic transaction like the Spin-off, or attempt to sell either all or parts of our existing business and operations to its current shareholders.

 

Q: What happens if I sell my shares after the Record Date, but before the Special Meeting?

 

A: The Record Date is earlier than the date of the Special Meeting. If you transfer your shares of the Company after the Record Date but before the Special Meeting, you will retain your right to vote at the Special Meeting, but will transfer ownership of the shares and will not hold an interest in the Company in respect of such shares after the Reverse Split, the Name Change and the Restructure are completed.

 

Q: Are there risks associated with the Reverse Split, the Name Change, Capital Increase and the Restructure that I should consider in deciding how to vote?

 

A: Yes. There are a number of risks related to the Restructure and other transactions contemplated by the Exchange Agreement and Purchase Agreement, such as the Reverse Split and the Name Change, that are discussed in this proxy statement. Please read with particular care the detailed description of the risks described in “Risk Factors” beginning on page 18 of this proxy statement.

 

Q: How does the Board recommend that I vote?

 

A: The Board recommends that IFMK stockholders vote or give instruction to vote:

 

FOR” the Acquisition Proposal;

 

FOR” the Spin-off Proposal;

 

FOR” the Capital Increase Proposal;

 

FOR” the Name Change Proposal;

 

FOR” the Election of Directors Proposal; 

 

FOR” the Reverse Split Proposal; and

 

FOR” the Adjournment Proposal, if presented.

 

You should read “The Acquisition — Reasons for the Acquisition” beginning on page 75 for a discussion of the factors that the Board considered in deciding to recommend the approval of the Reverse Split Proposal, the Capital Increase Proposal, the Election of Directors Proposal, the Name Change Proposal, the Spin-off Proposal and the Acquisition Proposal.

  

Q: How do I vote?

 

A:   After you have carefully read this proxy statement prospectus and have decided how you wish to vote your shares of IFMK common stock, please vote promptly. 

 

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Stockholders of Record

 

If your shares of IFMK common stock are registered directly in your name with IFMK’s transfer agent, Continental Stock Transfer, you are the stockholder of record of those shares and these proxy materials have been mailed or e-mailed to you by the Company. You may vote your shares by Internet or by mail as further described below. Your vote authorizes Long Yi, Chief Financial Officer of the Company, as your proxy, with the power to appoint his substitute, to represent and vote your shares as you directed.

 

Vote by Internet—http://www. ____

 

Use the Internet to transmit your voting instructions 24 hours a day, seven days a week until 11:59 p.m. (Eastern Time) on ___, ____, 2019.

 

Please have your proxy card available and follow the instructions to obtain your records and create an electronic ballot. 

 

Vote by mail

 

Complete, date and sign your proxy card and return it in the postage-paid envelope provided.

 

Beneficial Owners

 

If your shares of IFMK common stock are held in a stock brokerage account, by a bank, broker or other nominee, you are considered the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your bank, broker or nominee that is considered the holder of record of those shares. As the beneficial owner, you have the right to direct your bank, broker, trustee or nominee on how to vote your shares via the Internet or by telephone if the bank, broker, trustee or nominee offers these options. You can also sign and return a proxy card. Your bank, broker, trustee or nominee will send you instructions for voting your shares. Please note that you may not vote shares held in street name by returning a proxy card directly to IFMK or by voting in person at the Special Meeting unless you provide a “legal proxy,” which you must obtain from your broker, bank or nominee. Furthermore, brokers, banks and nominees who hold shares of IFMK common stock on your behalf may not give a proxy to IFMK to vote those shares without specific instructions from you.

 

For a discussion of the rules regarding the voting of shares held by beneficial owners, please see the question below entitled “If I am a beneficial owner of shares of IFMK common stock, what happens if I don’t provide voting instructions?,” “What is discretionary voting?” and “What is a broker non-vote?”

 

Q: What vote is required to approve each proposal?

 

A: 

The affirmative vote of the holders of a majority of the outstanding shares of our common stock is required to approve the Reverse Split Proposal. The affirmative vote of the holders of a majority of votes cast by our shareholders that are present in person or by proxy at our special meeting is required to approve both the Acquisition Proposal and Spin-off Proposal. Election of the director’s proposal requires the affirmative vote of a plurality of the shares of Common Stock represented in person or by proxy and entitled to vote in the election of directors at the Meeting. Approval of the Adjournment Proposal whether or not a quorum is present, requires the affirmative vote of a majority of the votes cast by the holders of shares of IFMK’s common stock entitled to vote.

 

Although the Name Change Proposal and Capital Increase Proposal in themselves do not need stockholder vote, the Charter Amendment which includes the reverse split will require approval of a majority of the outstanding shares of our common stock.

 

Q: How many votes do I and others have?

 

A: You are entitled to one vote for each share of IFMK common stock  that you held as of the Record Date. As of the close of business on the Record Date, there were outstanding shares of IFMK common stock.

 

Q: How will our directors and executive officers vote on the Reverse Split Proposal, the Name Change Proposal, the Capital Increase Proposal, the Election of Directors Proposal,  the Acquisition Proposal and the Spin-off Proposal?

 

A: As of the Record Date, the directors and executive officers of IFMK as a group owned and were entitled to vote [_________] shares of the common stock of the Company, representing [____]% of the outstanding shares of IFMK common stock on that date. IFMK expects that its directors and executive officers will vote their shares in favor of the Reverse Split Proposal, the Name Change Proposal, the Election of Directors Proposal, the Acquisition Proposal and the Spin-off Proposal.

  

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Q: What will happen if I fail to vote or I abstain from voting?

 

A: Your failure to vote or your abstention from voting will have the same effect as a vote against the Reverse Split Proposal, the Name Change Proposal, the Acquisition Proposal, the Spin-off Proposal, and the Adjournment Proposal. Abstention will not have any effect to the Election of Directors Proposal. Your failure to vote on the Election of Director Proposal may result in some or all of the director nominees fail to be elected. 

 

Q: How many shares must be present to hold the Special Meeting?

 

A: The presence in person or by proxy of a majority of the outstanding shares of IFMK common stock entitled to vote at the Special Meeting is necessary to constitute a quorum at the Special Meeting. The inspector of election will determine whether a quorum is present. If you are a beneficial owner (as defined above) of shares of the Company’s common stock and you do not instruct your bank, broker or other nominee how to vote your shares on any of the proposals, your shares will not be counted as present at the Special Meeting for purposes of determining whether a quorum exists. Votes of stockholders of record who are present at the Special Meeting in person or by proxy will be counted as present at the Special Meeting for purposes of determining whether a quorum exists, whether or not such holder abstains from voting on all of the proposals.

 

Q: If I am a beneficial owner of shares of IFMK common stock, what happens if I don’t provide voting instructions? What is discretionary voting? What is a broker non-vote?

 

A: If you are a beneficial owner and you do not provide voting instructions to your broker, bank or other holder of record holding shares for you, your shares will not be voted with respect to any proposal for which your broker does not have discretionary authority to vote. Even though IFMK is listed on the Nasdaq Capital Market, the rules of the New York Stock Exchange determine whether proposals presented at stockholder meetings are “discretionary” or “non-discretionary.” If a proposal is determined to be discretionary, your broker, bank or other holder of record is permitted under New York Stock Exchange rules to vote on the proposal without receiving voting instructions from you. If a proposal is determined to be non-discretionary, your broker, bank or other holder of record is not permitted under New York Stock Exchange rules to vote on the proposal without receiving voting instructions from you. A “broker non-vote” occurs when a bank, broker or other holder of record holding shares for a beneficial owner does not vote on a non-discretionary proposal because the holder of record has not received voting instructions from the beneficial owner.

 

Under the rules of the New York Stock Exchange, each of the proposals to be presented at the Special Meeting is a non-discretionary proposal. Accordingly, if you are a beneficial owner and you do not provide voting instructions to your broker, bank or other holder of record holding shares for you, your shares will not be voted with respect to any of the proposals. A broker non-vote would have the same effect as a vote against the Acquisition Proposal, the Spin-off Proposal, the Name Change Proposal, the Reverse Split Proposal, the Capital Increase Proposal, and the Adjournment Proposal. Abstentions and broker non-votes will have no effect on the Election of Directors Proposal.

 

Q: What will happen if I return my proxy card without indicating how to vote?

 

A: If you sign and return your proxy card without indicating how to vote on any particular proposal, the IFMK common stock represented by your proxy will be voted in favor of each such proposal. Proxy cards that are returned without a signature will not be counted as present at the Special Meeting and cannot be voted.

 

Q: Can I change my vote after I have returned a proxy or voting instruction card?

 

A: Yes. You can change your vote at any time before your proxy is voted at the Special Meeting. You can do this in one of four ways:

 

  you can grant a new, valid proxy bearing a later date;

 

  you can send a signed notice of revocation;

 

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  if you are a holder of record, you can attend the Special Meeting and vote in person, which will automatically cancel any proxy previously given, or you may revoke your proxy in person, but your attendance alone will not revoke any proxy that you have previously given; or

 

  if your shares of IFMK common stock are held in an account with a broker, bank or other nominee, you must follow the instructions on the voting instruction card you received in order to change or revoke your instructions.

 

If you choose either of the first two methods, you must submit your notice of revocation or your new proxy to the Secretary of IFMK, as specified in this proxy statement, no later than the beginning of the Special Meeting. If your shares are held in street name by your broker, bank or nominee, you should contact them to change your vote.

 

Q: Do I need identification to attend the Special Meeting in person?

 

A: Yes. Please bring proper identification, together with proof that you are a record owner of shares of IFMK common stock. If your shares are held in street name, please bring acceptable proof of ownership, such as a letter from your broker or an account statement stating or showing that you beneficially owned shares of IFMK common stock on the record date. Acceptable proof of ownership is either (a) a letter from your broker stating that you beneficially owned IFMK stock on the Record Date or (b) an account statement showing that you beneficially owned IFMK stock on the Record Date.

 

Q: Are IFMK stockholders entitled to appraisal rights?

 

A: No. IFMK stockholders do not have appraisal rights in connection with the Reverse Split, the Name Change, the Acquisition or the Spin-off under the General Corporation Law of the State of Delaware (the “DGCL”).

 

Q: What do I do if I receive more than one set of voting materials?

 

A:  You may receive more than one set of voting materials for the Special Meeting, including multiple copies of this proxy statement, proxy cards and/or voting instruction forms. This can occur if you hold your shares of common stock in more than one brokerage account, if you hold shares directly as a record holder and also in street name, or otherwise through a nominee. Other circumstances may apply. If you receive more than one set of voting materials, each should be voted and/or returned separately in order to ensure that all of your shares of common stock are voted. 

 

Q: If I am an IFMK stockholder, should I send in my IFMK stock certificates with my proxy card?

 

A: No. Please DO NOT send your IFMK stock certificates with your proxy card.

 

   

Q: When do you expect the Reverse Split, the Name Change, the Capital Increase Proposal and the Restructure to be completed?

 

A: We are working to complete the Reverse Split, the Name Change, and the Restructure as quickly as possible, and we expect to complete all transactions in the fourth quarter of 2019. However, IFMK cannot assure you when or if the Acquisition will occur. The Acquisition and Spin-off are subject to stockholder approvals and other conditions, and it is possible that factors outside the control of both IFMK and Xiaotai could result in the Acquisition and Spin-off being completed at a later time, or not at all. There may be a substantial amount of time between the Special Meeting and the completion of the Acquisition and Spin-off.

 

Q: Whom should I call with questions about the Special Meeting, the Reverse Split, the Name Change, the Capital Increase or the Restructure?

 

A: IFMK stockholders should email our CFO, Mr. Long Yi, at 13584802352@139.com with any questions.

 

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FORWARD-LOOKING STATEMENTS

 

This proxy statement, including information incorporated by reference into this proxy statement, contains forward-looking statements regarding, among other things, IFMK’s plans, strategies and prospects, both business and financial. Although IFMK believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, IFMK cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under “Risk Factors” from time to time in IFMK’s filings with the SEC. Many of the forward-looking statements contained in this presentation may be identified by the use of forward-looking words such as “believe”, “expect”, “anticipate”, “should”, “planned”, “will”, “may”, “intend”, “estimated”, “aim”, “on track”, “target”, “opportunity”, “tentative”, “positioning”, “designed”, “create”, “predict”, “project”, “seek”, “would”, “could”, “continue”, “ongoing”, “upside”, “increases” and “potential”, among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this presentation are set forth in other reports or documents that we file from time to time with the SEC, and include, but are not limited to: 

 

  the number and percentage of our public stockholders voting against the Reverse Split Proposal, the Capital Increase Proposal, the Name Change Proposal, Acquisition Proposal and the Spin-off Proposal;

 

  the occurrence of any event, change or other circumstances that could give rise to the termination of the Exchange Agreement or the Purchase Agreement;

 

  the ability to obtain and/or maintain the listing of Xiaotai’s common stock on NASDAQ following the Restructure;

 

  changes adversely affecting the business in which the Company is engaged;

 

  management of growth;

 

  general economic conditions;

 

  the Company’s business strategy and plans, including future acquisitions of vessels;

 

  the result of future financing efforts; and

 

  and the other factors summarized under the section entitled “Risk Factors”.

 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement. All forward-looking statements included herein attributable to any of IFMK, Xiaotai or any person acting on either party’s behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, IFMK and Xiaotai have no obligation to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement or to reflect the occurrence of unanticipated events.

 

Before a stockholder grants its proxy or instructs how its vote should be cast regarding the Reverse Split Proposal, the Capital Increase Proposal, the Acquisition Proposal, the Spin-off Proposal or the Adjournment Proposal, they should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this proxy statement may adversely affect IFMK and Xiaotai.

  

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SUMMARY

 

This summary highlights selected information from this proxy statement and does not contain all of the information that is important to you. To better understand the proposals to be submitted for a vote at the Special Meeting, including the Acquisition, you should read this entire document carefully, including the Exchange Agreement and the Purchase Agreement, attached respectively as Annex A and Annex B to this proxy statement. The Exchange Agreement and the Purchase Agreement are the legal documents that govern the Acquisition and Spin-off respectively and the other transactions that will be undertaken in connection with the Restructure. It is also described in detail in this proxy statement in the section entitled “The Acquisition” and “The Spin-off.”

 

Acquisition

 

The Parties to the Exchange Agreement

 

iFresh

 

iFresh Inc., through its wholly owned subsidiary, NYM Holding Inc., is a fast growing Asian/Chinese grocery supermarket chain in the North Eastern U.S. providing food and other merchandise hard to find in mainstream grocery stores.

 

Since NYM was formed in 1995, it has targeted the Chinese and other Asian populations (collectively, the “Asian Americans”) in the U.S. with a deep cultural understanding of its consumers’ unique consumption habits. iFresh currently has nine (9) retail supermarkets across New York, Massachusetts and Florida, with over 6,920,500 sales transactions in the fiscal year ended March 31, 2018. NYM also has three stores under construction which are expected to open in the fourth quarter in 2018.  In addition to retail supermarkets, iFresh operates two in-house wholesale businesses, Strong America Inc. (“Strong America”) and New York Mart Group (“NYMG”) that offer more than 6,000 wholesale products and service to iFresh retail supermarkets and over 1,000 external customers including wholesale stores, retail supermarkets and restaurants. iFresh has a stable supply of food from farms in New Jersey and Florida, ensuring reliable supplies of popular vegetables, fruits and seafood. iFresh’s wholesale businesses and long term relationships with various farms insulate iFresh from supply interruptions, allowing it to remain competitive even during difficult markets.

 

iFresh’s shares of common stock are currently listed on the NASDAQ under the symbol “IFMK”. We intend to continue the listing of our common stock on NASDAQ upon the closing of the Acquisition.

 

The mailing address of iFresh’s principal executive office is 2-39 54th Avenue, Long Island City, NY and the phone number is +1 (718) 628 6200.

 

Xiaotai

 

Xiaotai is a “peer-to-peer” lending company in China providing an internet lending information intermediary platform providing borrowers access to a variety of loan products. The loan products currently facilitated on Xiaotai’s platform generally range from one-month to twenty-four months. They are unsecured loans lent based on a borrower’s creditworthiness and assessed repayment ability. Through its internet lending information intermediary platform, Xiaotai connects individual lenders with individual and small business borrowers. It currently conducts its business operations exclusively in China.

 

Supported by its proprietary finance technology, it has developed the Zhizi risk control system, which is a comprehensive risk control system and entitles the Company to receive a Level III Certificate for Protection of State Information Security awarded by the PRC Ministry of Public Security, the highest level of recognition granted to non-bank institutions in the finance industry for stringent information security management and risk controls. Leveraging its advanced finance technology and innovative, reliable risk control procedures in serving borrowers and investors through its website and mobile applications, it provides efficient and effective solutions to address largely underserved personal financing and investment demands of the rapidly growing middle class population in China.

 

The mailing address of Xiaotai’s principal executive officers is Room 301, Block 2, 611 Jianghong Road, Changhe Street Binjiang District, Hangzhou City, Zhejiang Province China, and the phone number is +86-571-26890017.

 

The Acquisition

 

On June 7, 2019, we entered into the Exchange Agreement with Xiaotai and the equity holders of Xiaotai (the “Xiaotai Sellers”), pursuant to which, among other things and subject to the terms and conditions contained therein, we will acquire all of the outstanding issued shares and other equity interests in Xiaotai from the Xiaotai Sellers. Pursuant to the Exchange Agreement, in exchange for all of the outstanding shares of Xiaotai, we will issue 254,813,383 shares of common stock (the “Exchange Shares”) to the Xiaotai Sellers. The Exchange Shares will be allocated among the Xiaotai Sellers pro-rata based on each such seller’s ownership of Xiaotai prior to the closing.

 

Upon completion of the Acquisition and the simultaneous Spin-Off, we will own 100% of Xiaotai, and will be a financial services group operating in both smart financing as well as microfinance sectors in China. It is anticipated immediately upon completion of the Acquisition, our existing shareholders will retain an ownership interest of approximately 6% and the Xiaotai Sellers will own approximately 94% of the Company assuming issuance of additional 254, 813, 383 shares by IFMK prior to closing of the Acquisition. 

  

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Conditions to Closing of the Acquisition

 

The obligation of the parties to complete the Acquisition is subject to the fulfillment or written waiver of certain closing conditions, including:

 

  the approval of the Exchange Agreement and the transactions contemplated thereby (including the Acquisition) by a majority of votes cast by our shareholders that are present in person or by proxy at our special meeting;
     
  the receipt of any other required governmental and regulatory approvals and consents;
     
  the receipt of any other required third person approvals in order to consummate the Acquisition;
     
 

there is no applicable law or order in effect which makes illegal or prevents or prohibits the transactions contemplated by the Exchange Agreement, and there is no pending third party non-Affiliate legal proceeding to enjoin or otherwise restrict the closing;

     
  KeyBank’s unconditional written consent approving the Acquisition;
  all of the conditions to the obligations of each party to consummate the Spin-off described in the Purchase Agreement shall have been satisfied;
     
  No pending action shall have been brought by third parties to enjoin or otherwise restrict the consummation of the closing;
     
  the appointment of persons designated by Xiaotai prior to the closing to the Board immediately prior the closing; and

 

We cannot provide assurance as to when or if all of the closing conditions will be satisfied or waived by the appropriate party. As of the date of this proxy statement, we have no reason to believe that any of these conditions will not be satisfied.

 

Termination

 

The Exchange Agreement may be terminated prior to the closing by:

 

  the mutual written consent of Xiaotai and us;
     
  ●  written notice by either Xiaotai or us if the closing has not occurred by the six-month anniversary of the date of the Exchange Agreement, which date is also referred to herein as the outside date, so long as no breach of the Exchange Agreement by such terminating party or its affiliates (or, with respect to Xiaotai, the Sellers) caused the closing not to have occurred by such date; 

 

  written notice by either us or Xiaotai if any governmental authority of competent jurisdiction has issued a final and non-appealable order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Exchange Agreement, so long as no breach of the Exchange Agreement by such terminating party or its affiliates (or, with respect to Xiaotai, the Sellers) was a substantial cause of, or substantially resulted in, such action by such governmental authority;

 

  written notice by Xiaotai for a breach of our representations, warranties, covenants or agreements in the Exchange Agreement which would result in the related closing condition not being met and such breach is incapable of cure or is not cured within the earlier of 20 days after notice of such breach or the outside date;

 

  written notice by us for a breach of Xiaotai’s or the Sellers’s representations, warranties, covenants or agreements in the Exchange Agreement which would result in the related closing condition not being met and such breach is incapable of cure or is not cured within the earlier of 20 days after notice of such breach or the outside date;

 

  written notice by us if there shall have been a material adverse effect on Xiaotai or its subsidiaries which is uncured and continuing for 30 days after notice of such material adverse effect or the outside date;

 

  written notice by Xiaotai if there shall have been a material adverse effect on us or our subsidiaries which is uncured and continuing for 30 days after notice of such material adverse effect or the outside date; or

 

  written notice by us if the requisite shareholder vote in favor of the Exchange Agreement and the Acquisition is not obtained at our special meeting.

 

If the Exchange Agreement is terminated, all further obligations of the parties under the Exchange Agreement will terminate and will be of no further force and effect and no party will have any further liability thereunder to any other party, except that certain obligations related to public announcements, confidential information, fees and expenses, and termination fees and general provisions will continue in effect, and no party shall be relieved of liability for any fraud claims or breach of the Exchange Agreement prior to such termination. 

 

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Fees and Expenses

 

In the event that we terminate the Exchange Agreement for breach by Xiaotai or a material adverse effect on Xiaotai or its subsidiaries which is uncured and continuing or for the failure to obtain the requisite shareholder vote in favor of the Exchange Agreement and the Acquisition at our special meeting, Xiaotai will be required to pay us as liquidated damages a termination fee equal to the transaction expenses incurred by or on behalf of us or any of our affiliates in connection with the Exchange Agreement or the transactions contemplated hereby. In the event Xiaotai terminates the Exchange Agreement for breach by us or a material adverse effect on us or our subsidiaries which is uncured and continuing, we will be required to pay Xiaotai as liquidated damages a termination fee equal to the transaction expenses incurred by or on behalf of Xiaotai or any of its affiliates in connection with the Exchange Agreement or the transactions contemplated hereby.

 

Other than the termination fee described above, each party will bear its own expenses in connection with the Exchange Agreement and the transactions contemplated thereby.

 

Board of Directors and Management Following the Acquisition

 

Immediately following the closing of the Acquisition, the Board will continue to consist of five directors, one of whom shall be designated by Xiaotai prior to the closing. The current chief executive officer of IFMK shall resign immediately before the closing. Therefore, the chief executive officer of Xiaotai shall become the chief executive officer of IFMK immediately before the closing. See section entitled “Post-Closing Board of Directors and Executive Officers.” 

 

Accounting Treatment

 

Both IFMK and Xiaotai prepare their financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). IFMK will acquire 100% of the outstanding shares of Xiaotai through issuance of 254,813,383 of its common shares. This transaction will be accounted for as a “reverse acquisition” since, immediately following completion of the transaction, the shareholders of Xiaotai immediately prior to the transaction will have effective control of the Company, through its approximately 94% ownership interest in the post-merger entity. For accounting purpose, Xiaotai will be deemed to be the accounting acquirer and IFMK will be deemed to be the accounting acquiree in the transaction.

 

Opinion of Benchmark to the Board of Directors of IFMK

 

IFMK engaged Benchmark as of February 2019 to render an opinion as to the fairness, from a financial point of view, to IFMK’s shareholders of the consideration to be paid by the Company in connection with the Acquisition. Benchmark is an investment bank that works regularly in the evaluation of businesses and their securities in connection with acquisitions, corporate restructuring, and financings. The Board decided to use its services as Benchmark represented to the Company that it has requisite experience in similar matters. Benchmark rendered its oral opinion to the Special Committee on June 3, 2019 (which was subsequently confirmed in writing by delivery of Benchmark’s written opinion) that the consideration to be paid in the Acquisition was fair, from a financial point of view, to IFMK’s stockholders.

 

Benchmark’s opinion was provided for the use and benefit of the Special Committee and the Board in connection with their consideration of the Acquisition and only addressed the fairness, from a financial point of view, to IFMK’s stockholders of the consideration to be paid by the Company in connection with the Acquisition pursuant to the Exchange Agreement, in each case as of the date of the opinion, and did not address any other aspect or implication of the Acquisition.

 

The summary of Benchmark’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the written opinion, which is included as Annex C to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Benchmark in preparing its opinion. However, neither Benchmark’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to any stockholder as to how such stockholder should act or vote with respect to any matter relating to the proposed Acquisition. 

 

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Interests of IFMK’s Directors and Officers in the Acquisition

 

As of the Record Date, the directors and executive officers of IFMK as a group owned and were entitled to vote [______ ] shares of the common stock of the Company, representing [ _____ ]% of the outstanding shares of IFMK common stock on that date. IFMK expects that its directors and executive officers will vote their shares in favor of the Reverse Split Proposal, the Capital Increase Proposal, the Name Change Proposal, the Acquisition Proposal, and the Spin-off Proposal. On June 7, 2019, we and NYM Holding, Inc., entered into a Purchase Agreement with Go Fresh 365 Inc., solely owned by Mr. Long Deng, IFMK’s Chief Executive Officer. The Purchase Agreement provides for the sale of 100% of the equity interest in NYM to GO Fresh 365 Inc. for cash consideration of $9.1 million. The transactions contemplated by the Purchase Agreement are a condition to the closing of the Acquisition and would take place contemporaneously with the closing of the Acquisition.

 

Besides the equity ownership of IFMK detailed above, the directors and executive officers of the Company do not have interests different than the other stockholders of IFMK.

 

Regulatory Approvals Required for the Acquisition

 

The Acquisition and the transactions contemplated by the Exchange Agreement are not subject to any additional federal or state regulatory requirements or approval, except for the approval of NASDAQ for listing of additional shares and the filings with the State of Delaware necessary to effectuate the transactions contemplated by the Exchange Agreement.

 

Spin-off

 

Parties to Purchase Agreement 

 

iFresh

 

iFresh Inc., through its wholly owned subsidiary, NYM Holding Inc., is a fast growing Asian/Chinese grocery supermarket chain in the North Eastern U.S. providing food and other merchandise hard to find in mainstream grocery stores.

 

Since NYM was formed in 1995, it has targeted the Chinese and other Asian populations (collectively, the “Asian Americans”) in the U.S. with a deep cultural understanding of its consumers’ unique consumption habits. iFresh currently has nine (9) retail supermarkets across New York, Massachusetts and Florida, with over 6,920,500 sales transactions in the fiscal year ended March 31, 2018. NYM also has three stores under construction which are expected to open in the fourth quarter in 2018. In addition to retail supermarkets, iFresh operates two in-house wholesale businesses, Strong America Inc. (“Strong America”) and New York Mart Group (“NYMG”), that offer more than 6,000 wholesale products and service to iFresh retail supermarkets and over 1,000 external customers including wholesale stores, retail supermarkets and restaurants. iFresh has a stable supply of food from farms in New Jersey and Florida, ensuring reliable supplies of popular vegetables, fruits and seafood. iFresh’s wholesale businesses and long-term relationships with various farms insulate iFresh from supply interruptions, allowing it to remain competitive even during difficult markets.

 

iFresh’s shares of common stock are currently listed on the NASDAQ under the symbol “IFMK”. We intend to continue the listing of our common stock on NASDAQ upon the closing of the Spin-off.

 

The mailing address of iFresh’s principal executive office is 2-39 54th Avenue, Long Island City, NY and the phone number is +1 (718) 628 6200.

 

NYM Holding Inc.

 

As described above in the section entitled iFresh.

 

Go Fresh

 

Go Fresh 365 Inc. is a Florida corporation solely owned by Mr. Long Deng, the CEO of iFresh.

 

The Spin-off

 

On June 7, 2019, we and NYM Holding, Inc., entered into a Purchase Agreement with Go Fresh 365 Inc., solely owned by Mr. Long Deng, IFMK’s Chief Executive Officer. The Purchase Agreement provides for the sale of 100% of the equity interest in NYM to GO Fresh for cash consideration of $9.1 million. The transactions contemplated by the Purchase Agreement are a condition to the closing of the Acquisition and would take place contemporaneously with the closing of the Acquisition.

 

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Conditions to Closing of the Spin-off

 

The obligation of the parties to complete the Spin-off is subject to the fulfillment or written waiver of certain closing conditions, including:

 

  the approval of the Purchase Agreement and the transactions contemplated thereby (including the Spin-off) by a majority of votes cast by our shareholders that are present in person or by proxy at our special meeting;
     
  the receipt of any other required Board, governmental and regulatory approvals and consents;
     
  the receipt of any other required third person approvals in order to consummate the Spin-off;
     
  there is no applicable law or order in effect which makes illegal or prevents or prohibits the transactions contemplated by the Purchase Agreement, and there is no pending third party non-Affiliate legal proceeding to enjoin or otherwise restrict the closing;
     
  all of the conditions to the obligations of each party to consummate the Acquisition described in the Exchange Agreement shall have been satisfied;
     
 

the written consent of KeyBank to the Spin-Off;

 

  No pending action shall have been brought by third parties to enjoin or otherwise restrict the consummation of the closing.
     

 

We cannot provide assurance as to when or if all of the closing conditions will be satisfied or waived by the appropriate party. As of the date of this proxy statement, we have no reason to believe that any of these conditions will not be satisfied.

 

Termination

 

The Purchase Agreement may be terminated prior to the closing by:

 

  the mutual written consent of Go Fresh and us; or

 

  written notice by either us or Go Fresh if any governmental authority of competent jurisdiction has issued a final and non-appealable order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Purchase Agreement, so long as no breach of the Purchase Agreement by such terminating party or its affiliates (or, with respect to Go Fresh, the Sellers) was a substantial cause of, or substantially resulted in, such action by such governmental authority.

 

If the Purchase Agreement is terminated, all further obligations of the parties under the Purchase Agreement will terminate and will be of no further force and effect and no party will have any further liability thereunder to any other party, except that certain obligations related to public announcements, confidential information, fees and expenses, and termination fees and general provisions will continue in effect, and no party shall be relieved of liability for any fraud claims or breach of the Purchase Agreement prior to such termination. 

 

Fees and Expenses

 

Each party will bear its own expenses in connection with the Purchase Agreement and the transactions contemplated thereby.

 

Board of Directors and Management Following the Spin-off

 

Immediately following the closing of the Spin-off, the Board will be the same as described above regarding the Acquisition.

 

Opinion of Benchmark to the Board of Directors of IFMK

 

IFMK engaged Benchmark as of February 2019 to render an opinion as to whether the consideration to be received by the Company in connection with the Spin-off is fair to IFMK’s shareholders from a financial point. Benchmark is an investment bank that works regularly in the evaluation of businesses and their securities in connection with acquisitions, corporate restructuring, and financings. The Special Committee decided to use its services as Benchmark represented to the Company that it has requisite experience in similar matters. Benchmark rendered its oral opinion to the Special Committee on June 3, 2019 (which was subsequently confirmed in writing by delivery of Benchmark’s written opinion) that the consideration to be received by the Company in connection with the Spin-off was fair, from a financial point of view, to IFMK’s stockholders.

 

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Benchmark’s opinion was provided for the use and benefit of the Special Committee and the Board in connection with their consideration of the Spin-off and only addressed the fairness, from a financial point of views, of the consideration to be received by the Company in connection with the Spin-off to IFMK’s stockholders pursuant to the Purchase Agreement, in each case as of the date of the opinion, and did not address any other aspect or implication of the Spin-off.

 

The summary of Benchmark’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the written opinion, which is included as Annex D to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Benchmark in preparing its opinion. However, neither Benchmark’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to any stockholder as to how such stockholder should act or vote with respect to any matter relating to the proposed Spin-off. 

 

Interests of IFMK’s Directors and Officers in the Spin-off

 

As of the Record Date, the directors and executive officers of IFMK as a group owned and were entitled to vote [______] shares of the common stock of the Company, representing [_____]% of the outstanding shares of IFMK common stock on that date. IFMK expects that its directors and executive officers will vote their shares in favor of the Reverse Split Proposal, the Capital Increase Proposal, the Name Change Proposal, the Acquisition Proposal, and the Spin-off Proposal. On June 7, 2019, we and NYM Holding, Inc., entered into a Purchase Agreement with Go Fresh 365 Inc., solely owned by Mr. Long Deng, IFMK’s Chief Executive Officer. The Purchase Agreement provides for the sale of 100% of the equity interest in NYM to GO Fresh 365 Inc. for cash consideration of $9.1 million. The transactions contemplated by the Purchase Agreement are a condition to the closing of the Acquisition and would take place contemporaneously with the closing of the Acquisition.

 

Besides the equity ownership of IFMK detailed above, the directors and executive officers of the Company do not have interests different than the other stockholders of IFMK.

 

Regulatory Approvals Required for the Spin-off

 

The Spin-off and the transactions contemplated by the Purchase Agreement are not subject to any additional federal or state regulatory requirements or approval, except for the approval of NASDAQ for listing of additional shares and the filings with the State of Delaware necessary to effectuate the transactions contemplated by the Purchase Agreement.

 

The Reverse Split

 

The Board has adopted resolutions (i) declaring that filing an amendment to the Company’s Certificate of Incorporation to affect the Reverse Split of our issued and outstanding common stock was advisable, and (ii) directing that a proposal to approve the Reverse Split be submitted to the holders of our common stock for their approval. The Reverse Split of our issued and outstanding common stock will be effected by a ratio of not less than one-for-two and not more than one-for-ten at any time prior to 2019, with the exact ratio to be set at a whole number within this range as determined by the Board in its sole discretion.

 

The Board is submitting the Reverse Split Proposal to our stockholders for approval with the intent of increasing the market price of our common stock to enhance our ability to meet the continued listing requirements of the Nasdaq Capital Market, to make our common stock sufficiently attractive for IFMK to consummate the Acquisition transaction and to ensure that IFMK will be able to meet the initial listing requirements of Nasdaq Capital Market after consummation of the Acquisition transaction. Please see the section entitled “The Reverse Split” for more information.

 

The Name Change

 

The Board is submitting the Name Change Proposal to our stockholders for approval to better reflect the future business of the combined organization. Because the Company intend to switch from its current grocery store business to financial technology business currently conducted in Zhejiang province, The Board believes majority of the future growth will come from the online consumer financing operations conducted by Xiaotai. This transaction will be accounted for as a “reverse acquisition” since, immediately following completion of the transaction, the shareholders of Xiaotai immediately prior to the transaction will have effective control of the Company, through its approximately 94% ownership interest in the post-merger entity. For accounting purpose, Xiaotai will be deemed to be the accounting acquirer and IFMK will be deemed to be the accounting acquiree in the transaction.

 

The Capital Increase

 

The Board is submitting the Capital Increase Proposal to our stockholders for approval to give the Company more flexibility for future capital raising, incentivize directors, officers and employees, strategic acquisitions and other corporate actions.

 

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Election of Directors

 

The Board is submitting the Election of Directors Proposal to our stockholders for approval to elect [ ] to serve on the Company’s Board for a term of one year.

 

Risk Factors

 

In evaluating the proposals to be presented at the Special Meeting, a stockholder should carefully read this proxy statement and especially consider the factors discussed in the section entitled “Risk Factors.”

 

Appraisal Rights

 

IFMK stockholders do not have appraisal rights in connection with the Reverse Split, the Capital Increase, the Name Change, the Election of Directors, and/or the Restructuring under the DGCL. 

 

The Special Meeting

 

The Special Meeting will be held at 10:00 a.m., local time, on [___, ______], 2019, at the offices of Hunter Taubman Fischer & Li, LLC, 1450 Broadway, 26th Floor, New York, NY 10018, to consider and vote upon the Reverse Split Proposal, the Capital Increase Proposal, the Election of Directors Proposal, the Acquisition Proposal and/or, if necessary, the Spin-off Proposal, the Adjournment Proposal to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the Special Meeting, IFMK is not authorized to consummate the Reverse Split, the Capital Increase, the Name Change, the Election of Directors, the Acquisition and/or the Spin-off.

 

Recommendation to Stockholders

 

After careful consideration, the Board has determined that the Acquisition Proposal, the Spin-off Proposal, the Capital Increase, the Name Change, and the Adjournment Proposal are fair to and in the best interests of the Company and its stockholders and unanimously recommends that you vote or give instruction to vote “FOR” the Reverse Split Proposal, “FOR” the Capital Increase Proposal, “FOR” the Name Change Proposal, “FOR” the Acquisition Proposal, “FOR” the Spin-off Proposal, “FOR” the Election of Directors Proposal, and “FOR” the Adjournment Proposal, if presented.

  

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RISK FACTORS

 

You should carefully consider the following risk factors, together with the other information contained in this proxy statement, including the factors discussed in Part I, Item 1A—Risk Factors in IFMK’s Annual Report on Form 10-K for the year ended March 30, 2018. If any of the following risks and uncertainties develops into actual events, these events could have a material adverse effect on both IFMK’s and Xiaotai’s businesses, financial conditions or results of operations. In addition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

 

Risks Related to the Acquisition

 

Subsequent to the consummation of the Acquisition, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and share price, which could cause you to lose some or all of your investment. 

 

Although we have conducted due diligence on Xiaotai, we cannot assure you that this diligence revealed all material issues that may be present in Xiaotai’s business, that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of our and Xiaotai’s control will not later arise. As a result, we may be forced to later write-down or write-off assets, restructure its operations, or incur impairment or other charges that could result in losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about the Company or its securities. In addition, charges of this nature may cause us to be unable to obtain future financing on favorable terms or at all.

 

The unaudited pro forma financial information included in this document may not be indicative of what our actual financial position or operational results would have been. 

 

The unaudited pro forma financial information in this proxy statement is presented for illustrative purposes only and is not necessarily indicative of what our actual financial position or results of operations would have been had the Acquisition been completed on the dates indicated. See the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” for more information.

 

We will have limited protection in the event that any of the representations and warranties made by Sellers or Xiaotai in the Exchange Agreement ultimately proves to be inaccurate or incorrect.

 

IFMK and its shareholders will have limited protection if any representation or warranty made by Sellers or Xiaotai in the Exchange Agreement proves to be inaccurate or incorrect. Accordingly, to the extent such representations or warranties are incorrect, IFMK would have limited indemnification claims with respect thereto and its financial condition or results of operations could be adversely affected.

 

We may waive one or more of the conditions to the Acquisition.

 

We may agree to waive, in whole or in part, some of the conditions to our obligations to complete the Acquisition, to the extent permitted by our charter and applicable laws. For example, it is a condition of our obligation to close the Acquisition and that Xiaotai’s representations and warranties are true and correct in all respects as of the closing date, except for such inaccuracies that, individually or in the aggregate, would not result in a Material Adverse Effect (as defined in the Exchange Agreement). However, if the Board determines that it is in the shareholders’ best interest to waive any such breach, then the board may elect to waive that condition and close the Acquisition.

 

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Our ability to successfully effect the Acquisition and successfully operate the business thereafter will be largely dependent upon the efforts of certain key personnel, including certain executive officers of IFMK and the key personnel of Xiaotai, all of whom we expect to join IFMK following the Acquisition. The loss of such key personnel could negatively impact the operations and profitability of the post-combination business. 

 

Our ability to successfully effect the Acquisition and successfully operate the business is dependent upon the efforts of certain key personnel including Mr. Long Yi, the Chief Financial Officer of IFMK and key personnel of Xiaotai. Although we expect all of such key personnel to remain  with Xiaotai following the Acquisition, it is possible that we will lose some key personnel, the loss of which could negatively impact the operations and profitability of our post-combination business. In addition, we do not have key-man insurance on the life of, any of our directors or executive officers. The unexpected loss of the services of one or more of our directors or executive officers could adversely impact our ability to complete the Acquisition. Furthermore, our assessment of these individuals may not prove to be correct. These individuals may be unfamiliar with the requirements of operating a company regulated by the SEC, which could cause us to have to expend time and resources helping them become familiar with such requirements.

 

A market for our common stock may not continue, which would adversely affect the liquidity and price of our common stock.

 

Following the Acquisition, as well as the anticipated concurrent reverse split, the price of our common stock may fluctuate significantly due to the market’s reaction to the Acquisition and general market and economic conditions. An active trading market for our common stock following the Acquisition may never develop or, if developed, it may not be sustained. In addition, the price of our common stock after the Acquisition can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, if our common stock is not listed on, or become delisted from, the NASDAQ for any reason, and are quoted on the OTC Bulletin Board (an inter-dealer automated quotation system for equity securities that is not a national securities exchange), the liquidity and price of our common stock may be more limited than if we were quoted or listed on the NASDAQ or another national securities exchange. You may be unable to sell your common stock unless a market can be established or sustained.

 

Although we expect that our common stock will remain listed on the NASDAQ after the Acquisition, there can be no assurance that our common stock will continue to be so listed or, if listed, that we will be able to comply with the continued listing standards of the NASDAQ.

  

We intend to apply for the continued listing of our common stock on the NASDAQ subsequent to the closing of the Acquisition. To continue listing our common stock on the NASDAQ subsequent to the closing of the Acquisition, we will be required to demonstrate compliance with NASDAQ’s initial listing standards, which are more rigorous than NASDAQ’s continued listing requirements, including that our common stock trade at a minimum of $4.00 per common stock unless we qualify the $3.00 closing price alternative requirement. We cannot assure you that we will be able to meet those initial listing standards at that time. 

 

If, after the Acquisition, the NASDAQ delists our common stock from trading on its exchange due to our failure to meet the NASDAQ’s initial and/or continued listing standards, we and our shareholders could face significant material adverse consequences including:

 

  a limited availability of market quotations for our securities;

 

  a determination that our ordinary shares are a “penny stock,” which will require brokers trading in our ordinary shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our ordinary shares;

 

  a limited amount of analyst coverage; and

 

  a decreased ability to issue additional securities or obtain additional financing in the future.

 

If the Acquisition’s benefits do not meet the expectations of investors, shareholders or financial analysts, the market price of our securities may decline.

 

If the benefits of the Acquisition do not meet the expectations of investors or securities analysts, the market price of the Company’s common stock prior to the closing of the Acquisition may decline. The market values of our securities at the time of the Acquisition may vary significantly from their prices on the date the Exchange Agreement was executed, the date of this proxy statement, or the date on which our shareholders vote on the Acquisition.

 

In addition, following the Acquisition, fluctuations in the price of our common stock could contribute to the loss of all or part of your investment. Prior to the Acquisition, there has not been a public market for Xiaotai’s securities. Accordingly, the valuation ascribed to Xiaotai and our common stock in the Acquisition may not be indicative of the price that will prevail in the trading market following the Acquisition. If an active market for our common stock develops and continues, the trading price of our common stock following the Acquisition could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our common stock and our common stock may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our common stock may not recover and may experience a further decline.

 

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Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in general, and the NASDAQ in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to the Company could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

 

Following the Acquisition, the Company’s business and share prices may suffer as a result of its lack of public company operating experience of new management. Furthermore, if securities or industry analysts do not publish or cease publishing research or reports about the Company, its business, or its market, or if they change their recommendations regarding our ordinary shares adversely, the price and trading volume of our ordinary shares could decline. 

 

Prior to the completion of the Acquisition, Xiaotai has been a privately-held company. Most members of Xiaotai’s management team have limited experience managing a publicly-traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. The management team may not successfully or efficiently manage Xiaotai’s transition to be a division of a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from Xiaotai’s senior management and could divert their attention away from the day-to-day management of Xiaotai’s business, which could harm Xiaotai’s business, results of operations and financial condition.

 

The obligation to disclose information publicly may put Xiaotai at a disadvantage to competitors that are private companies.

 

Upon completion of this acquisition, Xiaotai will become a member of a consolidated group of a publicly listed company in the United States. Xiaotai will need to disclose occurrence of matters that are material to the reporting company and its shareholders that Xiaotai would not be required to disclose if Xiaotai were a private company. Xiaotai’s competitors may have access to this information, which would otherwise be confidential. This may give them advantages in competing with Xiaotai. To the extent compliance with U.S. laws increases expenses or decreases Xiaotai’s competitiveness against such companies, the public listing could affect Xiaotai’s results of operations.

 

Xiaotai will incur additional costs as a result of becoming a subsidiary of a public company, which could negatively impact its net income and liquidity.

 

Upon completion of this acquisition, Xiaotai will become a subsidiary of a public company in the United States. As a result, Xiaotai will incur additional legal, accounting and other expenses that Xiaotai did not incur as a private company. Xiaotai expects that the rules and regulations will increase its legal, accounting and financial compliance costs and will make many corporate activities more time-consuming and costly. If Xiaotai fails to comply with these rules and regulations, Xiaotai could become the subject of a governmental enforcement action, investors may lose confidence in its public parent company and the share price could suffer.

 

The transition to becoming a division of a public company will require changes in the way Xiaotai operates its business.

 

Private companies often have less regulated methods of operation than public companies. This results in less transparency and presents greater risks of noncompliance with rules and regulations. In anticipation of the proposed transaction, Xiaotai management has begun to implement a variety of measures to ensure that the company follows the rules applicable to public companies in the United States. To the extent these new procedures and policies could not change historical behaviors that might be inconsistent with the rules regulating U.S. public company, Xiaotai could be at risk of violation or poor reporting as a public company following this transaction.

 

20

 

 

Completion of the Reverse Split and the Acquisition is subject to a number of conditions and if these conditions are not satisfied or waived, such transactions will not be completed.

 

IFMK’s obligation and the obligation of Xiaotai to complete the Acquisition are subject to satisfaction or waiver of a number of conditions, including, among others:

 

  approval and completion of the Reverse Split;

 

 

approval of the Acquisition by IFMK’s stockholders;

 

 

unconditional written consent from KeyBank simultaneously with consummation of the transaction contemplated in the Exchange Agreement;

 

 

satisfaction of all the conditions to the obligations of each party to consummate the Spin-off described in the Purchase Agreement;

 

  receipt of opinions of counsel;

 

  absence of injunctions or certain legal impediments;

 

  approval for the listing on NASDAQ of the shares of Xiaotai’s common stock to be issued in the Acquisition; and

 

  accuracy of the representations and warranties with respect to each of the foregoing transactions, subject to certain materiality thresholds.

 

There can be no assurance that the conditions to closing of the Exchange Agreement will be satisfied or waived or that the Acquisition itself will be completed.

 

NASDAQ may not list or continue to list our shares and the Exchange Shares on its exchange, which could prevent consummation of the Acquisition or could limit investors’ ability to make transactions in our securities. Consequently, we may be subject to additional trading restrictions. 

 

IFMK intends to apply to have the Exchange Shares listed on NASDAQ in connection with consummation of the Acquisition, and it is a closing condition of the Acquisition that our shares continue to be listed on NASDAQ. The post-Acquisition entity will be required to meet the initial listing requirements to be listed. We may not be able to meet those initial listing requirements. Even if our securities are so listed, we may be unable to maintain the listing of our securities in the future. If we fail to meet the initial listing requirements and NASDAQ does not list our securities on its exchange, neither IFMK nor Xiaotai would be required to consummate the Acquisition. In the event that each of IFMK and Xiaotai elected to waive this condition, IFMK and its stockholders could face significant material adverse consequences, including:

 

  a limited availability of market quotations for its securities;
     
  a limited amount of news coverage for the company; and
     
  a decreased ability to issue additional securities or obtain additional financing in the future.

 

Failure to complete the Acquisition could negatively impact IFMK’s stock price, future business or operations.

 

If the Acquisition is not completed, IFMK and Xiaotai may be subject to a number of material risks, including the following:

 

  IFMK may be required under certain circumstances to pay Xiaotai a termination fee;
     
  the price of IFMK’s common stock may decline to the extent that the relevant current market price reflects a market assumption that the Acquisition will be completed;
     
  IFMK may not have sufficient working capital to fund its operation on an ongoing basis;
     
  IFMK may not have sufficient time to regain compliance under NASDAQ continued Listing Rule 5810(c)(3)(A) in order to avoid being delisted from the Nasdaq Capital Market; and
     
  costs related to the Acquisition, such as legal, accounting, certain financial advisory and financial printing fees, must be paid even if the Acquisition is not completed.

 

Furthermore, if the Acquisition is terminated and either company’s board of directors determines to seek another Acquisition or business combination, there can be no assurance that it will be able to find a partner on terms as attractive as those provided for in the Exchange Agreement. In addition, while the Exchange Agreement is in effect and subject to very narrowly defined exceptions, IFMK is prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination (except with Xiaotai).

 

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The exercise of IFMK’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of Acquisition may result in a conflict of interest when determining whether such changes to the terms of the Acquisition or waivers of conditions are appropriate and in IFMK’s stockholders’ best interest.

 

In the period leading up to the closing of the Acquisition, events may occur that, pursuant to the Exchange Agreement, would require IFMK to agree to amend the Exchange Agreement, to consent to certain actions taken by Xiaotai or to waive rights that IFMK is entitled to under the Exchange Agreement. Such events could arise because of changes in the course of Xiaotai’s business, a request by Xiaotai to undertake actions that would otherwise be prohibited by the terms of the Exchange Agreement or the occurrence of other events that would have a material adverse effect on Xiaotai’s business. In any of such circumstances, it would be at IFMK’s discretion, acting through its board of directors, to grant its consent or waive those rights. The existence of the financial and personal interests of the directors of IFMK described in the preceding risk factors may result in a conflict of interest on the part of one or more of the directors between what he or they may believe is best for IFMK and its stockholders and what he or they may believe is best for himself or themselves in determining whether or not to take the requested action.

 

As of the date of this proxy statement, IFMK does not believe there will be any changes or waivers that IFMK’s directors and officers would be likely to make after stockholder approval of the Acquisition Proposal has been obtained. While certain changes could be made without further stockholder approval, IFMK will circulate a new or amended proxy statement and resolicit IFMK’s stockholders if changes to the terms of the transaction that would have a material impact on its stockholders are required prior to the vote on the Acquisition Proposal.

 

Xiaotai may not realize anticipated growth opportunities.

 

Xiaotai expects that it will realize growth opportunities and other financial and operating benefits as a result of the Acquisition. Xiaotai cannot predict with certainty if or when these growth opportunities and benefits will occur, or the extent to which they actually will be achieved. For example, the benefits from the Acquisition may be offset by costs incurred in obtaining or attempting to obtain regulatory approvals for the Acquisition, or as a result of being a public company. See “Risks Related to Xiaotai Industry” for a fuller discussion of the risks relating to Xiaotai following the Acquisition.

  

The Company and Xiaotai will incur significant transaction-related costs in connection with the Reverse Split and the Acquisition.

 

The Company and Xiaotai expect to incur a number of nonrecurring costs associated with the Reverse Split and the Acquisition before, at, and after closing the Acquisition. The Company and Xiaotai will also incur transaction fees and costs related to formulating and implementing post-Acquisition plans, including facility and system implementation costs and employment-related costs. The Company and Xiaotai will continue to assess the magnitude of these costs. Additional unanticipated costs may be incurred in the Acquisition and Xiaotai, in particular, will assess these costs in relation to post-acquisition activities.

 

If the Adjournment Proposal is not approved, and an insufficient number of votes have been obtained to authorize the consummation of the Acquisition, the Board will not have the ability to adjourn the Special Meeting to a later date in order to solicit further votes, and, therefore, the Acquisition will not be approved.

 

The Board is seeking approval to adjourn the Special Meeting to a later date or dates if, at the Special Meeting, based upon the tabulated votes, there are insufficient votes to approve the consummation of the Reverse Split and the Acquisition. If the Adjournment Proposal is not approved, IFMK’s board will not have the ability to adjourn the Special Meeting to a later date and, therefore, will not have more time to solicit votes to approve the consummation of the Reverse Split and the Acquisition. In such event, the Reverse Split and the Acquisition would not be completed.

 

Upon consummation of the Acquisition, Mr. Baofeng Pan, will beneficially own approximately 53.2% of the then issued and outstanding shares of common stock and exert significant influence on our operations.

 

Upon the consummation of the Acquisition, Mr. Baofeng Pan, our chairman and director upon closing of the Acquisition, will own approximately 53.2% of the then issued and outstanding shares of common stock. Accordingly, Mr. Pan, by virtue of his beneficial ownership of these shares, will be able to exercise substantial influence over our operations. He may have significant influence over election of directors and other matters requiring shareholder approval. Such concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination, which may, in turn, have an adverse effect on the market price of our stock or prevent our shareholders from realizing a premium over the then-prevailing market price for their stock.

 

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Mr. Baofeng Pan, as the principal shareholders of Xiaotai, have potential conflicts of interest with us, which may adversely affect our business.

 

Baofeng Pan, our Chairman and Director upon closing of the Acquisition, is a significant shareholder of Xiaotai, one of our VIE entities from which the majority of our revenue is expected upon closing of the Acquisition. Conflicts of interests between his duty to our Company and Xiaotai may arise. For example, Mr. Pan could cause Xiaotai to fail to take actions that are in the best interests of our Company. As Ms. Pan will be also CEO, Chairman and Director of our Company, he has duties of loyalty and care to us under Delaware law when there are any potential conflicts of interests between our company and Xiaotai. We cannot assure you, however, that if conflicts of interest arise, he will act completely in our interests or that conflicts of interests will be resolved in our favor. In addition, Mr. Pan could violate his employment agreement with us or his legal duties by diverting business opportunities from us to others. If we cannot resolve any conflicts of interest between us and Mr. Pan, as applicable, we would have to rely on legal proceedings, which could result in the disruption of our business.

 

Risks Related to IFMK

 

We are currently in default under our Credit Facility with KeyBank, which limits our liquidity and could result in KeyBank accelerating amounts we owe to it under the facility.

 

On December 23, 2016, NYM, as borrower, entered into a $25 million senior secured Credit Agreement (the “Credit Agreement”) with KeyBank National Association (“KeyBank” or “Lender”). The Credit Agreement provides for (1) a revolving credit of $5,000,000 for making advance and issuance of letter of credit, (2) $15,000,000 of effective date term loan and (3) $5,000,000 of delayed draw term loan. The interest rate is equal to (1) the Lender’s “prime rate” plus 0.95%, or (b) the Adjusted LIBOR rate plus 1.95%. Although the Company has been repaying the KeyBank facility in accordance with its terms, the Company failed to timely pay taxes in the aggregate principal amount of $1,187,693, which resulted in a tax lien being imposed upon the Company by the IRS on June 11, 2018 in the amount of $1,236,831.08. Due to these outstanding taxes owed and the tax lien, the Company is currently in default under the Credit Agreement. We have advised KeyBank of the default, and while KeyBank has not yet acted to accelerate payment of the facility, KeyBank does consider us to be in default and will not make any further advances under the Credit Facility until we comply with our obligations under the Credit Agreement. Our inability to draw down amounts under the credit facility significantly impairs the Company’s growth plans and limits its liquidity. In addition, if KeyBank were to decide to accelerate repayment of the Credit Facility, our financial condition and results of operation would be negatively impacted. By June 29, 2018, the Company had paid the full amount of the outstanding IRS obligation. Although the Company anticipates being able to obtain a waiver from KeyBank regarding the Company’s default, there is no guarantee that we will be successful in doing so.

   

There is substantial doubt about the Company’s ability to continue as a going concern.

 

As discussed in the Annual Report on Form 10-K filed on June 29, 2018, we incurred operating losses, did not meet the financial covenant required in the Credit Agreement and are currently in default of the Credit Agreement due to our failure to pay certain tax obligations. These conditions raise substantial doubt about our ability to continue as a going concern.

 

IFMK’s continued growth depends on new store acquisitions and openings and on increasing same store sales, and IFMK’s failure to achieve these goals could negatively impact its results of operations and financial condition.

 

Our growth strategy depends, in large part, on acquiring and opening new stores in existing and new areas and operating those stores successfully. Successful implementation of this strategy is dependent on sufficient capital support from financing, finding suitable stores to acquire, identifying suitable locations and negotiating acceptable lease terms for store sites, as it faces competition from other retailers for such sites. There can be no assurance that we will continue to grow through new store acquisitions and openings. We may not be able to obtain sufficient capital support for the expansion plan, or successfully implement the plan to acquire or open new stores timely or within budget or operate them successfully, and there can be no assurance that store acquisition or opening costs for, net sales of, contribution margin of and average payback period on initial investment for new stores will conform to our operating model discussed elsewhere in this report. Lower contribution margins from new stores, along with the impact of related store acquisition, opening and store management relocation costs, may have an adverse effect on our financial condition and operating results. In addition, if we acquire stores in the future, it may not be able to successfully integrate those stores into its existing store base and those stores may not be as profitable as its existing stores.

 

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Also, we may not be able to successfully hire, train and retain new store employees or integrate those employees into the programs, policies and culture of us. We or our third party vendors may not be able to adapt our distribution, management and other operating systems to adequately supply products to new stores at competitive prices so that we can operate the stores in a successful and profitable manner. We may not have the level of cash flow or financing necessary to support our growth strategy.

 

Additionally, our acquisition and opening of new stores will place increased demands on our operational, managerial and administrative resources. These increased demands could cause the Company to operate its existing business less effectively, which in turn could cause deterioration in the financial performance of our existing stores. If the Company experiences a decline in performance, it may slow or discontinue store openings, or may decide to close stores that it is unable to operate in a profitable manner.

 

Additionally, some of our new stores may be located in areas where the Company has little experience or a lack of brand recognition. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause these new stores to be less successful than stores in our existing markets.

 

Our operating results and stock price will be adversely affected if we fail to implement our growth strategy or if we invest resources in a growth strategy that ultimately proves unsuccessful.

 

Our newly opened stores may negatively impact our financial results in the short-term and may not achieve sales and operating levels consistent with our mature store base on a timely basis or at all.

 

The Company has actively pursued new store growth and plans to continue doing so in the future. The Company cannot assure you that its new store acquisitions or openings will be successful or result in greater sales and profitability. New store openings may negatively impact our financial results in the short-term due to the effect of store opening costs and lower sales and contribution margin during the initial period following opening. New stores build their sales volume and their customer base over time and, as a result, generally have lower margins and higher operating expenses, as a percentage of net sales, than our more mature stores. A new store can take more than a year to achieve a level of operating performance comparable to our similarly existing stores. Further, we have experienced in the past, and expect to experience in the future, some sales volume transfer from our existing stores to our new stores as some of our existing customers switch to new, closer locations. As a result, part of the increase of the overall sales to us arising from a new store opening or a store acquisition may be offset by the “sales volume transfer” phenomena.

 

The competition from competitors may increase intensively in the future.

 

Food retail is a large and highly competitive industry. However, iFresh believes that the market participants in the Chinese supermarket industry are highly fragmented and immature. Currently, iFresh faces competition from smaller or dispersed competitors focusing on the niche market of Chinese consumers. However, with the rapid growth of the Chinese and other Asian population and their consumption power, other competitors may also begin operating in this niche market in the future. Those competitors include: (i) national conventional supermarkets, (ii) regional supermarkets, (iii) national superstores, (iv) alternative food retailers, (v) local foods stores, (vi) small specialty stores, and (vii) farmers’ markets.

 

The national and regional supermarket chains are experienced in operating multiple stores locations, expanding management and they have greater marketing or financial resources than iFresh does. Even though they currently offer only a limited selection of Chinese and Asian specialty foods, they may be able to devote greater resources to sourcing, promoting and selling their products if they choose to do so. On the contrary, the local food stores and markets are small in size with a deep understanding of local preferences, but their lack of scale results in high risk and limited growth potential.

 

If more and more competitors devote into this market segment aiming to serve Chinese and other Asian customers in the future, the competition will increase. Our operating results may be negatively impacted through a loss of sales, reduction in margin from competitive price changes and/or greater operating costs such as marketing, due to the increase of competition.

 

iFresh relies on a combination of product offerings, customer service, store format, location and pricing to compete.

 

iFresh competes with other food retailers on a combination of factors, primarily product selection and quality, customer service, store layout and decoration, location and price. Our success depends on its ability to offer products that appeal to its customers’ preferences. Failure to offer such products, or to accurately forecast changing customer preferences, could lead to a decrease in the number of customer transactions at Our stores and in the amount customers spend at our stores.

 

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Pricing in particular is a significant driver of consumer choice in Our industry and iFresh expects competitors to continue to apply pricing and other competitive pressures. To the extent that our competitors lower prices, its ability to maintain gross profit margins and sales levels may be negatively impacted. Some of Our competitors may have greater resources than it does. These competitors could use these advantages to take measures, including reducing prices, which could adversely affect Our competitive position, financial condition and results of operations.

 

If iFresh does not succeed in offering attractively priced products that consumers intend to purchase or are unable to provide a convenient and appealing shopping experience, our sales, operating margins and market share may decrease, resulting in reduced profitability.

 

Economic conditions that impact consumer spending could materially affect our business.

 

Ongoing economic uncertainty continues to negatively affect consumer confidence and discretionary spending. iFresh’s operating results may be materially affected by changes in economic conditions nationwide or in the regions in which iFresh operates that impact consumer confidence and spending, including discretionary spending. This risk may be exacerbated if customers choose lower-cost alternatives to iFresh’s product offerings in response to economic conditions. In particular, a decrease in discretionary spending could adversely impact sales of certain of iFresh’s higher margin product offerings. Future economic conditions affecting disposable consumer income, such as employment levels, business conditions, changes in housing market conditions, the availability of consumer credit, interest rates, tax rates and fuel and energy costs, could reduce overall consumer spending or cause consumers to shift their spending to lower-priced competitors. In addition, inflation or deflation can impact iFresh’s business. Food deflation could reduce sales growth and earnings, while food inflation, combined with reduced consumer spending, could reduce gross profit margins. As a result, iFresh’s results of operations could be materially adversely affected.

 

Fresh’s existing stores are mainly located in Northeastern American metropolitan areas. The geographic concentration of its stores creates an exposure to the economy of the Northeastern United States and any downturn in this region could materially adversely affect iFresh’s financial condition and results of operations.

 

Perishable products make up a significant portion of iFresh’s sales, and ordering errors or product supply disruptions may have an adverse effect on iFresh’s profitability and operating results.

 

iFresh has a significant focus on perishable products. Sales of perishable products accounted for approximately 64% of iFresh’s net sales in fiscal year ended March 31, 2019. iFresh has self-owned wholesale facilities and stable supply relationship with farm partners, which significantly reduces ordering errors and product disruption. However, iFresh still relies on various suppliers and vendors to provide and deliver its product inventory on a continuous basis. iFresh could suffer significant perishable product inventory losses in the event of the loss of a major supplier or vendor, disruption of its supply chain, extended power outages, natural disasters or other catastrophic occurrences. While iFresh has implemented certain systems to ensure that its ordering is in line with demand, it cannot assure you that its ordering systems will always work efficiently, in particular in connection with the new additional stores, which have no, or a limited, ordering history. If iFresh were to over-order, it could suffer inventory losses, which would negatively impact its operating results.

 

Interruption of exclusive distribution of brands or imports relating to iFresh’s wholesale operations may adversely impact iFresh’s financial conditions and operating results.

 

iFresh conducts wholesale business through its two subsidiaries, Strong America Inc. and New York Mart Group, which enables iFresh to have stronger negotiating power with vendors as well as a way to source products from China, Thailand and Taiwan to its own retail stores. Strong America is also the exclusive distributor of nine famous oversea brands. If iFresh can’t renew its exclusive distribution contracts relating to those brands, iFresh’s sales, both retail and wholesale, may be adversely affected. Furthermore, importing products from other countries is subject to the impact of various international factors, including international trading policies, shipping costs, currency fluctuations, tariffs and customs procedures for imports, which may affect the supply and purchase prices of the products to be imported by iFresh’s wholesale distributors and sold by them to iFresh. If iFresh fails to obtain or maintain a sustainable supply of these products from its vendors, its financial conditions and operating results will be adversely impacted.

 

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The operation of new stores and online sales may cannibalize sales in iFresh’s stores and its financial results can be affected by economic and competitive conditions in this area.

 

All of iFresh’s existing stores are located in the Northeastern United States and it intends to grow its store base in this area. New stores are expected to be opened in the Greater New York City and Boston metropolitan areas. As iFresh opens new stores in closer proximity to its customers who currently travel longer distances to shop at iFresh’s stores, iFresh expects some of these customers to take advantage of the convenience of iFresh’s new locations. Simultaneously, iFresh will develop online sales to cover the customers living in a 2.5-hour drive radius, which may satisfy the demand from those Chinese customers living in the suburbs.

 

Some sales volume may transfer from iFresh’s existing stores to its new stores as some of its existing customers switch to these new, closer locations, or convenient online shopping. Consequently, iFresh’s new stores and online sales may adversely impact sales at iFresh’s existing stores. 

 

Disruption of relationships with vendors could negatively affect iFresh’s business.

 

iFresh purchases vegetables and fruits directly from farms and other vendors and maintains stable relationships with the vendors to ensure reliable supplies of popular seasonal Chinese specialty of vegetables and fruits. iFresh also depends on third-party suppliers for exclusive third-party brands. The cancellation of iFresh’s supply arrangement with any of its suppliers or the disruption, delay or inability in supply from its suppliers could adversely affect iFresh’s sales. If iFresh’s suppliers fail to comply with food safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. iFresh cannot assure you that it would be able to find replacement suppliers on commercially reasonable terms.

 

iFresh may be unable to protect or maintain its intellectual property, which could result in customer confusion, a negative perception of its brand and adversely affect its business.

 

iFresh believes that its intellectual property has substantial value and has contributed significantly to the success of iFresh’s business. In particular, iFresh’s trademarks, including New York Mart, are valuable assets that reinforce iFresh’s customers’ favorable perception of its stores.

 

From time to time, third parties have used names similar to iFresh’s, have applied to register trademarks similar to iFresh’s and, as iFresh believes, have infringed or misappropriated iFresh’s intellectual property rights. iFresh responds to these actions on a case-by-case basis, including, where appropriate, by sending cease and desist letters and commencing opposition actions and litigation. The outcomes of these actions have included both negotiated out-of-court settlements as well as litigation. iFresh cannot assure you that the steps it has taken to protect its intellectual property rights are adequate, that its intellectual property rights can be successfully defended and asserted in the future or that third parties will not infringe upon or misappropriate any such rights. In addition, iFresh’s trademark rights and related registrations may be challenged in the future and could be canceled or narrowed. Failure to protect iFresh’s trademark rights could prevent iFresh in the future from challenging third parties who use names and logos similar to iFresh’s trademarks, which may in turn cause consumer confusion or negatively affect consumers’ perception of iFresh’s brand and products, and eventually adversely affect iFresh’s sales and profitability. Moreover, intellectual property disputes and proceedings and infringement claims may result in a significant distraction for management and significant expense, which may not be recoverable regardless of whether iFresh is successful. Such proceedings may be protracted with no certainty of success, and an adverse outcome could subject iFresh to liabilities, force iFresh to cease use of certain trademarks or other intellectual property or force iFresh to enter into licenses with others. Any one of these occurrences may have a material adverse effect on iFresh’s business, results of operations and financial condition.

 

If iFresh experiences a data security breach and confidential customer information is disclosed, iFresh may be subject to penalties and experience negative publicity, which could affect iFresh’s customer relationships and have a material adverse effect on its business.

 

iFresh and its customers could suffer harm if customer information was accessed by third parties due to a security failure in iFresh’s systems. The collection of data and processing of transactions requires iFresh to receive, transmit and store a large amount of personally identifiable and transaction related data. This type of data is subject to legislation and regulation in various jurisdictions. Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal legislative proposals addressing data privacy and security. If some of the current proposals are adopted, iFresh may be subject to more extensive requirements to protect the customer information that it processes in connection with the purchases of iFresh’s products. iFresh may become exposed to potential liability with respect to the data that it collects, manages and processes, and may incur legal costs if its information security policies and procedures are not effective or if it is required to defend its methods of collection, processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to iFresh’s methods of handling personal data could adversely affect its business, results of operations, financial condition and cash flows due to the costs and negative market reaction relating to such developments. Additionally, if iFresh suffers data breaches, one or more of the credit card processing companies that it relies on may refuse to allow it to continue to participate in their network, which would limit iFresh’s ability to accept credit cards at its stores and could adversely affect its business, results of operations, financial condition and cash flows.

 

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Data theft, information espionage or other criminal activity directed at the retail industry or computer or communications systems may materially adversely affect iFresh’s business by causing iFresh to implement costly security measures in recognition of actual or potential threats, by requiring iFresh to expend significant time and expense developing, maintaining or upgrading its information technology systems and by causing it to incur significant costs to reimburse third parties for damages. Such activities may also materially adversely affect iFresh’s financial condition, results of operations and cash flows by reducing consumer confidence in the marketplace and by modifying consumer spending habits.

 

If iFresh is unable to renew or replace current store leases or if it is unable to enter into leases for additional stores on favorable terms, or if one or more of its current leases are terminated prior to expiration of their stated term, and it cannot find suitable alternate locations, iFresh’s growth and profitability could be negatively impacted.

 

iFresh currently leases all of its store locations. Many of iFresh’s current leases provide unilateral option to renew for several additional rental periods at specific rental rates. iFresh’s ability to re-negotiate favorable terms on an expiring lease or to negotiate favorable terms for a suitable alternate location, and iFresh’s ability to negotiate favorable lease terms for additional store locations, could depend on conditions in the real estate market, competition for desirable properties, its relationships with current and prospective landlords, or other factors that are not within iFresh’s control. Any or all of these factors and conditions could negatively impact iFresh’s growth and profitability.

  

iFresh leases certain of its stores and related properties from related parties.

 

Long Deng, one of iFresh’s directors and executive officers, owns 50% of Dragon Development LLC, which leases to iFresh the premises at which Strong America, one of iFresh’s wholesale subsidiaries, is located. During fiscal year ended March 31, 2017, rental payments (excluding maintenance and taxes that iFresh is obligated to pay) under the leases from Dragon Development LLC were $637,273. The leases with Dragon Development LLC renewed on May 1, 2016, and their remaining terms are 10 years. iFresh has no assurance that these related parties will renew the lease agreements with it after expiration. If iFresh cannot renew the leases, it will have to move its stores and warehouses locations, which increases the uncertainty of finding suitable locations for those stores and the reputation recognition in new locations, which may adversely affect iFresh’s sales, expenses, profit and financial position.

 

Failure to retain iFresh’s senior management and other key personnel may adversely affect its operations.

 

iFresh’s success is substantially dependent on the continued service of its senior management and other key personnel. These executives, and in particular Long Deng, iFresh’s Executive Chairman and Chief Executive Officer and Chief Operating Officer, have been primarily responsible for determining the strategic direction of iFresh’s business and for executing its growth strategy and are integral to its brand and culture, and the reputation iFresh enjoys with suppliers and consumers. The loss of the services of any of these executives and other key personnel could have a material adverse effect on iFresh’s business and prospects, as iFresh may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause iFresh’s stock price to decline. The loss of key employees could negatively affect iFresh’s business.

 

If iFresh is unable to attract, train and retain employees, it may not be able to grow or successfully operate its business.

 

The retail store industry is labor intensive, and iFresh’s success depends in part upon its ability to attract, train and retain a sufficient number of employees who understand and appreciate iFresh’s culture and are able to represent its brand effectively and establish credibility with its business partners and consumers. iFresh’s ability to meet its labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce in the markets in which iFresh is located, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. In the event of increasing wage rates, if iFresh fails to increase its wages competitively, the quality of its workforce could decline, causing its customer service to suffer, while increasing its wages could cause its earnings to decrease. If iFresh is unable to hire and retain employees capable of meeting its business needs and expectations, its business and brand image may be impaired. Any failure to meet iFresh’s staffing needs or any material increase in turnover rates of iFresh’s employees may adversely affect its business, results of operations and financial condition.

 

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Changes in and enforcement of immigration laws could increase iFresh’s costs and adversely affect iFresh’s ability to attract and retain qualified store-level employees.

 

Federal and state governments from time to time implement immigration laws, regulations or programs that regulate iFresh’s ability to attract or retain qualified foreign employees. Some of these changes may increase iFresh’s obligations for compliance and oversight, which could subject iFresh to additional costs and make iFresh’s hiring process more cumbersome, or reduce the availability of potential employees. Although iFresh has implemented, and is in the process of enhancing, procedures to ensure its compliance with the employment eligibility verification requirements, there can be no assurance that these procedures are adequate and some of its employees may, without iFresh’s knowledge, be unauthorized workers. The employment of unauthorized workers may subject iFresh to fines or civil or criminal penalties, and if any of iFresh’s workers are found to be unauthorized, iFresh could experience adverse publicity that negatively impacts its brand and makes it more difficult to hire and keep qualified employees. iFresh may be required to terminate the employment of certain of its employees who were determined to be unauthorized workers. The termination of a significant number of employees may disrupt iFresh’s operations, cause temporary increases in iFresh’s labor costs as it trains new employees and result in additional adverse publicity. iFresh’s financial performance could be materially harmed as a result of any of these factors.

  

Prolonged labor disputes with employees and increases in labor costs could adversely affect iFresh’s business.

 

A considerable amount of iFresh’s operating costs is attributable to labor costs and, therefore, its financial performance is greatly influenced by increases in wage and benefit costs, including pension and health care costs. As a result, iFresh is exposed to risks associated with a competitive labor market. Rising health care and pension costs and the nature and structure of work rules will be important issues. Any work stoppages or labor disturbances as a result of employees’ dissatisfaction of their current employment terms could have a material adverse effect on iFresh’s financial condition, results of operations and cash flows. iFresh also expects that in the event of a work stoppage or labor disturbance, it could incur additional costs and face increased competition.

 

Various aspects of iFresh’s business are subject to federal, state and local laws and regulations. iFresh’s compliance with these regulations may require additional capital expenditures and could materially adversely affect its ability to conduct its business as planned.

 

iFresh is subject to federal, state and local laws and regulations relating to zoning, land use, environmental protection, workplace safety, food safety, public health, community right-to-know and alcoholic beverage and tobacco sales. In particular, the states in which iFresh operates and several local jurisdictions regulate the licensing of supermarkets and the sale of alcoholic beverages. In addition, certain local regulations may limit iFresh’s ability to sell alcoholic beverages at certain times. iFresh is also subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working conditions, immigration, disabled access and work permit requirements. Compliance with new laws in these areas, or with new or stricter interpretations of existing requirements, could reduce the revenue and profitability of iFresh’s stores and could otherwise materially adversely affect iFresh’s business, financial condition or results of operations. iFresh’s new store openings could be delayed or prevented or its existing stores could be impacted by difficulties or failures in iFresh’s ability to obtain or maintain required approvals or licenses. iFresh’s stores are subject to unscheduled inspections on a regular basis, which, if violations are found, could result in the assessment of fines, suspension of one or more needed licenses and, in the case of repeated “critical” violations, closure of the store until a re-inspection demonstrates that iFresh has remediated the problem. Certain of iFresh’s parking lots and warehouses either have only temporary certificates of occupancy or are awaiting a certificate of occupancy which, if not granted, would require iFresh to stop using such property. Additionally, a number of federal, state and local laws impose requirements or restrictions on business owners with respect to access by disabled persons. iFresh’s compliance with these laws may result in modifications to iFresh’s properties, or prevent iFresh from performing certain further renovations. iFresh cannot predict the nature of future laws, regulations, interpretations or applications, or determine what effect either additional government regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory schemes would have on iFresh’s business in the future.

 

iFresh’s plans to acquire and open new stores requires iFresh to spend capital. Failure to use its capital efficiently could have an adverse effect on iFresh’s profitability.

 

iFresh’s growth strategy depends on its acquisition of and opening new stores, which will require iFresh to use cash generated by its operations and a portion of the net proceeds of future equity or debt financing and borrowing under bank credit line. iFresh cannot assure you that cash generated by its operations, the net proceeds of future equity or debt financing and borrowing under bank credit line will be sufficient to allow iFresh to implement its growth strategy. If any of these initiatives prove to be unsuccessful, iFresh may experience reduced profitability and it could be required to delay, significantly curtail or eliminate planned store openings, which could have a material adverse effect on its financial condition and future operating performance and the price of its common stock. 

 

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Litigation may materially adversely affect iFresh’s business, financial condition and results of operations.

 

iFresh’s operations are characterized by a high volume of customer traffic and by transactions involving a wide variety of product selections. These operations carry a higher exposure to consumer litigation risk when compared to the operations of companies operating in many other industries. Consequently, iFresh may be a party to individual personal injury, product liability and other legal actions in the ordinary course of its business, including litigation arising from food-related illness. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that may decrease consumer confidence in iFresh’s businesses, regardless of whether the allegations are valid or whether iFresh is ultimately found liable. As a result, litigation may materially adversely affect iFresh’s businesses, financial condition, results of operations and cash flows.

 

Increased commodity prices and availability may impact profitability.

 

Many of iFresh’s products include ingredients such as wheat, corn, oils, milk, sugar, cocoa and other commodities. Commodity prices worldwide have been increasing. While commodity price inputs do not typically represent the substantial majority of iFresh’s product costs, any increase in commodity prices may cause its vendors to seek price increases from iFresh. Although iFresh is typically able to mitigate vendor efforts to increase its costs, it may be unable to continue to do so, either in whole or in part. In the event iFresh is unable to continue mitigating potential vendor price increases, it may in turn consider raising its prices, and its customers may be deterred by any such price increases. iFresh’s profitability may be impacted through increased costs to it which may impact gross margins, or through reduced revenue as a result of a decline in the number and average size of customer transactions.

 

Severe weather, natural disasters and adverse climate changes may materially adversely affect iFresh’s financial condition and results of operations.

 

Severe weather conditions and other natural disasters in areas where iFresh has stores or from which iFresh obtains the products it sells may materially adversely affect its retail operations or its product offerings and, therefore, its results of operations. Such conditions may result in physical damage to, or temporary or permanent closure of, one or more of iFresh’s stores, an insufficient workforce in iFresh’s markets and/or temporary disruption in the supply of products, including delays in the delivery of goods to iFresh’s stores or a reduction in the availability of products in its stores. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops may materially adversely affect the availability or cost of certain products within its supply chain. Any of these factors may disrupt iFresh’s businesses and materially adversely affect its financial condition, results of operations and cash flows.

 

The occurrence of a widespread health epidemic may materially adversely affect iFresh’s financial condition and results of operations.

 

iFresh’s business may be severely impacted by wartime activities, threats or acts of terror or a widespread regional, national or global health epidemic, such as pandemic flu. Such activities, threats or epidemics may materially adversely impact iFresh’s business by disrupting production and delivery of products to iFresh’s stores, by affecting iFresh’s ability to appropriately staff its stores or by causing customers to avoid public gathering places or otherwise change their shopping behaviors.

 

iFresh needs approximately $50 million for the year ended March 31, 2018 in order to achieve its planned growth for that year and if it cannot successfully obtain sufficient capital, the financial results and stock price of iFresh after the business combination will be adversely affected.

 

iFresh believes that it needs approximately $50 million for the year ended March 31, 2018 mainly for the purpose of acquiring additional stores to achieve its planned growth for that year. If it is not able to obtain financing on commercially reasonable terms in connection with the Business Combination, as is contemplated by the parties, it may not be able to implement its growth plan. If it is unable to affect its growth plan, iFresh’s financial results will be significantly worse than anticipated and its stock price may decline as a result. 

  

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iFresh is an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make its securities less attractive to investors.

 

iFresh is an “emerging growth company,” as defined in the JOBS Act. It may remain an “emerging growth company” until the fiscal year ended December 31, 2020. However, if its non-convertible debt issued within a three-year period or revenues exceeds $1 billion, or the market value of its common stock that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, iFresh would cease to be an emerging growth company as of the following fiscal year. As an emerging growth company, iFresh is not required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, has reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and is exempt from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Additionally, as an emerging growth company, iFresh has elected to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As such, iFresh’s financial statements may not be comparable to companies that comply with public company effective dates. As a result, potential investors may be less likely to invest in our securities.

 

Our Chief Financial Officer may be subject to conflicts of interest.

 

Our Chief Financial Officer, Mr. Long Yi, provides his services on a non-exclusive, part-time basis, and may therefore become subject to conflicts of interest resulting from his other activities. Because Mr. Yi works only part-time, instances may occur where he may not be immediately available to provide solutions to problems or address concerns that arise in the course of us conducting our business and thus adversely affect our business. In addition, Mr. Yi can become subject to conflicts of interest because he devotes part of his working time to other business endeavors, including serving as chief executive officer of Urban Tea Inc. (NASDAQ: MYT) and chief financial officer of China Bat Group Inc. (NASDAQ:GLG), and have responsibilities to these other entities. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us. Because of these relationships, Mr. Yi could be subject to conflicts of interest.

 

The directors and officers of our company, including Mr. Yi, are aware of the existence of laws governing the accountability of directors and officers for corporate opportunity and requiring disclosures by the directors and officers of conflicts of interest, and we will rely upon such laws in respect of any conflicts of interest or in respect of any breaches of duty by any of our directors and officers. All such conflicts are to be disclosed by such directors or officers in accordance with applicable laws and the directors and officers are to govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law. Currently, we have no policy in place to address such conflicts of interest. In the event Mr. Yi fails to comply with these laws, our business and results of operations could be materially adversely affected.

 

Risks Related to Xiaotai

 

Risks Related to Xiaotai’s Business and Industry

 

Xiaotai has a limited operating history in a new and evolving industry, and Xiaotai’s future growth and prospects may be unpredictable and subject to a number of variables.

 

The online lending information intermediary services industry (the “online lending industry”) is a new, growing and evolving industry in China. The PRC regulatory framework for this industry is also evolving and may remain uncertain for the foreseeable future. If China’s online lending industry does not maintain the level of a healthy development in the long term, and particularly if PRC laws and regulations impose undue restrictions on this industry, there may not be an adequate market for the loan products facilitated on Xiaotai’s platform. Xiaotai only began operating Xiaotai’s online lending facilitation platform in 2014 and is subject to all potential risks involved in a developing business enterprise in a new and evolving industry. The likelihood of Xiaotai’s continued success must be considered in light of the challenges, uncertainties, complications, unpredictable costs and delays frequently encountered in connection with a new and evolving industry and the competitive environment in which it operates.

 

Potential borrowers and investors may not be familiar with the online lending intermediary services segment and may not be able to distinguish Xiaotai’s services from those of Xiaotai’s competitors. Attracting new investors and new borrowers through Xiaotai’s cooperation partners to transact on Xiaotai’s platform is crucial to increasing the volume of loans facilitated through Xiaotai’s platform and to the success of Xiaotai’s business. Xiaotai may not be able to successfully attract new investors and new borrowers on a consistent basis. You should consider Xiaotai’s prospects for future operation success in light of the risks and uncertainties encountered by those businesses in their early stages of development. Xiaotai may not be able to successfully address these risks and uncertainties or implement Xiaotai’s operating strategies. If Xiaotai fail to do so, such failure could materially harm Xiaotai’s business operations or, in the extreme case, cause it to cease operations.

 

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If new negative publicity arises with respect to the online lending industry, Xiaotai’s business prospects and operating results could be adversely affected.

 

There have been a number of business failures and fraud or unfair dealing allegations against companies in the online lending industry in China since 2016. The PRC government has issued new rules and regulations in the past few years to develop a more transparent regulatory environment for the online lending industry. Not all companies in China’s online lending industry have been fully compliant with these regulations, and this has adversely impacted the reputation of China’s online lending industry as a whole. If borrowers or investors associate those failed companies or unfair business practices with us, they may be less willing to join Xiaotai’s platform or continue to participate in future transactions. Negative reputation can also arise from many other sources, such as misconduct by cooperation partners or other third-party service providers. Any negative publicity with respect to Xiaotai’s cooperation partners or service providers could also affect Xiaotai’s business and operating results to the extent that Xiaotai’s operations rely on those partners or if borrowers and investors associate Xiaotai with those partners. All of those factors could adversely affect customer confidence in the participation of Xiaotai’s platform, and as a result, could harm Xiaotai’s business and operating results.

 

Xiaotai’s recent rapid growth may not be indicative of Xiaotai’s future prospects, and any significant decrease in the loan transactions between borrowers and investors on Xiaotai’s platform could adversely affect Xiaotai’s business and operation results.

 

Xiaotai has been experiencing significant growth since Xiaotai’s inception in 2014, particularly with respect to the number of platform registered users and the total amount of loans facilitated. Xiaotai’s future growth, however, may not continue at the current pace or at all. The relatively short operating history of the online lending industry and the current market conditions may not present an adequate basis for evaluating Xiaotai’s business prospects and financial performance. Like Xiaotai’s industry peers, Xiaotai has a limited operating history under Xiaotai’s current business mode. It has encountered and will continue to encounter risks, uncertainties, unforeseeable costs and hurdles as it continues to develop.

 

To maintain Xiaotai’s growth momentum, Xiaotai seeks to continue to increase loan transactions through Xiaotai’s website and mobile platform by attracting new borrowers who meet Xiaotai’s platform borrowing standards through Xiaotai’s cooperation partners. In addition, Xiaotai also needs to ensure borrowers’ loans offer sufficiently high returns to incentivize new and existing investors so that they maintain or increase their investments in borrower loans. Any substantial decrease in the number of borrower and investor participations in the loan transactions on Xiaotai’s platform could adversely affect Xiaotai’s business prospects, results of operations and financial condition.

 

Xiaotai’s online facilitation operations require adequate funding from investors, and access to sufficient capital cannot be assured.

 

Xiaotai’s business operations are based on the matching of borrowers and investors through Xiaotai’s online platform. The growth and success of Xiaotai’s future operations depend on the availability of adequate capital to meet borrower demand for their borrowing needs. A large portion of platform investors’ capital has been from affluent individuals and middle-class families. In order to maintain the requisite level of funding for the loans facilitated on Xiaotai’s platform to meet borrower demand, Xiaotai intends to further diversify Xiaotai’s investor composition including attracting institutional investors, which usually invest larger amounts compared to individual investors. If adequate funds are not available to meet borrowers’ demand for loans, the volume of loans facilitated on Xiaotai’s platform may be significantly impacted. Also, investors may choose not to invest in loans facilitated on Xiaotai’s platform. If Xiaotai’s platform is unable to have adequate investor capital due to insufficient investment on Xiaotai’s platform, or if investments are not available to fund the loans on a timely basis, Xiaotai may experience a loss of market share or have a slower than expected growth, which would harm Xiaotai’s business, financial condition and results of operations.

 

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If Xiaotai is unable to increase the number of repeat borrowers on Xiaotai’s platform, the credit quality, amount of transactions and service fees, and overall profitability of Xiaotai’s platform may be adversely affected.

 

Since inception, Xiaotai has steadily experienced an increase in loan transactions on Xiaotai’s platform. Xiaotai relies on referrals from Xiaotai’s cooperation partners to acquire new and repeat borrowers. As such, Xiaotai’s cooperation relationships with Xiaotai’s industry partners are vital for expanding Xiaotai’s customer base and adding new registered users to borrow from investors on Xiaotai’s platform. Repeat borrowing is also crucial to Xiaotai’s growth because repeat borrowers generally demonstrate good credit behaviors and contribute to a higher overall credit quality of borrowers on Xiaotai’s platform. Additional loans facilitated to repeat borrowers contribute to an increase in Xiaotai’s transactions and service fees without lower costs. However, the growth in repeat borrowing rate may not immediately translate into profitability if Xiaotai cannot effectively manage Xiaotai’s customer acquisition cost to attract first-time loan borrowers to Xiaotai’s platform. Repeat borrowing tends to result in increases in average loan size as borrowers progressively borrow loans with higher principal amounts in subsequent loans on Xiaotai’s platform. As repeat borrowers borrow larger amounts of loans over time, Xiaotai expects to generate cumulative fees exceeding Xiaotai’s customer acquisition costs and increase Xiaotai’s overall profitability. While Xiaotai expects the rate of repeat borrowing on Xiaotai’s platform to continue to increase, if Xiaotai’s repeat borrowing rate decreases in the future, if repeat borrowers do not borrow larger loans or if the repeat borrowing rate is not as high as Xiaotai’s expectations, Xiaotai’s overall profitability may be adversely affected.

 

If Xiaotai cannot maintain or increase the volume of loan transactions facilitated through Xiaotai’s platform, Xiaotai’s business and results of operations will be adversely affected.

 

The volume of loan transactions facilitated through Xiaotai’s platform has grown steadily and rapidly since Xiaotai’s inception. The overall transaction volume may be affected by a number of factors, including Xiaotai’s brand recognition and reputation, the interest rates offered between borrowers and investors relative to market rates, the effectiveness of the platform’s risk control, the efficiency of Xiaotai’s platform, Xiaotai’s relationships with Xiaotai’s cooperation partners and other factors. Xiaotai intends to continue to dedicate significant resources to Xiaotai’s platform user acquisition efforts, including establishing new online acquisition channels. If there are insufficient qualified loan requests, investors may be unable to invest their capital in an efficient manner and may seek other investment opportunities. If there are insufficient investor commitments, borrowers may be unable to obtain capital through Xiaotai’s platform and may turn to other sources for their borrowing needs, and investors who wish to exit their investments prior to maturity on the secondary loan market may not be able to do so in a timely fashion.

 

If any of Xiaotai’s current customer acquisition channels become less effective, or if Xiaotai is unable to continue to use any of these channels, Xiaotai may not be able to attract new investors or the cooperation partners’ borrowers in a cost-effective manner or may even lose Xiaotai’s existing borrowers and investors to Xiaotai’s competitors. If Xiaotai fails to attract qualified borrowers and sufficient investor commitments, or if borrowers and investors decide not to continue to transact loans on Xiaotai’s platform at the current level, Xiaotai might be unable to increase Xiaotai’s loan transaction volume and revenues as anticipated, and Xiaotai’s business and results of operations may be adversely affected.

 

Failure to maintain good working relationships with Xiaotai’s cooperation partners or to develop relationships with new partners could have a material adverse effect on Xiaotai’s financial conditions and results of operations.

 

Xiaotai considers its relationships with industry cooperation partners crucial to Xiaotai’s future success, particularly with respect to Xiaotai’s borrower acquisitions, loan funding, and data sources for risk management. Xiaotai relies on referrals from its cooperation partners to acquire new and repeat borrowers. As such, Xiaotai’s cooperation relationships with its industry partners is critical for expanding Xiaotai’s customer base and adding new registered users to borrow from investors on Xiaotai’s platform. Xiaotai also obtains an enormous amount of data from e-commerce platforms, online consumer service providers, telecommunication service providers and other industry service providers. Additionally, Xiaotai engages a depository bank to provide fund depository, transfer, settlement and clearance services for Xiaotai’s platform.

 

We cannot predict whether Xiaotai’s industry partners would choose to terminate their relationships with Xiaotai or propose terms that Xiaotai cannot accept. Also, identifying potential new partners and maintaining relationships with existing partners require significant time and resources as does integrating third-party data and services. In addition, Xiaotai’s relationships with Xiaotai’s partners also does not prohibit them from working with Xiaotai’s competitors or from offering competing services. Xiaotai’s competitors may provide incentives to Xiaotai’s partners to favor their platform services over Xiaotai’s, which could have the effect of reducing the volume of loans facilitated through Xiaotai’s platforms if Xiaotai’s partners were to direct potential borrowers to other platforms or otherwise endorse Xiaotai’s competitor’s platform services over us. Also, Xiaotai’s partners may choose to launch their own lending platforms and become a competitor themselves. Further, if these partners do not perform as expected, the benefits to Xiaotai may not be as favorable as Xiaotai expects and Xiaotai may have disagreements or disputes with such partners, any of which could adversely affect Xiaotai’s brand and reputation as well as Xiaotai’s business operations. If Xiaotai cannot successfully enter into new cooperation relationships or maintain productive relationships with current partners, Xiaotai’s results of operations and financial conditions may be materially adversely affected.

 

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When new competitors seek to enter Xiaotai’s target markets, or when industry competitors seek to increase their market shares, they may substantially reduce their service fees or common terms in a particular market, which could adversely affect Xiaotai’s market share or ability to explore new market opportunities. In addition, since the online lending industry is a relatively recent development in China, potential investors and borrowers may not fully understand how Xiaotai’s platforms work and may not be able to fully appreciate the additional customer protections and features that Xiaotai has invested in and adopted on Xiaotai’s platforms as compared to other platforms. Xiaotai’s financial results may suffer if Xiaotai fail to act to meet these competitive challenges. Further, to the extent that Xiaotai’s competitors are able to offer more attractive terms to Xiaotai’s partners, such cooperation partners may choose to terminate their relationships with us. All of the foregoing could adversely affect Xiaotai’s business, results of operations, financial condition and future growth.

 

If Xiaotai cannot compete effectively in its targeted markets, Xiaotai’s operating results could be adversely affected.

 

China’s lending and investment markets are intensely competitive and rapidly evolving. Xiaotai competes with Xiaotai’s industry peers that actively attempt to attract potential borrowers, investors or both. With respect to borrowers, Xiaotai primarily competes with other online lending platforms that facilitate personal credits. With respect to investors, Xiaotai primarily compete with other online lending platforms in China.

 

Some of Xiaotai’s current or potential competitors have significantly more financial, technical, marketing and other resources than Xiaotai does and may be able to devote greater resources to the development, promotion, sale and support of their platforms and distribution channels. Their business models may also ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Xiaotai’s current or potential competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and brand loyalty, and broader customer and partnership relationships than Xiaotai has. For example, established internet companies, including social media companies that possess large, existing customer bases, substantial financial resources and established distribution channels have entered and may continue to enter the online lending market. Xiaotai’s competitors may be better equipped to expand customer base, respond quickly to new technologies and undertake more extensive marketing campaigns. If Xiaotai is unable to compete with such companies or meet the need for innovation in Xiaotai’s industry, the demand for Xiaotai’s platform services could stagnate or substantially decline, Xiaotai could experience reduced revenue, or Xiaotai’s platforms could fail to achieve or maintain wider market acceptance, any of which could harm Xiaotai’s business and results of operation.

 

Xiaotai relies on data sourced primarily from third parties and prospective borrowers in borrower qualification and credit assessments, and if the data is inaccurate or cannot be reliably used, loan products may lose their value resulting in Xiaotai’s loss of investors.

 

Xiaotai’s ability to evaluate borrowers and attract investors depends on accurate credit assessment, fraud detection and data processing. Xiaotai receives data and information from prospective borrowers and third-party sources, including credit reporting entities, data vendors, and consumer transaction companies. In addition to traditional data used to analyze potential borrowers’ creditworthiness, Xiaotai also relies on behavioral data, including e-commerce, social media, online and other public information, and transactional data.

 

Unlike many developed countries, China does not have a well-developed centralized credit reporting system. Although Xiaotai has taken steps to verify potential borrower data, information obtained may nevertheless not be as complete or accurate as Xiaotai’s platform expects. Moreover, investors do not have access to all the financial information of a potential borrower and can rely only on Xiaotai’s qualification assessment and scoring technology to evaluate borrowers’ creditworthiness. If customer information from outside sources becomes unavailable or more expensive to obtain, Xiaotai would have to seek alternative sources of information and consequently Xiaotai’s operation costs would increase. If investors receive inaccurate, misleading or incomplete information supplied by potential borrowers and third-parties, those investors may experience no returns or lower than expected returns on their investments. Consequently, investors may lose confidence in the platform services, and Xiaotai’s sources of capital for Xiaotai’s platform operations would be jeopardized. As a result, Xiaotai’s business and results of operations may be adversely affected.

 

Xiaotai’s platform and technology systems rely on proprietary technologies that are highly technical, and if they contain undetected errors, Xiaotai’s business and results of operations could be adversely affected.

 

Xiaotai’s platform systems rely on software and other technology that are highly technical and complex. The systems depend on the ability of such technology to store, retrieve, process and manage immense amounts of data. The software technology on which Xiaotai relies may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the software has been released for external or internal use. Errors or other design defects within the software on which Xiaotai relies may result in a negative experience for borrowers and investors on the platform, delay introductions of new features or enhancements, result in errors or compromise Xiaotai’s ability to protect borrower or investor data or Xiaotai’s intellectual property. Any errors, bugs or defects discovered in Xiaotai’s proprietary software technologies could result in disruption to the platform operations, loss of borrowers or investors or potential liability for damages, any of which could adversely affect Xiaotai’s business, results of operations and financial conditions.

 

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Xiaotai may not be able to prevent others from unauthorized use of its intellectual property, and any infringement on Xiaotai’s IP rights could adversely affect Xiaotai’s platform operations and competitive position.

 

We regard Xiaotai’s trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to Xiaotai’s success, and Xiaotai relies on a combination of intellectual property laws and Contractual Arrangements, including confidentiality and non-compete agreements with Xiaotai’s employees and others to protect Xiaotai’s proprietary rights. Xiaotai cannot assure you that any of Xiaotai’s intellectual property rights would not be challenged, invalidated or misappropriated, or such intellectual property would be sufficient to provide Xiaotai with competitive advantages.

 

Registering, maintaining and enforcing intellectual property rights in China can often be a challenging task. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Preventing any unauthorized use of Xiaotai’s intellectual property is difficult and costly and the steps Xiaotai takes may be inadequate to prevent the misappropriation of Xiaotai’s intellectual property. In addition, risks exist that confidentiality and non-compete agreements could be breached by employees or counterparties, and there may not be adequate remedies available to Xiaotai for any such breach. In the event that Xiaotai has to resort to litigation to enforce intellectual property rights, such litigation could result in substantial costs and a diversion of Xiaotai’s managerial and financial resources. Xiaotai can provide no assurance that it will prevail in such litigation. In addition, Xiaotai’s trade secrets may be leaked or otherwise become available to, or be independently discovered by, Xiaotai’s competitors. If Xiaotai’s employees or consultants use intellectual property owned by others in their work, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing Xiaotai’s intellectual property rights could have a material adverse effect on Xiaotai’s business, financial condition and results of operations.

 

Personal data and other confidential information of borrowers, investors and partners which Xiaotai collects or is provided access to may subject Xiaotai to liabilities imposed by relevant governmental regulations or expose it to risks of cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions.

 

Xiaotai receives, transmits and stores a large volume of personally identifiable information and other confidential data from borrowers, investors and Xiaotai’s partners. There are a number of laws and regulations governing privacy and the storing, sharing, use, disclosure and protection of personally identifiable information and user data. Specifically, personally identifiable and other confidential information is increasingly subject to legislation and regulations in numerous domestic and international jurisdictions, the intent of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. This regulatory framework for privacy issues in China and worldwide is currently evolving and is likely to remain changing for the foreseeable future. In addition, there may be limits on the cross-border transmission of user data even to the extent that such transmission is within Xiaotai. Xiaotai could be adversely affected if legislation or regulations are expanded to require changes in business practices or privacy policies, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect Xiaotai’s business, financial condition and results of operations.

 

In addition to rules and regulations, industry groups or other private parties may propose new and different privacy standards. Because the interpretation and application of privacy and data protection laws and privacy standards are still evolving, it is possible that Xiaotai’s current practices may inadvertently fail to fully comply with certain aspects of those rules or privacy standards. Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional costs and liabilities, damage Xiaotai’s reputation, inhibit the use of Xiaotai’s platforms and adversely affect Xiaotai’s growth.

 

The data Xiaotai possessed and the automated nature of Xiaotai’s platforms may make it an easy target for and potentially vulnerable to, cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. Furthermore, some of the data Xiaotai possessed is stored on Xiaotai’s servers, which are hosted by third parties. While Xiaotai and third-party hosting facilities have taken steps to protect confidential information to which Xiaotai has access, Xiaotai’s security measures may be breached in the future. Any accidental or willful security breaches or other unauthorized access to Xiaotai’s platforms could cause confidential borrower, investor or partner information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose Xiaotai to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If Xiaotai’s security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in Xiaotai’s software are exposed and exploited, Xiaotai’s relationships with borrowers, investors and partners could be severely damaged, and Xiaotai could incur significant liability.

 

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In addition, malwares or other techniques that may potentially be used to sabotage or obtain unauthorized access to Xiaotai’s systems change frequently and generally are not recognized until they are launched against a target, and Xiaotai and third-party hosting facilities may be unable to anticipate these techniques or implement adequate preventative measures. Any security breach, whether actual or perceived, would harm Xiaotai’s reputation, and could cause it to lose borrowers, investors and partners and adversely affect Xiaotai’s business and results of operations.

 

Xiaotai’s platform operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China.

 

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology. Xiaotai relies on a limited number of telecommunication service providers to provide data communications capacity through local telecommunications lines and internet data centers to host Xiaotai’s servers. Xiaotai has limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of Xiaotai’s business, Xiaotai may be required to upgrade Xiaotai’s technology and infrastructure to keep up with the increasing traffic on Xiaotai’s platform. Xiaotai cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage.

 

In addition, Xiaotai has no control over the costs of the services provided by telecommunication service providers. If the prices Xiaotai pays for telecommunications and internet services rise significantly, Xiaotai’s results of operations may be adversely affected. Furthermore, if internet access fees or other charges to internet users increase, Xiaotai’s user traffic may decline and Xiaotai’s business may be harmed.

 

Xiaotai’s business success depends on the continued efforts of Xiaotai’s senior management and key employees. If Xiaotai failed to retain one or more core members of different functions and teams, Xiaotai’s business may be severely disrupted.

 

Xiaotai’s business operations depend on the continued services of Xiaotai’s senior management and key members of Xiaotai’s technical, operational and marketing teams. While Xiaotai has provided different incentives to Xiaotai’s management and other employees, Xiaotai cannot assure you that Xiaotai can continue to retain their services. If one or more of Xiaotai’s key executives or employees were unable or unwilling to continue in their present positions, Xiaotai may not be able to replace them easily or at all, Xiaotai’s business may be severely disrupted and Xiaotai’s financial condition and results of operations may be materially and adversely affected, and Xiaotai may incur additional expenses to recruit, train and retain qualified personnel. In addition, although Xiaotai has entered into confidentiality and non-competition agreements with Xiaotai’s key management and employees, there is no assurance that anyone of them will not join Xiaotai’s competitors or form a competing business. If any dispute arises between Xiaotai and Xiaotai’s current or former management members or employees, Xiaotai may have to incur substantial costs and expenses in order to enforce such agreements in China or Xiaotai may be unable to enforce them at all.

 

Misconduct, errors and underperformance by Xiaotai’s employees, service providers or other contracting third-parties could harm Xiaotai’s business and reputation.

 

Xiaotai is exposed to many types of operational risks, including the risk of misconduct and errors by Xiaotai’s employees, third-party service providers or other contracting third parties. Xiaotai’s business depends on Xiaotai’s employees and third-party service providers to interact with potential borrowers or investors, process large numbers of transactions and support the loan collection process, all of which involve the use and disclosure of personal information. Xiaotai could be materially adversely affected and suffer financial losses if transactions, arrangements or funds were redirected, misappropriated, breached or otherwise improperly executed, if personal information was disclosed to unintended recipients, or if an operational breakdown or failure in the processing of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of Xiaotai’s operations or systems. It is not always possible to identify misconduct or errors by employees, third-party service providers or other contracting parties, and the precautions Xiaotai takes to detect and prevent such types of activity may not be effective in controlling unknown or unmanaged risks or losses. If any of Xiaotai’s employees, third-party service providers or other contracting parties take, convert or misuse funds, documents or data or fail to follow protocol when interacting with borrowers and investors, Xiaotai could be liable for damages and subject to regulatory actions and penalties, in addition to suffering financial losses. Xiaotai could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability.

 

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As Xiaotai relies on certain third-party service providers, such as cooperation partner platforms, the depository bank and other service providers, to conduct Xiaotai’s business, and if these third-party service providers failed to function properly, Xiaotai cannot assure you that Xiaotai would be able to find an alternative in a timely and cost-efficient manner or at all. Any of these occurrences could result in Xiaotai’s diminished ability to operate Xiaotai’s business, potential liability to borrowers and investors, inability to attract borrowers and investors, reputational damage, regulatory intervention and financial harm, which could negatively impact Xiaotai’s business, financial condition and results of operations.

 

Competition for Xiaotai’s employees is intense, and Xiaotai may not be able to attract and retain the highly skilled employees needed to support Xiaotai’s business.

 

As Xiaotai continues to experience rapid growth, Xiaotai believes its success depends on the efforts and talents of Xiaotai’s employees, including computer engineers, financial personnel and marketing professionals. Xiaotai’s future success depends on Xiaotai’s continued ability to attract, develop, motivate and retain highly qualified and skilled employees. Competition for highly skilled sales, technical and financial personnel is extremely intense in today’s Chinese financial services industry. Xiaotai may not be able to hire and retain these personnel at a level consistent with our existing compensation and salary structure. Many of the companies with which Xiaotai competes for experienced employees have greater resources than Xiaotai does and may be able to offer more attractive terms of employment.

 

Xiaotai has incurred net losses in the recent past, and may incur losses again in the future.

 

Xiaotai has incurred net losses in the past. Xiaotai anticipates that Xiaotai’s operating expenses will increase in the foreseeable future as Xiaotai seeks to continue to grow Xiaotai’s business, attract new and repeat borrowers, investors and partners, and further develop Xiaotai’s platform and services for the benefit of investors and borrowers on Xiaotai’s platforms. These efforts may be more expensive than anticipated, and Xiaotai may not succeed in increasing Xiaotai’s revenues sufficiently to offset these higher expenses. If Xiaotai is unable to execute Xiaotai’s business development strategy or unable to generate sufficient amount of services fees from Xiaotai’s customers, it may not achieve the earning level it anticipates. Xiaotai may incur net losses or may be unable to maintain profitability on a quarterly or annual basis on a consistent basis.

 

Xiaotai’s business and operating results may be impacted by adverse economic and market conditions.

 

Many factors, including factors that are beyond Xiaotai’s control, may have a detrimental impact on borrowers’ willingness to seek loans and investors’ ability and desire to lend, and consequentially have a negative effect on Xiaotai’s business and results of operations. These factors include general economic conditions, the general interest rate environment, unemployment rates, and the availability of other investment opportunities. If any of these factors arise, Xiaotai’s revenue and transactions on Xiaotai’s platforms would decline and Xiaotai’s business would be negatively impacted.

 

There can be no assurance that economic conditions will remain favorable for Xiaotai’s business or that demand for Xiaotai’s online lending information services will remain at current levels. Reduced demand for loans transacted on Xiaotai’s platform would negatively impact Xiaotai’s growth and revenue. If an insufficient number of qualified borrowers apply for Xiaotai’s loans or Xiaotai’s access to investors’ capital for loans on Xiaotai’s platforms decreases, Xiaotai’s growth and revenue could decline.

 

If we fail to establish and maintain proper internal financial reporting controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act, we will be required to file a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. We have assessed that we have material weaknesses in our internal control over financial reporting. We and our independent registered public accounting firm identified several material weaknesses in our internal control in the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2017 and 2018. (1) our lack of sufficient skilled staff with U.S. GAAP knowledge and the SEC reporting knowledge for the purpose of financial reporting as well as the lack in formal accounting policies and procedures manual to ensure proper financial reporting in accordance with U.S. GAAP and SEC reporting requirements; and (2) our lack of internal audit function to establish formal risk assessment process and internal control framework (3) our lack of detail internal accounting policies and procedures to ensure the proper information maintained.

 

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Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting as we and they will be required to do after we become a public company. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional deficiencies may have been identified.

 

The presence of material weaknesses in internal control over financial reporting could result in financial statement errors which, in turn, could lead to errors in our financial reports and/or delays in our financial reporting, which could require us to restate our operating results. We might not identify one or more material weaknesses in our internal controls in connection with evaluating our compliance with Section 404 of the Sarbanes-Oxley Act. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, we will need to expend significant resources and provide significant management oversight.

 

In order to address the identified material weaknesses, we have taken and plan to take the following measures:

 

  engaged an outside professional consulting firm to supplement our efforts to improve our internal control over financial reporting;
     
  recruit sufficient qualified professionals with appropriate levels of knowledge and experience to assist in reviewing and resolving accounting issues in routine or complex transactions;
     
  improve the communication between management, board of directors and the Chief Financial Officer;
     
  obtain proper approval for other significant and non-routine transactions from the Board of Directors; and improve accounting controls on areas such as expenses.

 

Implementing any appropriate changes to our internal controls may require specific compliance training of our directors and employees, entail substantial costs in order to modify our existing accounting systems, take a significant period of time to complete and divert management’s attention from other business concerns. These changes may not, however, be effective in maintaining the adequacy of our internal control.

 

If we are unable to conclude that we have effective internal controls over financial reporting, investors may lose confidence in our operating results, the price of the Ordinary Shares could decline and we may be subject to litigation or regulatory enforcement actions. In addition, if we are unable to meet the requirements of Section 404 of the Sarbanes-Oxley Act, the Ordinary Shares may not be able to remain listed on the NASDAQ Capital Market.

 

Xiaotai may not be able to effectively manage its growth or implement its future business strategies and as a result, Xiaotai’s business and results of operations may be materially and adversely affected. 

 

Xiaotai is experiencing a period of growth and expansion that has placed, and continues to place, significant strain on Xiaotai’s management and resources. Factors relating to Xiaotai’s business that may impact Xiaotai’s growth and cause fluctuations, among other things, include:

 

  a decline or slowdown of the growth in the value of loan products available on Xiaotai’s lending platform;

 

  changes in laws or regulatory policies that could impact Xiaotai’s ability to provide services to Xiaotai’s clients;

 

  negative publicity regarding the financial services industry in China;

 

  unanticipated delays of product or service rollouts;

 

  unanticipated changes to economic terms in contracts with Xiaotai’s service providers, including renegotiations that may not be favorable to Xiaotai or Xiaotai’s clients;

 

  failure to enter into contracts with new loan product providers and cancellations of existing contracts with loan product providers;

 

  increases in the number of clients who decide to terminate their relationship with Xiaotai or platform borrowers of the loan products; and

 

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Xiaotai believes that its growth will depend on the ability to effectively implement its business strategies and address the above listed factors that may affect its operations.

 

In order to strengthen Xiaotai’s market position in the financial information service industry in China, Xiaotai needs to allocate substantial resources to facilitate high-quality loan products and services and continue to grow Xiaotai’s internet lending information intermediary business, all of which require Xiaotai to further expand, train, manage and motivate Xiaotai’s workforce and maintain Xiaotai’s relationships with Xiaotai’s clients, third-party service providers and other industry players. Xiaotai’s operational expenses may increase due to establishment of additional offices and client centers so as to increase Xiaotai’s market penetration. Xiaotai anticipates that Xiaotai will also need to implement a variety of enhanced and upgraded operational systems, procedures and controls, including the improvement of Xiaotai’s accounting and other internal management systems. All of these endeavors involve risks and will require substantial management efforts, attention and skills, and significant additional expenditure. Xiaotai cannot assure you that Xiaotai’s current and planned personnel, systems, procedures and controls will be adequate to support Xiaotai’s future operations. In addition, Xiaotai cannot assure you that Xiaotai will be able to manage its growth or implement Xiaotai’s future business strategies effectively, and failure to do so may materially and adversely affect Xiaotai’s business and results of operations.

 

Xiaotai may fail to obtain and maintain licenses and permits necessary to conduct Xiaotai’s operations in China, and Xiaotai’s business may be materially and adversely affected as a result of any changes in the laws and regulations governing the financial services industry in China.

 

The laws and regulations governing the internet lending information intermediary services industry in China are still evolving. Substantial uncertainties exist regarding the regulatory system and the interpretation and implementation of current and any future PRC laws and regulations applicable to the P2P lending industry and companies conducting online lending information intermediary services businesses. Depending on the type of products and services being offered, the business operation may be subject to the supervision and scrutiny by different authorities. To date, the PRC government has not adopted a unified regulatory framework governing the distribution or management of online lending products.

 

Xiaotai currently holds value-added telecommunications business certificate to conduct online lending information intermediary services. However it does not have an internet content provider license. Xiaotai cannot assure you that Xiaotai will be able to maintain Xiaotai’s existing licenses, qualifications or permits, renew any of them when their current term expires or obtain additional licenses necessary for Xiaotai’s future business expansion. Any violation of China Banking Regulatory Commission (“CBRC”) regulations would negatively impact Xiaotai’s registration progress.

 

In addition, if future PRC regulations require that Xiaotai obtain additional licenses or permits in order to continue to conduct Xiaotai’s business operations, there is no guarantee that Xiaotai would be able to obtain such licenses or permits in a timely fashion, or at all. If any of these situations occur, Xiaotai’s business, financial condition and prospects would be materially and adversely affected.

 

Xiaotai’s risk management policies and procedures may not be fully effective in identifying or mitigating risk exposure in all market environments or against all types of risk, including employee and financial advisor misconduct. 

 

Xiaotai has devoted significant resources to developing Xiaotai’s risk management policies and procedures and will continue to do so. Supported by its proprietary finance technology, Xiaotai has developed the Zhizi risk control system, which is a comprehensive risk control system and has enable Xiaotai to receive a Level III Certificate for Protection of State Information Security awarded by the PRC Ministry of Public Security, the highest level of recognition granted to non-bank institutions in the finance industry for stringent information security management and risk controls. Nonetheless, Xiaotai’s policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating Xiaotai’s risk exposure in all market environments or against all types of risk. Many of Xiaotai’s risk management policies are based upon observed historical market behavior or statistics based on historical models. During periods of market volatility or due to unforeseen events, the historically derived correlations upon which these methods are based may not be valid. As a result, these methods may not predict future exposures accurately, which could be significantly greater than what Xiaotai’s models indicate. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that are publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated.

 

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Moreover, Xiaotai is subject to the risks of errors and misconduct by Xiaotai’s employees and advisors, which include:

 

  engaging in misrepresentation or fraudulent activities when marketing or distributing funds lending products to clients;

 

  improperly using or disclosing confidential information of Xiaotai’s clients, third-party funds lending product providers or other parties;

 

  concealing unauthorized or unsuccessful activities; or

 

  otherwise not complying with laws and regulations or Xiaotai’s internal policies or procedures.

 

Although Xiaotai has established an internal compliance system to supervise service quality and regulation compliance, these risks may be difficult to detect in advance and deter, and could harm Xiaotai’s business, results of operations or financial performance.

 

In addition, although Xiaotai performs due diligence on potential clients, Xiaotai cannot assure you that Xiaotai will be able to identify all the possible issues based on the information available to us. If certain investors or borrowers do not meet the relevant qualification requirements for products Xiaotai distribute or under applicable laws, Xiaotai may also be deemed in default of the obligations required in Xiaotai’s contract with the product providers. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to properly record and verify a large number of transactions and events, and these policies and procedures may not be fully effective in mitigating Xiaotai’s risk exposure in all market environments or against all types of risk.

 

Non-compliance on the part of third parties with which Xiaotai conducts business could disrupt Xiaotai’s business and adversely affect Xiaotai’s results of operations.

 

Xiaotai’s third-party payment companies or other business counterparties that act agents to administer funding and repayment activities among borrowers, investors, the asset platform and the funding platform and to perform fund settlement functions may be subject to regulatory penalties or punishments because of their regulatory compliance failures, which may affect Xiaotai’s business activities and reputation and in turn, Xiaotai’s results of operations. Although Xiaotai conducts due diligence on Xiaotai’s business counterparties, Xiaotai cannot be certain whether any such counterparty has infringed or will infringe any third parties’ legal rights or violate any regulatory requirements. Xiaotai cannot assure you that these counterparties will continue to maintain all applicable permits and approvals, and any noncompliance on the part of these counterparties may cause potential liabilities to Xiaotai and in turn disrupt Xiaotai’s operations.

 

A portion of Xiaotai’s revenue, net income and cash flow are variable, which may make it difficult for Xiaotai to achieve steady earnings growth from period to period.

 

A portion of Xiaotai’s revenue, net income and cash flow are variable. For example, Xiaotai is entitled to receive service fees from loan facilitation and thus generate its revenues only upon the investors’ receiving loan repayments from borrowers. Such variability in the timing and amount of service fees may affect Xiaotai’s results of operations and cash flow during a particular period, which may not be indicative of Xiaotai’s performance in a future period. Xiaotai may not achieve steady growth in net income and cash flow from period to period. Xiaotai cannot predict precisely when, or if, realizations of such income will occur. If Xiaotai were to have a realization event in a particular period, the event may have a significant impact on Xiaotai’s results and cash flow for that particular period.

  

Any failure to protect Xiaotai’s clients’ privacy and confidential information could lead to legal liability, adversely affect Xiaotai’s reputation and have a material adverse effect on Xiaotai’s business, financial condition or results of operations.

 

Xiaotai’s services involve the exchange, storage and analysis of highly confidential information, including detailed personal and financial information regarding Xiaotai’s clients, through a variety of electronic and non-electronic means, and Xiaotai’s reputation and business operations are highly dependent on Xiaotai’s ability to safeguard the confidential personal data and information of Xiaotai’s clients. Xiaotai relies on a network of process and software controls to protect the confidentiality of data provided to Xiaotai or stored on Xiaotai’s systems.

 

If Xiaotai cannot not maintain adequate internal controls or fails to implement new or improved controls, this data could be misappropriated or confidentiality could otherwise be breached. Xiaotai could be subject to liability if Xiaotai inappropriately disclose any client’s personal information, or if third parties are able to illegally gain access to any client’s name, address, portfolio holdings, or other personal and confidential information. Any such event could subject Xiaotai to claims for identity theft or other similar fraud claims or claims for other misuses of personal information, such as unauthorized marketing or unauthorized access to personal information. In addition, such events would cause Xiaotai’s clients to lose their trust and confidence in us, which may result in a material adverse effect on Xiaotai’s business, results of operations and financial condition.

 

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Xiaotai may not be able to prevent unauthorized use of Xiaotai’s intellectual property, which could reduce demand for Xiaotai’s services, adversely affect Xiaotai’s revenues and harm Xiaotai’s competitive position.

 

Xiaotai relies primarily on a combination of copyright, trade secret, trademark and anti-unfair competition laws and contractual rights to establish and protect Xiaotai’s intellectual property rights. Xiaotai cannot assure you that the steps Xiaotai has taken or will take in the future to protect Xiaotai’s intellectual property or piracy will prove to be sufficient. For example, although Xiaotai requires Xiaotai’s employees to enter into confidentiality agreements in order to protect Xiaotai’s trade secrets, other proprietary information and, most importantly, Xiaotai’s client information, these agreements might not effectively prevent disclosure of Xiaotai’s trade secrets, know-how or other proprietary information and might not provide an adequate remedy in the event of unauthorized disclosure of such confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases Xiaotai could not assert any trade secret rights against such parties. Implementation of intellectual property-related laws in China has historically been lacking, primarily due to ambiguity in the PRC laws and enforcement difficulties. Accordingly, intellectual property rights and confidentiality protection in China may not be as effective as in the United States or other countries. Current or potential competitors may use Xiaotai’s intellectual property without Xiaotai’s authorization in the development of products and services that are substantially equivalent or superior to Xiaotai’s, which could reduce demand for Xiaotai’s solutions and services, adversely affect Xiaotai’s revenues and harm Xiaotai’s competitive position. Even if Xiaotai were to discover evidence of infringement or misappropriation, Xiaotai’s recourse against such competitors may be limited or could require Xiaotai to pursue litigation, which could involve substantial costs and diversion of management’s attention from the operation of Xiaotai’s business.

 

Xiaotai may face intellectual property infringement claims, which could be time-consuming and costly to defend and may result in the loss of significant rights by Xiaotai. 

 

Although Xiaotai has not been subject to any litigation, pending or threatened, alleging infringement of third parties’ intellectual property rights, Xiaotai cannot assure you that such infringement claims will not be asserted against Xiaotai in the future. Some third parties may own technology patents, copyrights, trademarks, trade secrets and Internet content, which they may use to assert claims against us. Xiaotai requires Xiaotai’s advisors, managers and relevant staff to follow certain procedures designed to reduce the likelihood that Xiaotai may use, develop or make available any content or applications without the proper licenses or necessary third-party consents. However, these procedures may not be effective in completely preventing the unauthorized posting or use of copyrighted material or the infringement of other rights of third parties.

 

Intellectual property litigation is expensive and time-consuming and could divert resources and management attention from the operation of Xiaotai’s business. If there is a successful claim of infringement, Xiaotai may be required to alter Xiaotai’s services, cease certain activities, pay substantial royalties and damages to, and/or obtain one or more licenses from third parties. Xiaotai may not be able to obtain those licenses on commercially acceptable terms, or at all. Any of those consequences could cause Xiaotai to lose revenues, impair Xiaotai’s client relationships and harm Xiaotai’s reputation.

 

Legal or administrative proceedings or allegations against Xiaotai or Xiaotai’s management could have a material adverse impact on Xiaotai’s reputation, results of operations, financial condition and liquidity.

 

Xiaotai has not been subject to legal or administrative proceedings or third-party allegations historically which were likely to have had a material adverse effect on Xiaotai’s business, financial condition or results of operations. Xiaotai has been, and may from time to time in the future become, a party to such proceedings or claims arising in the ordinary course of Xiaotai’s business. Any lawsuit or allegation against us, with or without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice by Xiaotai or perceived wrong doing by any key member of Xiaotai’s management team could harm Xiaotai’s reputation, distract Xiaotai’s management from day-to-day operations and cause Xiaotai to incur significant expenses in the defense of such matters. A substantial judgment, award, settlement, fine, or penalty may generate negative publicity against Xiaotai and could be materially adverse to Xiaotai’s operating results or cash flows for a particular future period, depending on Xiaotai’s results for that period. This risk may be heightened during periods when credit, equity or other financial markets are volatile, or when clients or investors are experiencing losses.

 

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Xiaotai’s principal shareholder has substantial influence over Xiaotai and his interests may not be aligned with the interests of Xiaotai’s other shareholders.

 

As of the date of this Proxy Statement, Mr. Baofeng Pan beneficially owns an aggregate of approximately 56.6% of Xiaotai’s issued and outstanding Ordinary Shares. As a result of Mr. Pan substantial shareholding, Mr. Pan has a substantial influence over Xiaotai’s business, including decisions regarding mergers, consolidations and the sale of all or substantially all of Xiaotai’s assets, election of directors and other significant corporate actions. Mr. Pan may take actions that are not in the best interests of Xiaotai or Xiaotai’s other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of Xiaotai, which could deprive Xiaotai’s shareholders of an opportunity to receive a premium for their shares as part of a sale of Xiaotai and might reduce the price of Xiaotai’s Ordinary Shares. These actions may be taken even if they are opposed by Xiaotai’s other shareholders.

 

Xiaotai has limited insurance coverage.

 

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Other than casualty insurance on some of Xiaotai’s assets, Xiaotai does not have commercial insurance coverage on Xiaotai’s other assets and Xiaotai does not have insurance to cover Xiaotai’s business or interruption of Xiaotai’s business, litigation or product liability. Moreover, the low coverage limits of Xiaotai’s property insurance policies may not be adequate to compensate Xiaotai for all losses, particularly with respect to any loss of business and reputation that may occur. Xiaotai has determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for Xiaotai to have such insurance. Any uninsured occurrence of loss or damage to property, litigation or business disruption may result in Xiaotai’s incurring substantial costs and the diversion of resources, which could have an adverse effect on Xiaotai’s results of operations and financial condition.

 

Risks Related to Xiaotai’s Corporate Structure

 

If the PRC government finds that the agreements that establish the structure for operating certain of Xiaotai’s operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, Xiaotai could be subject to severe penalties or be forced to relinquish Xiaotai’s interests in those operations.

  

Xiaotai’s contractual arrangements with Xiaotai Zhejiang and its shareholders enable Xiaotai to (1) have power to direct the activities that most significantly affect the economic performance of Xiaotai Zhejiang; (2) receive substantially 100% of the economic benefits from Xiaotai Zhejiang in consideration for the services provided by Xiaotai Zhejiang; and (3) have an exclusive option to purchase most or part of the equity interests in Xiaotai Zhejiang when and to the extent permitted by PRC law, or request any existing shareholder of Xiaotai Zhejiang to transfer any or part of the equity interest in Xiaotai Zhejiang to another PRC person or entity designated by WFOE at any time at Xiaotai’s discretion. Because of these contractual arrangements, Xiaotai is the primary beneficiary of Xiaotai Zhejiang and hence treat each of Xiaotai Zhejiang as Xiaotai’s VIE, and consolidate Xiaotai Zhejiang and its subsidiaries’ results of operations into Xiaotai’s.

 

Xiaotai’s contractual arrangements with Yingran Hangzhou and its shareholders enable Xiaotai to (1) have power to direct the activities that most significantly affect the economic performance of Yingran Hangzhou; (2) receive substantially 100% of the economic benefits from Yingran Hangzhou in consideration for the services provided by Yingran Hangzhou; and (3) have an exclusive option to purchase most or part of the equity interests in Yingran Hangzhou when and to the extent permitted by PRC law, or request any existing shareholder of Yingran Hangzhou to transfer any or part of the equity interest in Yingran Hangzhou to another PRC person or entity designated by WFOE at any time at Xiaotai’s discretion. Because of these contractual arrangements, Xiaotai is the primary beneficiary of Yingran Hangzhou and hence treat each of Yingran Hangzhou as Xiaotai’s VIE, and consolidate Yingran Hangzhou and its subsidiaries’ results of operations into Xiaotai’s.

 

If the PRC government finds that Xiaotai’s contractual arrangements do not comply with its restrictions on foreign investment in the online lending intermediary business, or if the PRC government otherwise finds that we, Xiaotai Zhejiang, Yingran Hangzhou or any of their subsidiaries or branches are in violation of PRC laws or regulations or lack the necessary permits or licenses to operate Xiaotai’s business, the relevant PRC regulatory authorities, including the CSRC, would have broad discretion in dealing with such violations or failures, including, without limitation:

 

  revoking Xiaotai’s business and operating licenses;

 

  discontinuing or restricting Xiaotai’s operations;

 

  imposing fines or confiscating any of Xiaotai’s income that they deem to have been obtained through illegal operations;

 

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  imposing conditions or requirements with which Xiaotai or Xiaotai’s PRC subsidiary and consolidated entities may not be able to comply;

 

  requiring Xiaotai or Xiaotai’s PRC subsidiary and consolidated entities to restructure the relevant ownership structure or operations;

 

  restricting or prohibiting Xiaotai’s use of the proceeds from financing activities of foreign investors to finance the business and operations of Xiaotai’s VIE and their respective subsidiary; or

 

  taking other regulatory or enforcement actions that could be harmful to Xiaotai’s business.

 

Any of these actions could cause significant disruption to Xiaotai’s business operations, and may materially and adversely affect Xiaotai’s business, financial condition and results of operations. In addition, it is unclear what impact the PRC government actions would have on Xiaotai and on Xiaotai’s ability to consolidate the financial results of any of Xiaotai’s consolidated entities in Xiaotai’s consolidated financial statements, if the PRC government authorities find Xiaotai’s legal structure and contractual arrangements to be in violation of PRC laws, rules and regulations. If any of these penalties results in Xiaotai’s inability to direct the activities of Xiaotai Zhejiang and Yingran Hangzhou that most significantly impact its economic performance and/or our failure to receive the economic benefits from Xiaotai Zhejiang and Yingran Hangzhou, Xiaotai may not be able to consolidate Xiaotai Zhejiang or Yingran Hangzhou into our consolidated financial statements in accordance with U.S. GAAP.

 

Xiaotai relies on contractual arrangements with Xiaotai’s VIEs, and their shareholders for Xiaotai’s China operations, which may not be as effective as direct ownership in providing operational control. 

 

Xiaotai relies on contractual arrangements with Xiaotai’s VIEs, Xiaotai Zhejiang and Yingran Hangzhou, and their Participating Shareholders to operate Xiaotai’s operations in China. These contractual arrangements may not be as effective as direct ownership in providing Xiaotai with control over Xiaotai’s VIEs. For example, Xiaotai’s VIEs and their Participating Shareholders could breach their contractual arrangements with Xiaotai by, among other things, failing to operate Xiaotai’s business in an acceptable manner or taking other actions that are detrimental to Xiaotai’s interests. These risks exist throughout the period in which Xiaotai operates its business through the contractual arrangements with VIEs. If Xiaotai were the controlling shareholder of the VIEs with direct ownership, Xiaotai would be able to exercise Xiaotai’s rights as shareholders to effect changes to their board of directors, which in turn could implement changes at the management and operational level. However, under the current contractual arrangements, as a legal matter, if Xiaotai’s VIEs or its shareholders fail to perform their obligations under these contractual arrangements, Xiaotai may have to incur substantial costs to enforce such arrangements, and rely on legal remedies under PRC law, including contract remedies, which may be time-consuming, unpredictable and expensive. If Xiaotai is unable to enforce these contractual arrangements, or if Xiaotai suffers significant delay or other obstacles in the process of enforcing these contractual arrangements, Xiaotai’s business and operations could be severely disrupted, which could materially and adversely affect Xiaotai’s results of operations and damage Xiaotai’s reputation.

 

For the years ended December 31, 2017 and 2016 and the six months ended June 30, 2018, Xiaotai Zhejiang and its subsidiaries and branches contributed 100%, 100% and 100% of Xiaotai’s total net revenues, respectively. Yingran Hangzhou and its subsidiaries and branches did not contribute any net revenues to Xiaotai’s total net revenues for the relevant years and periods, as it was formed on July 5, 2018. In the event Xiaotai is unable to enforce the contractual arrangements, Xiaotai may not be able to have the power to direct the activities that most significantly affect the economic performance of Xiaotai Zhejiang or Yingran Hangzhou or their subsidiaries and branches, and Xiaotai’s ability to conduct Xiaotai’s business may be negatively affected, and Xiaotai may not be able to consolidate the financial results of Xiaotai Zhejiang or Yingran Hangzhou or their subsidiaries and branches into Xiaotai’s consolidated financial statements in accordance with U.S. GAAP.

 

The shareholders of Xiaotai’s VIEs may have potential conflicts of interest with Xiaotai, and if any such conflicts of interest are not resolved in Xiaotai’s favor, Xiaotai’s business may be materially and adversely affected. 

 

Shareholders of Xiaotai’s VIEs, Xiaotai Zhejiang and Yingran Hangzhou, are PRC nationals. These individuals may have conflicts of interest with Xiaotai. Xiaotai Zhejiang is approximately 40.48 % owned by Mr. Baofeng Pan who will be appointed as the Chairman of the Board of Director and Director effective upon consummation of the Transactions, and Yingran Hangzhou is approximately 56.6% owned by Mr. Baofeng Pan. Conflicts of interest may arise between the roles of Mr. Baofeng Pan as shareholder, director of Xiaotai and as shareholder, director and officer of Xiaotai’s VIEs. Xiaotai relies on these individuals to abide by the laws of the Cayman Islands, which provide that directors and officers owe a fiduciary duty to Xiaotai that requires them to act in good faith and in the best interest of Xiaotai and not to use their positions for personal gains. On the other hand, PRC laws also provide that a director or an executive officer owes a fiduciary duty to the company he or she directs or manages. Xiaotai cannot assure you that when conflicts arise, shareholders of Xiaotai’s VIEs will act in the best interest of Xiaotai or that conflicts will be resolved in Xiaotai’s favor. These individuals may breach or cause the VIEs to breach the existing contractual arrangements. If Xiaotai cannot resolve any conflicts of interest or disputes between Xiaotai and these shareholders, Xiaotai would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to Xiaotai’s operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.

 

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Xiaotai’s ability to enforce the equity pledge agreements between Xiaotai and the Participating Shareholders of Xiaotai Zhejiang and Hangzhou Yingran may be subject to limitations based on PRC laws and regulations.

 

Pursuant to the equity pledge agreements relating to Xiaotai Zhejiang and Yingran Hangzhou, Xiaotai Zhejiang shareholders and Yingran Hangzhou shareholder pledged their equity interests in Xiaotai Zhejiang and Yingran Hangzhou to WFOE to secure Xiaotai Zhejiang’s and Yingran Hangzhou’s performances of the obligations under the Consulting Services Agreements and the Operating Agreements. The equity pledges under these equity pledge agreements have been registered with the relevant local branch of the State Administration for Industry and Commerce, or the SAIC. Under the PRC Property Law, when an obligor fails to pay its debt when due, the pledgee may choose to either conclude an agreement with the pledger to obtain the pledged equity or seek payments from the proceeds of the auction or sell-off of the pledged equity. If Xiaotai Zhejiang and Yingran Hangzhou fail to perform its obligations secured by the pledges under the equity pledge agreements respectively, one remedy in the event of default under the agreements is to require the pledger to sell the equity interests in Xiaotai Zhejiang and Yingran Hangzhou, as applicable, in an auction or private sale and remit the proceeds to Xiaotai’s subsidiary in China, net of related taxes and expenses. Such an auction or private sale may not result in Xiaotai’s receipt of the full value of the equity interests in Xiaotai’s VIEs. Xiaotai consider it very unlikely that the public auction process would be undertaken since, in an event of default, Xiaotai’s preferred approach would be to ask Xiaotai’s PRC subsidiary that is a party to the exclusive Equity Option Agreements with the Xiaotai Zhejiang Shareholders and the Yingran Hangzhou Shareholders, to designate another PRC person or entity to acquire the equity interests in such VIEs and replace the existing shareholders pursuant to the exclusive Equity Option Agreements.

 

In addition, in the registration forms of the local branch of the SAIC for the pledges over the equity interests under the equity pledge agreements, the amount of registered equity interests pledged to Xiaotai’s PRC subsidiary was stated as the pledger’s portion of the registered capital of the VIEs. The equity pledge agreements with the shareholders of Xiaotai’s VIEs provide that the pledged equity interest constitute continuing security for any and all of the indebtedness, obligations and liabilities of Xiaotai’s VIEs under the relevant contractual arrangements, and therefore the scope of pledge should not be limited by the amount of the registered capital of the applicable VIEs. However, there is no guarantee that a PRC court will not take the position that the amount listed on the equity pledge registration forms represents the full amount of the collateral that has been registered and perfected. If this is the case, the obligations that are supposed to be secured in the equity pledge agreements in excess of the amount listed on the equity pledge registration forms could be determined by the PRC court to be unsecured debt, which takes last priority among creditors and often does not have to be paid back at all. Xiaotai do not have agreements that pledge the assets of Xiaotai’s VIEs and their subsidiaries for the benefit of Xiaotai or Xiaotai’s PRC subsidiary, although Xiaotai’s VIEs grant Xiaotai’s PRC subsidiary options to purchase the assets of Xiaotai’s VIEs and their equity interests in its subsidiaries under the exclusive Equity Option Agreements.

 

If any of Xiaotai’s VIEs become the subject of a bankruptcy or liquidation proceeding, Xiaotai may lose the ability to use and enjoy their assets, which could reduce the size of Xiaotai’s operations and materially and adversely affect Xiaotai’s business. 

 

Xiaotai does not have priority pledges and liens against the assets of Xiaotai’s VIEs. As a contractual and property right matter, this lack of priority pledges and liens has remote risks. If Xiaotai Zhejiang and Yingran Hangzhou undergo an involuntary liquidation proceeding, third-party creditors may claim rights to some or all of its assets and Xiaotai may not have priority against such third-party creditors on the assets of Xiaotai’s VIEs. If Xiaotai’s VIEs liquidate, Xiaotai may take part in the liquidation procedures as a general creditor under the PRC Enterprise Bankruptcy Law and recover any outstanding liabilities owed by Xiaotai Zhejiang or by Yingran Hangzhou under the applicable service agreement.

 

If the shareholders of Xiaotai’s VIEs were to attempt to voluntarily liquidate Xiaotai’s VIEs without obtaining Xiaotai’s prior consent, Xiaotai could effectively prevent such unauthorized voluntary liquidation by exercising Xiaotai’s right to request the shareholders of Xiaotai’s VIEs to transfer 100% of its equity ownership interests to a PRC entity or individual designated by Xiaotai in accordance with the Equity Option Agreements with the shareholders of Xiaotai’s VIEs. In addition, under the Equity Pledge Agreement signed by Xiaotai Zhejiang and its Participating Shareholders and by Yingran Hangzhou and its Participating Shareholders, and according to the PRC Property Law, the shareholders of Xiaotai Zhejiang and the shareholders of Yingran Hangzhou do not have the right to issue dividends to themselves or otherwise distribute the retained earnings or other assets of Xiaotai Zhejiang or Yingran Hangzhou without Xiaotai’s consent. In the event that the shareholders of Xiaotai’s VIEs initiate a voluntary liquidation proceeding without Xiaotai’s authorization or attempts to distribute the retained earnings or assets of Xiaotai’s VIEs without Xiaotai’s prior consent, Xiaotai may need to resort to legal proceedings to enforce the terms of the contractual arrangements. Any such litigation may be costly and may divert Xiaotai’s management’s time and attention away from the operation of Xiaotai’s business, and the outcome of such litigation will be uncertain.

  

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Xiaotai’s contractual arrangements with Xiaotai’s VIEs may result in adverse tax consequences to Xiaotai.

 

As a result of Xiaotai’s corporate structure and the contractual arrangements among Xiaotai’s PRC subsidiary, Xiaotai’s VIEs and their Participating Shareholders, Xiaotai is effectively subject to the PRC value-added tax at rates from 3% to 6% and related surcharges on revenues generated by Xiaotai’s subsidiary from Xiaotai’s contractual arrangements with Xiaotai’s VIEs. The PRC Enterprise Income Tax Law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its affiliates or related parties to the relevant tax authorities. These transactions may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year during which the transactions are conducted. Xiaotai may be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between Xiaotai and Xiaotai’s VIEs were not on an arm’s length basis and therefore constitute a favorable transfer pricing arrangements. If this occurs, the PRC tax authorities could request that Xiaotai’s VIEs and subsidiary adjust their taxable income upward for PRC tax purposes. Such a pricing adjustment could adversely affect Xiaotai by reducing expense deductions recorded by such VIEs and thereby increasing the VIEs’ tax liabilities, which could subject the VIEs to late payment fees and other penalties for the underpayment of taxes. Xiaotai’s consolidated net income may be materially and adversely affected if Xiaotai’s VIEs tax liabilities increase or if either of them becomes subject to late payment fees or other penalties.

 

Substantial uncertainties exist with respect to the interpretation and implementation of PRC Foreign Investment Law and how it may impact the viability of Xiaotai’s current corporate structure, corporate governance, business operations and financial results. 

 

On March 15, 2019, the Second Session of the 13th National People’s Congress voted to pass the Foreign Investment Law of the People’s Republic of China which will come into force on January 1, 2020. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. While ancillary regulations are still waiting for enactment after the legislation of Foreign Investment Law, substantial uncertainties exist with respect to the viability of Xiaotai’s current corporate structure, corporate governance, business operations and financial results to some extent.

 

The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including Xiaotai, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. It is unclear whether under the Foreign Investment Law, a VIE that is controlled via contractual arrangements will also be deemed as an FIE, if it is ultimately “controlled” by foreign investors. Therefore, for companies with a VIE structure in an industry category that is on the “negative list,” the existing VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state owned enterprises or agencies, or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the VIE will be treated as an FIE and any operation in the industry category on the “negative list” without proper market entry clearance may be found illegal.

 

The Foreign Investment Law has not taken a position on what will happen to the existing companies with a VIE structure. If the Foreign Investment Law or its to be enacted ancillary regulations mandate further actions, Xiaotai will face uncertainties as to whether such clearance can be timely obtained, if at all. Furthermore, due to lack of guidance under the Foreign Investment Law, Xiaotai is unable to ascertain the controlling status of Xiaotai although no more than 50% of the total share capital of Xiaotai is held on record by PRC residents, and Xiaotai cannot assure you of the controlling status of Xiaotai after the completion of the Acquisition. If Xiaotai is not considered as ultimately controlled by PRC domestic investors, further actions required to be taken by Xiaotai under the Foreign Investment Law and its ancillary regulations may materially and adversely affect Xiaotai’s business and financial condition.

 

Risks Related to the Spin-off

 

We may incur greater costs following the Restructuring than we did before the Restructuring, which could decrease our profitability.

 

After the Spin-off, we may be unable to obtain the goods, services and technologies at prices or on terms as favorable to us as those we obtained prior to the Spin-off. We also relied on NYM Holding Inc. to provide various financial, administrative and other corporate services. The Company will provide certain of these services on a short-term transitional basis after the Spin-off. However, we will be required to establish the necessary infrastructure and systems to supply these services on an ongoing basis. We may not be able to replace the services provided by NYM Holding Inc. in a timely manner or on terms and conditions as favorable as those we receive from NYM Holding Inc. If functions previously performed by NYM Holding Inc. cost us more than the amounts reflected in our historical financial statements, our profitability could decrease.

 

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We may not realize the potential benefits from the Spin-off; the Company’s stockholders may not realize the potential benefits of the spin-off.

 

We may not realize the potential benefits that we expect from our spin-off from NYM Holding Inc. By separating from NYM Holding Inc., there is a risk that the Company may be more susceptible to market fluctuations and other adverse events than we would have been before the Restructuring. In addition, we will incur significant costs, including those described below, which may exceed our estimates, and we may incur some negative effects from the Spin-off.

 

We do not have an operating history independent from NYM Holdings Inc. and our historical and pro forma financial information may not be a reliable indicator of our future results.

 

The historical financial information we have included in this information statement has been derived from NYM Holding Inc.’s consolidated financial statements and accounting records and does not necessarily reflect what our financial position, results of operations and cash flows would have been had we been a separate, stand-alone entity during the periods presented. Actual costs that may have been incurred if we had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure. In addition, the historical information may not be indicative of what our results of operations, financial position and cash flows will be in the future. For example, following the Spin-off, changes will occur in our cost structure, debt financing and interest expense, funding and operations, including changes in our tax structure and increased costs associated with becoming a public, stand-alone company.

 

We might have been able to receive better terms from unaffiliated third-parties than the terms we receive in our agreements with Go Fresh.

 

Our agreements with Go Fresh related to the Spin-off, including the Purchase Agreement, were negotiated with Go Fresh in the context of our anticipated separation from NYM Holdings Inc. and the subsequent acquisition of Xiaotai. Although the agreement is intended to be on an arm’s-length basis, it may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third-parties. The terms of the agreement being negotiated in the context of our separation concern, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations among Go Fresh and us.

 

Risks Related to Doing Business in China

 

The laws and regulations governing the online lending intermediary service industry in China are developing and evolving and subject to changes. If Xiaotai fail to obtain and maintain requisite approvals, licenses or permits applicable to Xiaotai’s business, or fails to comply with existing and future applicable laws, regulations or requirements of local regulatory authorities, Xiaotai’s business, financial condition and results of operations would be materially and adversely affected.

 

Due to the relatively short history of the online lending information intermediary service industry in China, the PRC government has yet to establish a comprehensive regulatory framework governing Xiaotai’s industry. Before any industry-specific regulations were introduced in mid-2015, the PRC government simply relied on general and basic laws and regulations in governing the online lending information intermediary service industry, including the PRC Contract Law, the General Principles of the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court.

 

In July 2015, the China Banking Regulatory Commission, or the CBRC, together with nine other PRC regulatory agencies jointly issued a series of policy measures applicable to the online lending information intermediary service industry titled the Guidelines on Promoting the Healthy Development of Online Finance Industry, or the Guidelines. The Guidelines formally introduced for the first time the regulatory framework and basic principles for administering the online lending information intermediary service industry in China. Following the core principles of the Guidelines, a series of additional restrictions and affirmative obligations were imposed on online lending information intermediaries by the Implementation Strategies Targeted towards Risks related to Online Finance circulated by the General Office of the State Council in April 2016, the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries (the “Interim Measures”) issued by the CBRC and other PRC regulatory agencies in August 2016, the Circular on Regulating and Rectifying of “Cash Loan” Services (“Circular 141”) issued by the Office of the Leading Group for the Special Campaign against Internet Financial Risks and the Office of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks in December 2017, the Notice on The Improvement and Acceptance of P2P Online Lending Risks (“Circular 57”) and the Notice on Conducting Compliance Inspection on P2P Lending Platforms issued by the Office of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks in December 2017 and in August 2018, respectively. In addition, in February 2017 and August 2017, the CBRC issued the Guidelines on Online Lending Funds Custodian Business, or the Custodian Guidelines, and the Guidelines on Information Disclosure of the Business Activities of Online Lending Information Intermediaries, or the Disclosure Guidelines, respectively. Recently on August 13, 2018, the National P2P Online Lending Risk Special Remediation Work Leading Group Office, or the P2P Remediation Office, released Notice on Conducting Compliance Inspections for P2P Online Lending Agencies, or the Compliance Inspection Notice.

 

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According to the Interim Measures, the maximum loan balance at any given time for an individual or business enterprise shall be not more than RMB 200,000 and RMB 1,000,000, respectively, borrowed from a single internet lending information intermediary platform and not more than RMB 1 million for an individual or RMB 5 million for business enterprise, respectively, in total from all platform. If Xiaotai were found to be in violation of the Interim Measures, a penalty of up to RMB30,000 would be imposed for such violation. Furthermore, the Interim Measures require online lending information intermediaries and their branches that propose to carry out the online lending information intermediary services to file a record with the local financial regulatory department at the place where it is registered within ten business days after obtaining the business license. Local financial regulatory departments have the power to assess and classify the online lending information intermediaries which have filed a record, and to publicize the record-filing information and the classification results on their official websites. An online lending information intermediary must apply for appropriate telecommunication business license in accordance with the relevant requirements of telecommunication authorities subsequent to completion of the filing and is required to explicitly identify ourselves as an online lending information intermediary in Xiaotai’s business scope.

 

In accordance with the Guidelines and the Interim Measures, the relevant authorities are in the process of making detailed implementation rules regarding, among other things, filing procedures, assessment standards and classification rules for online lending information intermediaries, and specific rules and procedures regarding, among other things, application for appropriate telecommunication business license and change of business scope by existing online lending information intermediaries have yet to be formulated and issued. Xiaotai is unable to predict with certainty the impact, if any, that future legislation, judicial precedents and interpretations, rules or regulations relating to the online lending information intermediary service industry will have on Xiaotai’s business, financial condition and results of operations. According to the Circular of the General Office of the State Council on Issuing the Implementation Plan for Special Rectification on Risks in Internet Financial promulgated in April 2016, competent authorities are in the process of evaluating existing practices of online lending information intermediaries in the market and requesting rectification of those that have been identified during the evaluation as in conflict with the Guidelines and the Interim Measures. Pursuant to the Guideline of CBRC on Risk Prevention and Control in Banking Industry promulgated by CBRC on April 7, 2017 and Opinions on Promoting in the Classification and Disposal of Online Lending Institutions and Risk Prevention promulgated by the P2P Remediation Office on December 19, 2018, the promotion for the special risk rectification for internet lending platform (or the “P2P”) shall be continued. Internet lending intermediaries shall not market the borrowers who do not have the repayment ability and they are also prohibited from providing Internet loan services to students on campus. Furthermore, a Notification for Further Strengthening on Administration for Campus Loans was issued by CBRC, Ministry of Education of the PRC and Ministry of Human Resources and Social Security of the PRC on May 27, 2017 stipulated that all Campus loans business conducted by internet lending platform shall be suspended.

 

The laws, regulations, rules and governmental policies are expected to continue to evolve in Xiaotai’s industry. The growth in popularity of online individual finance in China increases the likelihood for the government authorities to further regulate Xiaotai’s industry. Although as of the date of this proxy, Xiaotai has not been subject to any material fines or other penalties under the abovesaid laws or regulations, Xiaotai cannot assure you that Xiaotai’s practices will not be required to be rectified or Xiaotai’s rectification measures and results will be satisfactory to relevant authorities, and Xiaotai cannot assure you that Xiaotai will be able to successfully make filings, obtain and maintain requisite licenses and meet other regulatory requirements set forth in applicable laws, rules and regulations. If Xiaotai fails to conduct Xiaotai’s business in a manner required by the relevant authorities or take rectification measures when required by the relevant authorities, or obtain and maintain any requisite approvals, licenses or permits or meet other requirements applicable to Xiaotai’s business, Xiaotai’s business, financial condition and results of operations would be materially and adversely affected.

  

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If Xiaotai’s practice is deemed to violate any PRC laws and regulations, Xiaotai’s business, financial condition and results of operations would be materially and adversely affected.

 

The PRC regulatory regime with respect to the online individual finance industry is relatively new and evolving, and their interpretation and enforcement are subject to significant uncertainties, it results in difficulties in determining whether Xiaotai’s existing practices would violate any applicable laws and regulations.

 

The Guidelines, the Interim Measures, Circular 141, Circular 57 and other laws and regulations prohibit online lending information intermediaries from certain activities, including but not limited to, credit enhancement, illegal fund-raising, and setting up capital pool. Furthermore, intermediaries that provide online lending information services shall not engage in certain activities, including, among others, (i) fundraising for the intermediaries themselves, (ii) holding investors’ fund or setting up capital pools with investors’ funds directly or indirectly, (iii) providing or providing in a disguised way security or guarantee to investors as to the principals and returns of the investment directly or indirectly, (iv) issuing or selling any wealth management products, or other financial products, or acting as an agent in selling such financial products; (v) mismatch between investor’s expected timing of exit and the maturity date, (vi) securitization, (vii) promoting its financing products on physical premises other than through the permitted electronic channels, such as telephones, mobile phones and internet, (viii) providing loans with its own capital, except as otherwise permitted by laws and regulations; (ix) equity crowd-funding; (x) deducting interest from loan principal; (xi) outsourcing key services such as customer information collection, screening, credit evaluation; (xii) facilitating loans without a designated purpose; (xiii) provide risk reserve fund to the investors; (xiv) provide loans to students in campus; (xv) issuing loans, except as otherwise provided by laws and regulations; (xvi) carrying out asset-like securitization business or the transfer of creditor’s rights in the form of packaged assets, securitized assets, trust assets, fund shares, etc.; (xvii) engaging in any form of mixing, bounding and agency with other institutions conducting investment, sales agency and brokerage except as otherwise provided by laws, regulations and supervision rules as to the internet lending fields and (xviii) conducting any misbehaviors that could mislead lenders and borrowers. Xiaotai has relied on its cooperation partners in borrower referrals and previously had not conducted due diligence on such partners before the issuance of Circular 141. There could be instances in which the cooperation partners had deducted interests from loan principals or setting ultra-high interest rates for any loans. Xiaotai is making efforts on strengthening the supervision and inspection of daily operations of its cooperation partners and effectively preventing non-compliance in the course of business development. For those non-compliant cooperation partners, Xiaotai would terminate cooperation with them. Besides, for a few individual micro-borrowing users, there is a case where the credit evaluation is conducted by the cooperation partners. Xiaotai is sorting out and rectifying business with related cooperation partners and the information collection and credit evaluation authority previously delegated to the cooperation partners will be recovered. Moreover, Xiaotai has not imposed strict control over the identity of the borrowers and the use of the loans, and there may be cases of student loans and illegal borrowings. As to this point, Xiaotai would check borrower’s identity through Xuexin website (a website established by Ministry of Education of China for qualification inquiry) to ensure that the borrower is not a student, strengthen the use of loans as well as borrowers’ willingness of repayment and modify the loan-related contracts to require borrowers to promise that loans would not be used for purpose of down payment or real estate off-site funding. Furthermore, according to Circular 57, high frequency credit transference and any other non-compliant loans such as loans issued through related parties is prohibited. Previously, there are no restrictions and rules on Xiaotai’s platform on creditor’s rights transference and unconditional and high-frequency creditor’s rights transference may occur. However, Xiaotai is in the process of rectification by informing in advance the borrower’s intent of renew and specially setting up module for free creditor’s rights transference and creditor’s rights must be held for at least two months before transference and high-frequency credit transference is prohibited. Besides, Xiaotai would also do due diligence on cooperation partners to make sure their loan mode is compliant. We, however, cannot assure you that Xiaotai’s rectification will be successful or timely and as mentioned above, if Xiaotai cannot detect non-compliant behaviors of its cooperation partners or recover its credit evaluation rights in time or normalization its borrowers and loan purposes, its business, results of operations would be adversely affected.

 

In addition, the Interim Measures require that the balance of money borrowed by the same individual must not exceed RMB200,000 (US$29,254) on an online lending information intermediary platform and not exceed RMB1 million (US$146,271) on all online lending information intermediary platform in the PRC. Due to lack of industry-wide information sharing arrangement, Xiaotai cannot assure you that the aggregate amount of loans taken out by a borrower on Xiaotai’s platform and other online lending information intermediary platform at a point in time does not exceed the limit set in the Interim Measures. The Interim Measures also require the intermediaries that provide online lending information services to strengthen their risk management, enhance screening and verifying efforts on the borrowers’ and investors’ information, and to set up custody accounts with qualified banks to hold customer funds, and to disclose the basic information to the investors and borrowers. On August 2018, Xiaotai signed capital custody agreement with Bank of Xi’an, the first batch of banks passed the assessment of the depository system of the China Internet Finance Association, and upload system simultaneously.

 

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Any violation of such applicable laws, regulations or relevant regulatory provisions may subject online peer-to-peer lending information intermediaries to sanctions, including, among others, supervision interviews, regulatory warning, correction order, condemnation, negative credit record and publication, fines, and criminal liabilities if the act constitutes a criminal offense.

 

To comply with existing laws, regulations, rules and governmental policies relating to the online consumer finance industry, Xiaotai has implemented various policies and procedures to conduct Xiaotai’s business and operations.  However, due to lack of detailed implementation rules on certain key requirements of the regulations and different interpretation of the regulations by the local authorities, Xiaotai cannot be certain that Xiaotai’s existing practices would not be deemed in violation of any existing or future laws, rules and regulations that are applicable to Xiaotai’s business.

 

In addition, Circular 141 prohibits peer-to-peer lending information intermediaries from providing loan matching services without designated use. Therefore Xiaotai requires a borrower to specify its loan use during the application process. The multilateral loan agreement among the borrower, investor and Xiaotai also stipulates the loan use and the borrower’s undertaking that he or she would not use the proceeds for any use other than the prescribed purposes (including but not limited to lending, payment for property purchases, foreclosures, real estate over-the-counter financing, real estate development, securities investment or equity investment, over-the-counter allocation, futures contracts, structured products and other derivatives and investments with equal risk or other illegal transactions, etc.). Xiaotai also request Xiaotai’s borrowers to provide proof for usage of such loan when its term expires on a selective basis. Where the borrower fails to comply with the aforesaid undertaking, the lender may call the loan and demand the borrower to bear the liability for the breach of the agreement. Where the borrower violates the laws and regulations, Xiaotai has the right to immediately report to corresponding regulatory authorities including the public security bureau.  However, Xiaotai cannot monitor how borrowers use the proceeds from time to time. Xiaotai cannot ensure borrowers fully comply with the loan agreement, and there can be no assurance that such practice would be considered by PRC regulators as being in compliance with any existing or future laws, regulations, rules and governmental policies on prohibition against facilitating loans without a designated purpose.

 

As of the date of this proxy statement, Xiaotai has not been subject to any material fines or other penalties under any PRC laws or regulations, including those governing the online consumer finance industry in China.  If Xiaotai’s practice is deemed to violate any laws, regulations and rules, Xiaotai may face, among others, regulatory warning, correction order, condemnation, fines and criminal liability. If such situations occur, Xiaotai’s business, financial condition, results of operations and prospects would be materially and adversely affected.

 

As the regulatory framework for the online finance industry evolves, domestic and foreign governments may draft and propose new laws, regulations, notices or interpretive releases to regulate marketplace lending, including Xiaotai’s online and mobile-based channels, which may negatively affect Xiaotai’s business operations and financial conditions.

 

The peer-to-peer lending industry in China has historically been largely unregulated. In July 2015, ten PRC central government ministries and regulators, including the PBOC, the CBRC, the Ministry of Finance, the Ministry of Public Security and the Cyberspace Administration of China, together released the Guidelines, which provide regulatory principles for Internet financing businesses, including those in the online marketplace lending industry. In August 2016, the CBRC and other regulators collectively announced the Interim Measures, which proposed the implementation of new requirements including, among others, filing, reporting, fund depository, risk and information disclosure, loan management and the permitted business scope for participants in the online marketplace lending industry. In November 2016, the CBRC, the MIIT and the Industry and Commerce Administration Department, jointly issued the Guidance to the Administration of Filling and Registration of Online Lending Information Intermediaries, or the Guidance of Administration, which provides general filing rules for online lending intermediaries, and authorizes local financial regulators to make detailed implementation rules regarding filing procedures according to their local practices. Since 2017, local financial regulators have been conducting thorough investigations and inspections of online lending intermediaries and require a rectification if any illegality is discovered. After local financing regulators have completed their investigation and examination, Xiaotai may be permitted to submit a filing application. In February 2017, the CBRC released the Guidance to regulate funds depositories for online lending intermediaries, or the Guidance, which defines several obligations and responsibilities of online lending intermediaries and commercial banks involved in the online funds depository business. Nevertheless, it is uncertain as to how the Interim Measures will be further interpreted and implemented. The relevant local authorities are also in the process of making detailed implementation rules regarding filing procedures. On August 13, 2018, the P2P Remediation Office released Notice on Conducting Compliance Inspections for P2P Online Lending Agencies, or the Compliance Inspection Notice, to Xiaotai’s direct agencies nationwide. The Compliance Inspections emphasizes ten core guidelines that is similarly prescribed in the Interim Measures while requiring online lending intermediaries to conduct ratifications in accordance with the attached Online Lending Information Intermediary Compliance Check List, or the Checklist, which lists 108 detailed rules, based upon the principals prescribed by the Guidelines and the Interim Measures and other regulations and laws, for self-check and report of online lending intermediaries and complete such ratification before December, 2018. On December 19, 2018, the P2P Remediation Office promulgated Opinions on Promoting in the Classification and Disposal of Online Lending Institutions and Risk Prevention. However, the final official content and timing of the final implementation rules and other related new rules are uncertain. Due to the fact that Xiaotai has not fully comply with the Interim Measures in the grace period of twelve months and is not sure it shall comply with any new regulations or laws and if any new regulations differ from Xiaotai’s expectations, Xiaotai may be materially and adversely affected. Xiaotai is unable to predict with certainty the impact, if any, that future legislation, judicial precedents, or regulations relating to the marketplace lending industry will have on Xiaotai’s business, financial condition and results of operations. Furthermore, the increasing growth in popularity of marketplace lending and borrowing increases the likelihood that the PRC government will seek to further regulate the marketplace lending industry.

 

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In addition, the regulatory framework for Internet commerce, including online marketplaces such as Xiaotai’s, with respect to Xiaotai’s online and mobile-based channels, is evolving, and it is possible that new laws and regulations will be adopted domestically and internationally, or existing laws and regulations may be interpreted in new ways, which, along with possible changes needed to fully comply with any newly released regulations, could affect the operation of Xiaotai’s marketplace and the way in which Xiaotai interact with borrowers and investors. The cost to comply with such laws or regulations would increase Xiaotai’s operating expenses, and Xiaotai may be unable to pass those costs on to borrowers and investors in the form of increased fees. In addition, governmental or regulatory agencies may decide to impose taxes on services provided over the Internet or by online marketplaces. These taxes could discourage the use of Xiaotai’s marketplace, which would adversely affect the viability of Xiaotai’s business.

 

Changes in PRC regulations relating to interest rates for P2P lending could have a material adverse effect on Xiaotai’s business.

 

The interest rate permitted to be charged on loans facilitated by Xiaotai’s platform is subject to limitations set forth in the Provisions of the Supreme People’s Court on Application of Laws to the Hearing of Private Lending Cases, or the Provisions on Private Lending Cases, which provides that (i) when the interest rate agreed between the borrower and investor does not exceed an annual interest rate of 24%, the People’s Court will uphold the interest rate charged by the investor, and (ii) when the interest rate agreed between the borrower and investor exceeds an annual interest rate of 36%, the portion in excess of 36% is void and the People’s Court will uphold the borrower’s claim for return of the excess portion to the borrower. For loans with interest rates per annum between 24% and 36%, if the interest on the loans has already been paid to the investor, and so long as such payment has not damaged the interest of the state, the community or any third parties, the courts will likely not enforce the borrower’s demand for the return of such interest payment. If an interest rate for overdue payments is not agreed to before lending, the interest rate on overdue payments is permitted up to the interest rate for the loan. If neither the interest rate for the loan nor the interest rate for overdue payments have been agreed to, overdue payments are permitted to have an interest rate of 6%. Although Xiaotai’s platform primary source of income relies on the service fee that borrower and investor pay, and such income should cover all business expenses as employee salary, rental costs, advertisements and so on, but the reduced interest rates may affect Xiaotai’s to improve Xiaotai’s capability and efficiency to procure business and Xiaotai’s business would be adversely affected.

 

Xiaotai’s operations may need to be modified to comply with existing and future requirements set forth by the CBRC or laws or regulations promulgated by other PRC authorities regulating the marketplace lending industry in China.

 

In April 2014, the CBRC announced four principles regarding the marketplace lending industry in China: (i) marketplace lending platform shall be treated as agencies, (ii) marketplace lending platform shall not provide guarantee services, (iii) marketplace lending platform shall not maintain a fund pool, and (iv) marketplace lending platform shall not illegally conduct fundraising.

 

In July 2015, ten PRC central government ministries and regulators, including the PBOC, the CBRC, the Ministry of Finance, the Ministry of Public Security and the Cyberspace Administration of China, together released the Guidelines, which identified the CBRC as the supervisory regulator for the online lending industry. According to the Guidelines, online marketplace lending platform may only serve as intermediaries to provide information services to borrowers and investors and may not provide credit enhancement services or illegally conduct fundraising. The Guidelines also outlined certain regulatory propositions, which would require Internet finance companies, including online marketplace lending platform, to (i) complete website filing procedures with the administrative departments overseeing telecommunications; (ii) use banking financial institutions’ depository accounts to hold lending capital, and engage an independent auditor to audit such accounts and publish audit results to customers; (iii) improve the disclosure of operational and financial information, provide sufficient risk disclosure, and set up thresholds for qualified investors to provide better protections to investors; (iv) enhance online security management to protect customers’ personal and transactional information; and (v) take measures against anti-money laundering and other financial crimes.

 

In August 2016, the CBRC and other regulators collectively announced the publication of the Interim Measures. The Interim Measures also stipulated a twelve-month transition period from the time of their effectiveness for online lending intermediaries to make necessary adjustments. Apart from what had already been emphasized in the Guidelines and other previously released principles, the Interim Measures also include: (i) general principles; (ii) filing administration; (iii) business rules and risk management guidelines; (iv) protection measures for investors and borrowers; (v) rules on information disclosure; (vi) supervision and administrative mechanisms; and (vii) legal liabilities.

 

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In November 2016, the CBRC, the MIIT and the Industry and Commerce Administration Department, jointly issued the Guidance of Administration, which provides the general filing rules for online lending intermediaries and delegates the filing authority to the local financial authorities. Since 2017, local financial regulators have been conducting investigations on the online lending intermediaries, and if Xiaotai failed to be in full compliance with any regulations, Xiaotai may be required to rectify mistakes within a certain period as stipulated in the rectification order of local financial regulators. After local financing regulators have completed their investigation and examination, Xiaotai may be permitted to submit a filing application.

 

In February 2017, the CBRC released the Guidance to regulate funds depositories for online lending intermediaries, which defines several obligations and responsibilities of online lending intermediaries and commercial banks involved in the online funds depository business. Although Xiaotai’s current arrangements with commercial banks is temporarily compliant with the requirements of the Guidance as to the fund depositary, Xiaotai is not able to predict with certainty whether it can constantly adjust Xiaotai’s operations to fully comply with the evolving laws and regulations.

 

In August 23, 2017, CBRC released Guidelines for information disclosure of business activities of online lending information intermediaries, or the Information Disclosure Guidelines, or the Information Disclosure Guidelines, which provides that online lending information intermediaries should disclose the following information to the public: (i) the financial audit report of the previous year; (ii) audit results of key points of business compliance; (iii) compliance review report of the previous year. Every year before 10th January, the online lending information intermediary should disclose the information of point (i) and (ii) and disclose the information of point (iii) before 30th April. Xiaotai has been well operated in material information disclosure, but it still has some aspects to be improved, such as it did not disclose the compliance review report of the year 2017 within required time limit due to certain reasons.

 

As is described above, some aspects of Xiaotai’s platform operations have not and also may not currently be operating in full compliance with the Guidelines, the Interim Measures, the Guidance, the Information Disclosure Guidelines, the Compliance Inspection Notice and the other regulations and principles that have been announced in recent years. For example, the Guidelines, the Interim Measures, the Guidance, the Compliance Inspection Notice and other regulations are not clear about the definition of “credit enhancement service”, nor do they address whether a marketplace lending platform’s affiliated enterprise could provide a “credit enhancement service”. If the early repayment of Xiaotai’s property sides is classified as a “credit enhancement service” as such definition is clarified, Xiaotai may be required to make changes within the specified period before December, 2018 to the way in which Xiaotai conducts Xiaotai’s business. In this case, loans facilitated on Xiaotai’s platform may face more difficult repayment risks and reduce investors’ activeness to invest in some ways. Additionally, the Interim Measures provide upper limits on the loan balance of a single borrower. Xiaotai may need to rely on the information provided by borrowers to determine whether their lending amounts from all intermediaries have reached the upper limits, and the information they provide may contain misrepresentation or omission or otherwise be unreliable. Moreover, the Interim Measures require online lending intermediaries to file with the local financial regulators and to include serving as an Internet lending information intermediary in their business scope. Xiaotai plan to make all requisite filings and changes to Xiaotai’s business scope to the extent necessary when such filing procedures are clarified by the relevant authorities. Although Xiaotai do not anticipate any material difficulties in making the requisite filings or changing Xiaotai’s business scope, any failure to do so within the specified period may delay the process of filing. In addition, the Interim Measures stipulate that online lending intermediaries shall not operate businesses other than risk management and necessary business processes such as information collection and confirmation, post-loan tracking and pledge management in accordance with online-lending regulations, via offline physical locations. However, the Interim Measures do not clearly set forth the types of business process that are not permitted to operate through offline physical locations.

 

Furthermore, the Interim Measures proposed requirements including with respect to certain prohibited activities, risk disclosure, borrower information disclosure and online dispute resolution, examination and verification functions, anti-fraud measures, risk education and training, information reporting, anti-money laundering, anti-terrorist financing, systems, facilities and technologies, service fees, electronic signatures, loan management, risk assessment, auditing and authentication, reporting obligations and information security. To the extent that Xiaotai’s business is deemed to be non-compliant with any of these requirements of the Interim Measures, Xiaotai may need to make necessary adjustments to comply it so as to complete filing in a timely manner or, as a result, Xiaotai’s business may be materially and adversely affected.

 

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The facilitation of loans through Xiaotai’s online platform could give rise to liabilities under PRC laws and regulations that prohibit illegal fundraising.

 

PRC laws and regulations prohibit persons and companies from raising funds through advertising to the public a promise to repay premium or interest payments over time through payments in cash or in kind except with the prior approval of the applicable government authorities. Failure to comply with these laws and regulations may result in penalties imposed by the PBOC, the Administration for Industry and Commerce, or AIC, and other governmental authorities, and can lead to civil or criminal lawsuits.

 

To date, Xiaotai has not been subject to any material fines or other penalties under any PRC laws and regulations that prohibit illegal fundraising. In this capacity, Xiaotai do not raise funds or promise repayment of premium or interest obligations. Nevertheless, considerable uncertainties exist with respect to the PBOC, AIC and other governmental authorities’ interpretations of the fundraising-related laws and regulations. While Xiaotai’s agreements with investors require investors to guarantee the legality of all funds investors put on Xiaotai’s platform, Xiaotai is unable to fully verify the source of investors’ funds individually, and therefore, to the extent that investors’ funds are obtained through illegal fundraising, Xiaotai may be negligently liable as a facilitator of illegal fundraising. In addition, while Xiaotai’s loan agreements contain provisions that require borrowers to use the proceeds for purposes listed in their loan applications, Xiaotai is unable to monitor the borrowers’ use of funds on an on-going basis, and therefore, to the extent that borrowers use proceeds from the loans for illegal activities, Xiaotai may be negligently liable as a facilitator of an illegal use. Although Xiaotai has designed and implemented procedures to identify and eliminate instances of fraudulent activities on Xiaotai’s platform, as the number of borrowers and investors on Xiaotai’s platform increase, Xiaotai may not be able to identify all fraudulent conduct that may violate illegal fundraising laws and regulations.

 

The facilitation of loans through Xiaotai’s platform could give rise to liabilities under PRC laws and regulations that prohibit unauthorized public offerings.

 

The PRC Securities Law stipulates that no organization or individual is permitted to issue securities for public offering without obtaining prior approval in accordance with the provisions of the law. The following offerings are deemed the be public offerings under the PRC Securities Law: (i) offering of securities to non-specific targets; (ii) offering of securities to more than 200 specific targets; and (iii) other offerings provided by the laws and administrative regulations. Additionally, private offerings of securities shall not be carried out through advertising, open solicitation and disguised publicity campaigns. If any transaction between one borrower and multiple investors on Xiaotai’s platform is identified as a public offering by PRC government authorities, Xiaotai may be subject to sanctions as a facilitator under PRC laws and Xiaotai’s business may be adversely affected.

 

Xiaotai may be subject to risks if Xiaotai has to restructure its relationship with a controlled variable interest entity and obtain a telecommunication business license.

 

Xiaotai has contractual arrangements with consolidated VIEs including a Consultation Services Agreement, an Operating Agreement, a Call Option Agreements, an Equity Pledge Agreement, and a Voting Rights Proxy and Financial Supporting Agreement (collectively the “Contractual Arrangements”), through which it operates Xiaotai’s online lending facilitation platform. There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the Contractual Arrangements between WFOE and Xiaotai Zhejiang or Yingran Hangzhou. The PRC government including local financial regulators may determine that the Contractual Arrangements necessary to form and control the VIEs, or the Contractual Arrangements, do not comply with PRC licensing, registration, policies, legal or regulatory requirements, or with requirements or policies that may be adopted in the future and Xiaotai could be subject to severe penalties, material difficulties in making the requisite filings or registrations, or be forced to relinquish Xiaotai Zhejiang or Yingran Hangzhou interests in certain operations. Although Xiaotai believe the Contractual Arrangements comply with all applicable PRC laws, rules and regulations, and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, the PRC courts or regulatory authorities may determine that Xiaotai’s corporate structure and Contractual Arrangements violate PRC laws, rules or regulations. If the PRC courts or regulatory authorities determine that Xiaotai’s Contractual Arrangements are in violation of applicable PRC laws, rules or regulations, Xiaotai’s Contractual Arrangements will become invalid or unenforceable.

 

If Xiaotai Zhejiang, Yingran Hangzhou or their ownership structure or the Contractual Arrangements are determined to be in violation of any existing or future PRC laws, rules or regulations, or Xiaotai Zhejiang or Yingran Hangzhou fails to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

 

  revoking the business and operating licenses
     
  discontinuing or restricting the operations;

 

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  imposing conditions or requirements with which Xiaotai may not be able to comply;
     
  requiring us, to restructure the relevant ownership structure or operations; or
     
  imposing fines.

 

The imposition of any of these penalties would severely disrupt Xiaotai’s ability to conduct business and have a material adverse effect on Xiaotai’s financial condition, results of operations and prospects.

 

Xiaotai has relied and expects to continue to rely on Contractual Arrangements with consolidated VIEs and Xiaotai’s shareholders to operate Xiaotai’s business. These Contractual Arrangements may not be as effective as direct ownership in providing Xiaotai with control over Xiaotai’s consolidated variable interest entities. For example, consolidated VIEs and Xiaotai’s shareholders could breach their Contractual Arrangements by, among other things, failing to conduct their operations, including maintaining Xiaotai’s website and using the domain names and trademarks, in an acceptable manner or taking other actions that are detrimental to Xiaotai’s interests. If Xiaotai had direct ownership of consolidated VIEs, Xiaotai would be able to exercise Xiaotai’s rights as a shareholder to effect changes in the board of directors of consolidated VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current Contractual Arrangements, Xiaotai relies on the performance of the Contractual Arrangements in place with a VIE which operates Xiaotai’s online platform, which may not be as effective in providing it with control over such operations as Xiaotai would have with direct ownership of such VIE. The shareholders of consolidated VIEs may not act in the best interests of Xiaotai or may not perform their obligations under these contracts. Such risks exist throughout the period in which Xiaotai intend to operate Xiaotai’s business through the Contractual Arrangements with consolidated VIEs. Although Xiaotai has the right to replace any shareholder of Zhejiang Xiaotai under their respective Contractual Arrangements, if any shareholder of consolidated VIEs is uncooperative or any dispute relating to these contracts remains unresolved, Xiaotai will have to enforce Xiaotai’s rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, Xiaotai’s Contractual Arrangements with consolidated VIEs, Xiaotai’s consolidated variable interest entity, may not be as effective in ensuring Xiaotai’s control over the relevant portion of Xiaotai’s business operations as direct ownership would be.

 

If Xiaotai’s consolidated variable interest entity or Xiaotai’s shareholders fail to perform their respective obligations under the Contractual Arrangements, Xiaotai may have to incur substantial costs and expend additional resources to enforce such arrangements. Xiaotai may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which Xiaotai cannot assure you will be effective under PRC laws. For example, if the shareholders of Xiaotai Zhejiang were to refuse to transfer their equity interest in Xiaotai Zhejiang, as the case may be, to Xiaotai or Xiaotai’s designee if Xiaotai exercise the purchase option pursuant to these Contractual Arrangements, or if they were otherwise to act in bad faith, then Xiaotai may have to take legal actions to compel them to perform their contractual obligations.

 

All the agreements under Xiaotai’s Contractual Arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit Xiaotai’s ability to enforce these Contractual Arrangements. Meanwhile, there are very few precedents and little formal guidance as to how Contractual Arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that Xiaotai is unable to enforce these Contractual Arrangements, or if Xiaotai suffer significant delay or other obstacles in the process of enforcing these Contractual Arrangements, Xiaotai may not be able to exert effective control over Xiaotai’s consolidated variable interest entities, and Xiaotai’s ability to conduct Xiaotai’s business may be negatively affected.

 

On March 15, 2019, the Second Session of the 13th National People’s Congress voted to pass the Foreign Investment Law  of the People’s Republic of China which will come into force on January 1, 2020. The Foreign Investment Law does not address what actions will be taken with respect to the existing companies with structures similar to VIEs, whether or not these companies are controlled by Chinese parties. It is uncertain when ancillary regulations of the Foreign Investment Law will be enacted and what actions will be taken with respect to the existing companies with VIE structures. If any Contractual Arrangements Xiaotai may implement are found to be in violation of any existing or future PRC laws or regulations, or if Xiaotai fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating the income of Xiaotai’s PRC subsidiary or consolidated VIE, revoking the business licenses or operating licenses of Xiaotai’s PRC subsidiaries or consolidated VIE, prohibiting Xiaotai’s use of proceeds from future public investors’ investments to finance Xiaotai’s business and operations in the PRC, and taking any other regulatory or enforcement actions that could be harmful to Xiaotai’s business. Any of these actions could cause significant disruption to Xiaotai’s operations and adversely affect Xiaotai’s business. If any of these occurrences results in Xiaotai’s inability to direct the activities of the consolidated VIE and/or Xiaotai’s failure to receive economic benefits from a consolidated VIE, Xiaotai may not be able to consolidate Xiaotai’s results into Xiaotai’s consolidated financial statements in accordance with U.S. GAAP.

 

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Xiaotai may lose the ability to use assets held by Xiaotai’s consolidated VIEs that are material to the operation of Xiaotai’s business if the entities go bankrupt or become subject to a dissolution or liquidation proceeding.

 

Xiaotai’s consolidated VIEs holds certain assets that are material to the operation of Xiaotai’s business, including domain names, equipment and technologies for online lending marketplace and lending matching offline. Under the Contractual Arrangements, Xiaotai’s consolidated VIEs may not and their shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of their assets or their legal or beneficial interests in the business without Xiaotai’s prior consent. However, in the event Xiaotai’s consolidated VIEs’ shareholders breach the these Contractual Arrangements and voluntarily liquidate Xiaotai’s consolidated VIEs or Xiaotai’s consolidated VIEs declare bankruptcy and all or part of their assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without Xiaotai’s consent, it may be unable to continue some or all of Xiaotai’s business activities, which could materially and adversely affect Xiaotai’s business, financial condition and results of operations. If Xiaotai’s consolidated VIEs undergo a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering Xiaotai’s ability to operate Xiaotai’s business, which could materially and adversely affect Xiaotai’s business, financial condition and results of operations.

 

Xiaotai’s payment management services may need to be modified to comply with future PRC laws and regulations regarding the debt collection industry in China.

 

In 2000, the State Economic and Trade Commission, the Ministry of Public Security and the State Administration for Industry and Commerce issued the Notice on Prohibition of All Types of Debt Collection Companies and Raids on Illegal Debt Collection Activities (Guo Jing Mao Zong He (2000) 568), or the Notice on Prohibition, which regulates the activities on debt collection companies, including the prohibition on the use of threats, intimidation, harassment or disclosure of private information in collection efforts. While Xiaotai believe that Xiaotai’s payment management services team, which engages in collection efforts primarily by means of phone calls and text message, is in compliance with the Notice on Prohibition, Xiaotai may need to modify Xiaotai’s payment management services in the future to comply with changes to debt collection regulations.

 

China’s M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for Xiaotai to pursue growth through acquisitions in China.

 

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investor, or the M&A Rules, and other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress on August 30, 2007 and effective as of August 1, 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by MOFCOM before they can be completed. In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Further, on August 25, 2011, MOFCOM promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the MOFCOM Security Review Regulations, which became effective on September 1, 2011, to implement Circular 6. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national security” concerns. Under the MOFCOM Security Review Regulations, MOFCOM will focus on the substance and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If MOFCOM decides that a specific merger or acquisition is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Circular 6 led by the National Development and Reform Commission, or NDRC, and MOFCOM under the leadership of the State Council, to carry out the security review. The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through Contractual Arrangements or offshore transactions. There is no explicit provision or official interpretation stating that the merger or acquisition of a company engaged in the peer-to-peer lending intermediary facilitation business requires security review.

 

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In the future, Xiaotai may grow Xiaotai’s business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from MOFCOM or Xiaotai’s local counterparts may delay or inhibit Xiaotai’s ability to complete such transactions. It is unclear whether Xiaotai’s business would be deemed to be in an industry that raises “national defense and security” or “national security” concerns. However, MOFCOM or other government agencies may publish explanations in the future determining that Xiaotai’s business is in an industry subject to the security review, in which case Xiaotai’s future acquisitions in the PRC, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited.

 

Xiaotai relies on dividends and other distributions on equity paid by Xiaotai’s PRC subsidiary to fund any cash and financing requirements it may have, and any limitation on the ability of Xiaotai’s PRC subsidiary and other consolidated entities to pay dividends, other distributions, repay debts or make inter-entity payments could affect Xiaotai’s ability to distribute profits to Xiaotai’s shareholders, including U.S. investors following the proposed Acquisition.

 

Xiaotai is a holding company and relies on dividends or other distributions paid by Xiaotai’s PRC subsidiary for Xiaotai’s cash requirements, including the funds necessary to pay dividends and other cash distributions to Xiaotai’s shareholders, to service any debts it may incur, and to pay Xiaotai’s operating expenses. PRC regulations currently permit payments of dividends only out of accumulated profits, as determined in accordance with the accounting standards and regulations in China, which differ in many aspects from generally accepted accounting principles in other jurisdictions. Xiaotai’s PRC subsidiaries are required to allocate certain percentages of any accumulated profits after tax each year to their statutory common reserve fund as required under the PRC Company Law until the aggregate accumulated statutory common reserve funds exceed fifty percent of Xiaotai’s registered capital. Such reserve funds cannot be distributed as cash dividends. In addition, if Xiaotai’s PRC subsidiaries incur debts on their own or enter into certain agreements in the future, the instruments governing the debt or such other agreements may restrict their ability to pay dividends or make other distributions to their shareholders. Therefore, these restrictions on the availability and usage of Xiaotai’s major source of funding may materially and adversely affect Xiaotai’s ability to pay dividends to Xiaotai’s shareholders and to service Xiaotai’s debts. In addition, the PRC tax authorities may require Xiaotai’s PRC subsidiary to adjust Xiaotai’s taxable income under the Contractual Arrangements it currently has in place with Xiaotai’s consolidated variable interest entity in a manner that would materially and adversely affect Xiaotai’s ability to pay dividends and other distributions to Xiaotai and Xiaotai’s shareholders.

 

Moreover, the ability of Xiaotai’s PRC subsidiary to pay dividends and other distributions may be restricted due to foreign exchange control policies and the availability of Xiaotai’s cash balance. Substantially all of Xiaotai’s operations are conducted in China and Xiaotai’s PRC consolidated subsidiaries receive substantially all of their revenue in Renminbi, which is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of Xiaotai’s PRC subsidiary to use Xiaotai’s Renminbi revenues to pay dividends to Xiaotai and Xiaotai’s shareholders, including U.S. investors following the proposed acquisition. Additionally, Xiaotai’s funds may not be readily available to satisfy obligations which may incur outside the PRC, which could adversely affect Xiaotai’s business and prospects or the ability to meet Xiaotai’s cash obligations. If Xiaotai do not receive dividends from Xiaotai’s PRC subsidiary, Xiaotai’s liquidity and financial condition will be materially and adversely affected.

 

In response to the persistent capital outflow in China and RMB’s depreciation against U.S. dollar in the fourth quarter of 2016, the PBOC and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures over the last years, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, on January 26, 2017, SAFE issued the Notice of State Administration of Foreign Exchange on Improving the Check of Authenticity and Compliance to further Promote Foreign Exchange Control, or the SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits. The PRC government may continue to strengthen capital controls, and more restrictions and substantial vetting process may be put in place by SAFE for cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of Xiaotai’s PRC subsidiary to pay dividends or make other kinds of payments to Xiaotai’s shareholders, including U.S. investors following the proposed acquisition, could substantially affect the Company shareholders’ confidence and materially and adversely limit Xiaotai’s ability to grow, make investments or acquisitions that could be beneficial to Xiaotai’s business, pay dividends, or otherwise fund and conduct Xiaotai’s business.

 

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PRC regulations relating to offshore investment activities by PRC residents and PRC entities may limit Xiaotai’s PRC subsidiaries’ ability to increase their registered capital or distribute profits or otherwise expose Xiaotai to liability and penalties under PRC law.

 

SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or Xiaotai’s local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operating term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.

 

SAFE Circular 37 was issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE further enacted the Notice on Further Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment effective from June 1, 2015, or SAFE Circular 13, which allows PRC residents or entities to register with qualified banks in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

 

If Xiaotai’s shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches or qualified banks as required by SAFE Circular 37 and other related rules, Xiaotai’s PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation, and Xiaotai may be restricted in Xiaotai’s ability to contribute additional capital to Xiaotai’s PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

 

Xiaotai has requested PRC residents whom Xiaotai know hold direct or indirect interests in Xiaotai to make the necessary applications, filings and amendments as required under SAFE Circular 37 and other related rules. The shareholders who are PRC resident have completed the registration with the local SAFE branch or qualified banks. However, Xiaotai cannot assure you that all of Xiaotai’s shareholders or beneficial owners who are PRC residents or entities will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations if the registration information changes. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by Xiaotai to amend the foreign exchange registrations of Xiaotai’s PRC subsidiary, could subject it to fines or legal sanctions, restrict Xiaotai’s overseas or cross-border investment activities, limit Xiaotai’s subsidiaries’ ability to make distributions or pay dividends or affect Xiaotai’s ownership structure, which could adversely affect Xiaotai’s business and prospects.

 

Xiaotai’s leased property interests may be defective and Xiaotai’s right to the leased properties affected by such defects may be challenged, which could cause significant disruption to Xiaotai’s business.

 

Under PRC laws, all lease agreements are required to be registered with the local housing authorities. Xiaotai Zhejiang presently leases certain premises in China, and certain landlords of these premises have not completed the registration of their ownership rights or the registration of Xiaotai Zhejiang’s leases with the relevant authorities. Failure to complete these required registrations may expose Xiaotai Zhejiang’s landlords, lessors and Xiaotai Zhejiang to potential monetary fines or may require Xiaotai Zhejiang to relocate Xiaotai’s offices and incur the associated losses. If there is a third-party claim with respect to ownership of the premises, Xiaotai’s business may be affected.

 

The approval of the CSRC may be required in connection with the proposed acquisition under PRC law.

 

The M&A Rules, which were adopted in 2006 by six PRC regulatory agencies, including the CSRC, purport to require offshore special purpose vehicles that are controlled by PRC domestic companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and the CSRC has not issued any definitive rule of interpretation concerning whether transactions like the proposed acquisition are subject to CSRC approval procedures under the M&A Rules. This transaction may ultimately require approval from the CSRC. If CSRC approval is required, it is uncertain how long it will take Xiaotai to obtain the approval and any failure to obtain or delay in obtaining CSRC approval for this transaction would subject Xiaotai to sanctions imposed by the CSRC and other PRC regulatory agencies, which could include fines and penalties on Xiaotai’s operations in China, restrictions or limitations on Xiaotai’s ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect Xiaotai’s business, results of operations and financial condition.

 

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We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as Xiaotai’s PRC counsel, and hence Xiaotai may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on Xiaotai’s operations in China, limit Xiaotai’s operating privileges in China, delay or restrict the repatriation of the proceeds from investments by future public investors into China or take other actions that could have a material adverse effect on Xiaotai’s business, financial condition, results of operations and prospects. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that Xiaotai obtain their approvals for this transaction, Xiaotai may be unable to obtain a waiver of such approval requirements. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on Xiaotai’s results of operations.

 

The future development of money laundering and anti-terrorism regulations in the PRC may increase Xiaotai’s obligations to supervise and report transactions between borrowers and investors on Xiaotai’s platform, thereby increasing Xiaotai’s costs and exposure to the risk of criminal or administrative sanctions.

 

PRC laws and regulations relating to money laundering and anti-terrorism have undergone considerable development over recent years. The Guidelines and the Interim Measures require it to take effective measures to verify customer identities, monitor and report suspicious transactions and keep client information and transaction records safe. Xiaotai is also required to assist in investigations by judicial authorities and the public security bureau. Xiaotai currently relies primarily on the depository bank to carry out anti-money laundering due diligence of Xiaotai’s customers. Current PRC laws stipulate specific obligations and steps that the banks and third-party payment companies should follow for anti-money laundering due diligence. While the Guidelines and the Interim Measures do not stipulate explicit standards for Xiaotai’s anti-money laundering obligations, any new requirement under money laundering laws to supervise and report transactions with Xiaotai’s customers could have the effect of increasing Xiaotai’s costs and may expose it to potential criminal or administrative sanctions if Xiaotai fails to comply.

 

In January 2016, the Standing Committee of the National People’s Congress announced the Anti-Terrorism Law of the People’s Republic of China, or the Anti-Terrorism Law. According to this law, telecommunications operators and Internet service providers shall implement supervision systems for network security and information content as well as technical safety precautions in accordance with the relevant laws and administrative regulations to prevent the dissemination of information involving terrorism and extremism. If such information is found, the corresponding data transmission will be immediately stopped, relevant records will be saved, relevant information will be deleted and a report shall be made to the public security organizations or related departments. Furthermore, telecommunications, Internet, finance, accommodations, long-distance passenger transportation and motor vehicle leasing business operators and service providers shall check the identities of their customers. No services are permitted to be provided to unidentified customers or those who refuse to comply with identification checks. While Xiaotai believes that Xiaotai is in compliance with the Anti-Terrorism Law, to the extent that Xiaotai’s operations are not in compliance, Xiaotai may be exposed to potential criminal or administrative sanctions.

 

Xiaotai may be subject to penalties under relevant PRC laws and regulations due to failure to make full social security and housing fund contributions for some of Xiaotai’s employees.

 

In the past, contributions by Xiaotai’s PRC subsidiary for some of their employees to the social security and housing funds may not have been in compliance with relevant PRC regulations. Pursuant to the Regulation on the Administration of Housing Accumulation Funds, as amended in 2002, the relevant housing fund authority may order an enterprise to pay outstanding contributions within a prescribed time limit. Pursuant to the PRC Social Insurance Law promulgated in 2010, the social security authority may order an enterprise to pay the outstanding contributions within a prescribed time limit and may impose penalties if there is a failure to do so. If Xiaotai Zhejiang fails to make or supplement contributions of social security premiums within the stipulated period, the social security premiums collection agency may enquire into the deposit accounts of the employer with banks and other financial institutions. In an extreme situation, where Xiaotai Zhejiang or its subsidiaries (if any) failed to contribute social security premiums in full amount and do not provide guarantee, the social security premiums collection agency may apply to a Chinese court for seizure, foreclosure or auction of Xiaotai Zhejiang’s properties of value equivalent to the amount of social security premiums payable, and the proceeds from auction shall be used for contribution of social security premiums. If Xiaotai Zhejiang is subject to deposit, seizure, foreclosure or auction in relation to the underpaid employee benefits, Xiaotai’s financial condition and results of operations may be adversely affected.

 

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Regulatory bodies of the United States may be limited in their ability to conduct investigations or inspections of Xiaotai’s operations in China.

 

After an acquisition, Xiaotai may receive requests from certain U.S. agencies to investigate or inspect Xiaotai’s operations, or otherwise provide information. While Xiaotai will be compliant with these requests from these regulators, there is no guarantee that such requests will be honored by those entities who provide services to it or with whom it associates, especially as those entities located in China. Furthermore, an on-site inspection of Xiaotai’s facilities by any of these regulators may be limited or entirely prohibited. Such inspections, though permitted by Xiaotai and Xiaotai’s affiliates, are subject to the unpredictability of the Chinese enforcers, and may therefore be impossible to facilitate.

 

Adverse changes in the political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect Xiaotai’s business. 

 

Substantially all of Xiaotai’s assets are located in China and substantially all of Xiaotai’s revenues are derived from Xiaotai’s operations there. Accordingly, Xiaotai’s business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the Chinese economy has experienced significant growth in the past 30 years, the growth has been uneven across different periods, regions and among various economic sectors of China and the rate of growth has been slowing. Xiaotai cannot assure you that the Chinese economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such slowdown will not have a negative effect on Xiaotai’s business.

 

The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policies and providing preferential treatment to particular industries or companies. From late 2003 to mid-2008, the PRC government implemented a number of measures, such as increasing the People’s Bank of China’s statutory deposit reserve ratio and imposing commercial bank lending guidelines that had the effect of slowing the growth of credit, which in turn may have slowed the growth of the Chinese economy. In response to the recent global and Chinese economic downturn, the PRC government has promulgated several measures aimed at expanding credit and stimulating economic growth. Since August 2008, the People’s Bank of China has decreased the statutory deposit reserve ratio and lowered benchmark interest rates several times. Beginning in January 2010, however, the People’s Bank of China started to take measures including increasing the statutory deposit reserve ratio and raised the benchmark interest rates several times in response to rapid growth of credit in 2009 and 2010. Since January 2011, the People’s Bank of China has continually increased the statutory deposit reserve ratio and raising the benchmark interest rates. The increasing trend eased in December 2011 and the statutory deposit reserve ratio was reduced twice in February and May 2012. In addition, in July 2013, the People’s Bank of China revoked the restriction on loan interest rate of financial institutions. It is unclear whether PRC economic policies will be effective in stimulating growth, and the PRC government may not be effective in achieving stable economic growth in the future. Any slowdown in the economic growth of China could lead to reduced demand for Xiaotai’s services, which could materially and adversely affect Xiaotai’s business, as well as Xiaotai’s financial condition and results of operations.

 

Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and Xiaotai. 

 

The PRC legal system is based on written statutes and court decisions have limited precedential value. The PRC legal system is evolving rapidly, and the interpretation of many laws, regulations and rules may contain inconsistencies and enforcement of these laws, regulations and rules involves uncertainties.

 

From time to time, Xiaotai may have to resort to administrative and court proceedings to enforce Xiaotai’s legal rights. However, since PRC judicial and administrative authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be more difficult to predict the outcome of a judicial or administrative proceeding than in more developed legal systems. Furthermore, the PRC legal system is based, in part, on government policies and internal rules, some of which are not published in a timely manner, or at all, but which may have retroactive effect. As a result, Xiaotai may not always be aware of any potential violation of these policies and rules. Such unpredictability towards Xiaotai’s contractual, property (including intellectual property) and procedural rights could adversely affect Xiaotai’s business and impede Xiaotai’s ability to continue its operations.

 

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Fluctuations in exchange rates could have a material adverse effect on Xiaotai’s results of operations.

 

The value of Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of Renminbi to the U.S. dollar, and Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policies may impact the exchange rate between Renminbi and the U.S. dollar in the future.

 

To the extent that Xiaotai needs to convert U.S. dollars into Renminbi for capital expenditures and working capital and other business purposes, appreciation of Renminbi against the U.S. dollar would have an adverse effect on Renminbi amount Xiaotai would receive from the conversion. Conversely, if Xiaotai decides to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on Xiaotai’s Ordinary Shares, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against Renminbi would have a negative effect on the U.S. dollar amount available to us.

 

The reporting currency of Xiaotai is the U.S. dollar. However, the functional currency of Xiaotai’s consolidated subsidiaries and variable interest entities is the Renminbi and substantially all of their revenues and expenses are denominated in Renminbi. Fluctuations in exchange rates, primarily those involving the U.S. dollar, may affect the relative purchasing power of these proceeds. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect Xiaotai’s financial results reported in U.S. dollar terms without giving effect to any underlying change in Xiaotai’s business or results of operations. Fluctuations in the exchange rate will also affect the relative value of earnings from, and the value of any U.S. dollar-denominated investments Xiaotai makes in the future.

 

Very limited hedging options are available in China to reduce Xiaotai’s exposure to exchange rate fluctuations. To date, Xiaotai has not entered into any hedging transactions in an effort to reduce Xiaotai’s exposure to foreign currency exchange risk. While Xiaotai may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and Xiaotai may not be able to adequately hedge Xiaotai’s exposure or at all. In addition, Xiaotai’s currency exchange losses may be magnified by PRC exchange control regulations that restrict Xiaotai’s ability to convert Renminbi into foreign currency.

 

PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent Xiaotai from using the proceeds of Xiaotai’s financing transactions to make loans to Xiaotai’s PRC subsidiary and consolidated entities or to make additional capital contributions to Xiaotai’s PRC subsidiary, which may materially and adversely affect Xiaotai’s liquidity and Xiaotai’s ability to fund and expand Xiaotai’s business.

 

Xiaotai is an offshore holding company conducting Xiaotai’s operations in China through Xiaotai’s PRC subsidiary and consolidated entities. In utilizing the proceeds that Xiaotai will receive from Xiaotai’s financing activities, Xiaotai is permitted under PRC laws and regulations as an offshore holding company to provide funding to Xiaotai’s PRC subsidiary only through loans or capital contributions and to Xiaotai’s consolidated entities only through loans.

 

Any loans by Xiaotai to Xiaotai’s PRC subsidiary, which is treated as foreign-invested enterprises under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by Xiaotai to Xiaotai’s wholly owned PRC subsidiary to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the SAFE. If Xiaotai decides to finance Xiaotai’s wholly owned PRC subsidiary by means of capital contributions, these capital contributions must be filed with or approved by the MOFCOM or its local counterpart. Xiaotai may also extend loans to Xiaotai’s consolidated entities, which are treated as PRC domestic companies under PRC law, and loans with a term more than one year must be approved by the National Development and Reform Commission, or the NDRC, and must also be registered with the SAFE or its local branches, loans with term less than one year must be approved by the SAFE or its local branches.

 

On March 30, 2015, the SAFE issued the Circular on Reform of the Administrative Rules of the Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises, or SAFE Circular 19, which became effective on June 1, 2015. Pursuant to SAFE Circular 19, foreign-invested enterprises may either continue to follow the current payment-based foreign currency settlement system or elect to follow the “conversion-at-will” regime of foreign currency settlement. Where a foreign-invested enterprise follows the conversion-at-will regime of foreign currency settlement, it may convert part or all of the amount of the foreign currency in its capital account into Renminbi at any time. The converted Renminbi will be kept in a designated account labeled as settled but pending payment, and if the foreign-invested enterprise needs to make payment from such designated account, it still needs to go through the review process with its bank and provide necessary supporting documents. SAFE Circular 19, therefore, has substantially lifted the restrictions on the usage by a foreign-invested enterprise of its RMB registered capital converted from foreign currencies. According to SAFE Circular 19, such Renminbi capital may be used at the discretion of the foreign-invested enterprise and the SAFE will eliminate the prior approval requirement and only examine the authenticity of the declared usage afterwards. Nevertheless, foreign-invested enterprises like Xiaotai’s PRC subsidiary are still not allowed to extend intercompany loans to Xiaotai’s PRC consolidated entities. In addition, as Circular 19 was promulgated recently, there remain substantial uncertainties with respect to the interpretation and implementation of this circular by relevant authorities.

 

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In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, including SAFE Circular 19, Xiaotai cannot assure you that Xiaotai will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by Xiaotai to Xiaotai’s PRC subsidiary or consolidated entities or with respect to future capital contributions by Xiaotai to Xiaotai’s PRC subsidiary. Xiaotai’s failure to complete such registrations or obtain such approvals may negatively affect Xiaotai’s ability to use the proceeds Xiaotai receives from Xiaotai’s financing activities and to capitalize or otherwise fund operations of Xiaotai’s PRC operating entity, Xiaotai Zhejiang, and any other new subsidiaries Xiaotai may establish in the future for business purposes, which could materially and adversely affect Xiaotai’s liquidity and Xiaotai’s ability to fund and expand Xiaotai’s business.

 

Xiaotai’s PRC subsidiary and consolidated entities are subject to restrictions on paying dividends or making other payments to Xiaotai, which may restrict Xiaotai’s ability to satisfy Xiaotai’s liquidity requirements. 

 

Xiaotai is a holding company incorporated in the Cayman Islands. Xiaotai relies on dividends from Xiaotai’s PRC subsidiary as well as consulting and other fees paid to Xiaotai by Xiaotai’s consolidated entities for Xiaotai’s cash and financing requirements, such as the funds necessary to pay dividends and other cash distributions to Xiaotai’s shareholders, and service any debt Xiaotai may incur. Current PRC regulations permit Xiaotai’s PRC subsidiary to pay dividends to Xiaotai only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, Xiaotai’s PRC subsidiary is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, if Xiaotai’s PRC subsidiary and consolidated entities incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to Xiaotai, which may restrict Xiaotai’s ability to satisfy Xiaotai’s liquidity requirements.

 

In addition, the EIT Law and its implementation rules provide that withholding tax rate of 10% will be applicable to dividends payable by PRC companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.

 

China’s M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of PRC companies by foreign investors, which could make it more difficult for Xiaotai to pursue growth through acquisitions in China. 

 

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or M&A Rules, and other recently adopted regulations and rules concerning mergers and acquisitions in China established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex. For example, the M&A Rules require that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress on August 30, 2007 and effective as of August 1, 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds (i.e., during the previous fiscal year, (i) the total global turnover of all operators participating in the transaction exceeds RMB10.0 billion (US$1.4 billion) and at least two of these operators each had a turnover of more than RMB400.0 million (US$57.6 million) within China, or (ii) the total turnover within China of all the operators participating in the concentration exceeded RMB2.0 billion (US$0.3 billion), and at least two of these operators each had a turnover of more than RMB400.0 million (US$57.6 million) within China) must be cleared by the MOFCOM before they can be completed. In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Further, on August 25, 2011, the MOFCOM promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the MOFCOM Security Review Regulations, which became effective on September 1, 2011, to implement the Circular 6. Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national security” concerns. Under the MOFCOM Security Review Regulations, the MOFCOM will focus on the substance and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review. If the MOFCOM decides that a specific merger or acquisition is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Circular 6 led by the NDRC and the MOFCOM under the leadership of the State Council, to carry out security review. The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision or official interpretation stating that the merging or acquisition of a company engaged in the online lending intermediary  business requires security review.

 

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In the future, Xiaotai may grow its business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit Xiaotai’s ability to complete such transactions. The M&A Rules require a foreign investor to obtain the approval from the MOFCOM or its local counterpart only upon (i) its acquisition of a domestic enterprise’s equity interest; (ii) its subscription of the increased capital of a domestic enterprise; or (iii) establishes and operates a foreign-invested enterprise with assets acquired from a domestic enterprise. It is unclear whether Xiaotai’s business would be deemed to be in an industry that raises “national defense and security” or “national security” concerns. However, the MOFCOM or other government agencies may publish explanations in the future determining that Xiaotai’s business is in an industry subject to the security review, in which case Xiaotai’s future acquisitions in China, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited.

 

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject Xiaotai’s PRC resident beneficial owners or Xiaotai’s PRC subsidiary to liability or penalties, limit Xiaotai’s ability to inject capital into Xiaotai’s PRC subsidiary, limit Xiaotai’s PRC subsidiary’s ability to increase its registered capital or distribute profits to us, or may otherwise adversely affect us. 

 

The SAFE has promulgated several regulations that require PRC residents and PRC corporate entities to register with and obtain approval from local branches of the SAFE in connection with their direct or indirect offshore investment activities. These regulations apply to Xiaotai’s shareholders who are PRC residents and may apply to any offshore acquisitions that Xiaotai make in the future.

 

Under these foreign exchange regulations, PRC residents who make, or have previously made, prior to the implementation of these foreign exchange regulations, direct or indirect investments in offshore companies will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update the previously filed registration with the local branch of the SAFE, with respect to that offshore company, to reflect any material change involving its round-trip investment, capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger or division. If any PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiary of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into its PRC subsidiary. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

 

Xiaotai has requested PRC residents holding direct or indirect interest in Xiaotai to its knowledge to make the necessary applications, filings and amendments as required by these foreign exchange regulations. Such PRC resident shareholders and beneficial owners have completed their initial registrations in relation to their ownership in Xiaotai required by foreign exchange regulations. However, Xiaotai may not be informed of the identities of all the PRC residents holding direct or indirect interests in Xiaotai, and Xiaotai cannot provide any assurances that all of Xiaotai’s shareholders and beneficial owners who are PRC residents will make, obtain or update any applicable registrations or approvals required by these foreign exchange regulations. The failure or inability of Xiaotai’s PRC resident shareholders to make such registration or truthfully disclose actual controllers of the round-trip enterprises may subject PRC residents to fines up to RMB300,000 in case of domestic institutions or RMB50,000 in case of domestic individuals. If the PRC resident shareholders do not complete their registration with the local SAFE branches, the PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with SAFE registration and amendment requirements described above could result in liability under PRC law for violating applicable foreign exchange restrictions.

 

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However, as there is uncertainty concerning the reconciliation of these foreign exchange regulations with other approval requirements, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. Xiaotai cannot predict how these regulations will affect Xiaotai’s business operations or future strategy. For example, Xiaotai may be subject to a more stringent review and approval process with respect to Xiaotai’s foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect Xiaotai’s results of operations and financial condition. In addition, if Xiaotai decide to acquire a PRC domestic company, Xiaotai cannot assure you that Xiaotai or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict Xiaotai’s ability to implement its acquisition strategy and could adversely affect Xiaotai’s business and prospects.

 

Xiaotai may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to Xiaotai’s business may have a material adverse effect on Xiaotai’s business and results of operations. 

 

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.

 

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including Xiaotai’s internet-based business. Xiaotai cannot assure you that Xiaotai has obtained all the permits or licenses required for conducting Xiaotai’s business in China or will be able to maintain Xiaotai’s existing licenses or obtain new ones. If the PRC government considers that Xiaotai were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of Xiaotai’s business, it has the power, among other things, to levy fines, confiscate Xiaotai’s income, revoke Xiaotai’s business licenses, and require Xiaotai to discontinue Xiaotai’s relevant business or impose restrictions on the affected portion of Xiaotai’s business. Any of these actions by the PRC government may have a material adverse effect on Xiaotai’s business and results of operations.

 

The dividends Xiaotai receives from Xiaotai’s PRC subsidiary may be subject to PRC tax under the PRC Enterprise Income Tax Law, which would have a material adverse effect on Xiaotai’s financial condition and results of operations. In addition, if Xiaotai is classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to Xiaotai and Xiaotai’s non-PRC shareholders.

 

Pursuant to the PRC Enterprise Income Tax Law and its amendment, or the EIT Law, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Xiaotai is a Cayman Islands holding company and substantially all of Xiaotai’s income may come from dividends Xiaotai receive, directly or indirectly, from Xiaotai’s wholly foreign-owned PRC subsidiary. Since there is currently no such tax treaty between China and the Cayman Islands, dividends Xiaotai directly receive from Xiaotai’s wholly foreign-owned PRC subsidiary will generally be subject to a 10% withholding tax.

 

In addition, under the Arrangement between China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, where a Hong Kong resident enterprise which is considered a non-PRC tax resident enterprise directly holds at least 25% of a PRC enterprise, the withholding tax rate in respect to the payment of dividends by such PRC enterprise to such Hong Kong resident enterprise is reduced to 5% from a standard rate of 10%, subject to approval of the PRC local tax authority. Accordingly, Xiaotai HK may be able to enjoy the 5% withholding tax rate for the dividends it receives from Xiaotai Zhejiang, if Xiaotai Zhejiang satisfies the conditions prescribed in relevant tax rules and regulations, and obtain the approvals as required. However, if the Hong Kong resident enterprise is not considered to be the beneficial owner of such dividends under applicable PRC tax regulations, such dividends may remain subject to withholding tax at a rate of 10%. If Xiaotai HK is considered to be a non-beneficial owner for purposes of the tax arrangement, any dividends paid to them by Xiaotai’s wholly foreign-owned PRC subsidiary directly would not qualify for the preferential dividend withholding tax rate of 5%, but rather would be subject to a rate of 10%.

 

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Furthermore, under the EIT Law and implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on Xiaotai’s global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign enterprises, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having Xiaotai’s “de facto management body” in China and will be subject to PRC enterprise income tax on Xiaotai’s global income only if all of the following conditions are met: (i) the primary location of the operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

 

Xiaotai believes none of Xiaotai’s entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As all of Xiaotai’s management members are based in China, it remains unclear how the tax residency rule will apply to Xiaotai’s case. If the PRC tax authorities determine that Xiaotai or any of Xiaotai’s subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then Xiaotai or such subsidiary could be subject to PRC tax at a rate of 25% on Xiaotai’s world-wide income, which could materially reduce Xiaotai’s net income. In addition, Xiaotai will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that Xiaotai is a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of Xiaotai shareholders’ ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non- PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of Xiaotai would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that Xiaotai is treated as a PRC resident enterprise. Any such tax may adversely affect Xiaotai’s financial status.

 

If Xiaotai were required under the EIT Law to withhold such PRC income tax, your investment in Xiaotai’s Ordinary Shares may be materially and adversely affected.

 

If the custodians or authorized users of controlling non-tangible assets of Xiaotai, including Xiaotai’s corporate chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, Xiaotai’s business and operations could be materially and adversely affected. 

 

Under PRC law, legal documents for corporate transactions, including contracts such as consulting service agreements Xiaotai enter into with funds lending product providers, which are important to Xiaotai’s business, are executed using the chops (a Chinese stamp or seal) or seals of the signing entity, or with the signature of a legal representative whose designation is registered and filed with the relevant branch of the SAIC.

 

Although Xiaotai usually utilizes chops to enter into contracts, the designated legal representatives of each of Xiaotai’s PRC subsidiary and consolidated entities have the power to enter into contracts on behalf of such entities without chops and bind such entities. All designated legal representatives of Xiaotai’s PRC subsidiary and consolidated entities have signed employment undertaking letters with Xiaotai or Xiaotai’s PRC subsidiary and consolidated entities under which they agree to abide by various duties they owe to us. In order to maintain the physical security of Xiaotai’s chops and the chops of Xiaotai’s PRC entities, Xiaotai generally store these items in secured locations accessible only by the authorized personnel of each of Xiaotai’s PRC subsidiary and consolidated entities. Although Xiaotai monitor such authorized personnel, there is no assurance such procedures will prevent all instances of abuse or negligence. Accordingly, if any of Xiaotai’s authorized personnel misuse or misappropriate Xiaotai’s corporate chops or seals, Xiaotai could encounter difficulties in maintaining control over the relevant entities and experience significant disruption to Xiaotai’s operations. If a designated legal representative obtains control of the chops in an effort to obtain control over any of Xiaotai’s PRC subsidiary or consolidated entities, Xiaotai and its PRC subsidiary or consolidated entities would need to pass a new shareholder or board resolution to designate a new legal representative and Xiaotai would need to take legal action to seek the return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation of the representative’s fiduciary duties to us, which could involve significant time and resources and divert management attention away from Xiaotai’s regular business. In addition, the affected entity may not be able to recover corporate assets that are sold or transferred out of Xiaotai’s control in the event of such a misappropriation if a transferee relies on the apparent authority of the representative and acts in good faith.

 

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Increases in labor costs and enforcement of stricter labor laws and regulations in China may adversely affect Xiaotai’s business and Xiaotai’s profitability.

 

China’s overall economy and the average wage in China have increased in recent years and are expected to continue to grow. The average wage level for Xiaotai’s employees has also increased in recent years. Xiaotai expect that Xiaotai’s labor costs, including wages and employee benefits, will continue to increase. Unless Xiaotai is able to pass on these increased labor costs to the product providers or corporate borrowers who pay for Xiaotai’s services, Xiaotai’s profitability and results of operations may be materially and adversely affected.

 

In addition, Xiaotai has been subject to stricter regulatory requirements in terms of entering labor contracts with Xiaotai’s employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing insurance to designated government agencies for the benefit of Xiaotai’s employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract law, that became effective in January 2008, as amended on December 28, 2012 and effective as of July 1, 2013, and its implementation rules that became effective in September 2008, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that Xiaotai decide to terminate some of Xiaotai’s employees or otherwise change Xiaotai’s employment or labor practices, the Labor Contract Law and its implementation rules may limit Xiaotai’s ability to effect those changes in a desirable or cost-effective manner, which could adversely affect Xiaotai’s business and results of operations. On October 28, 2010, the Standing Committee of the National People’s Congress promulgated the PRC Social Insurance Law, or the Social Insurance Law, which became effective on July 1, 2011. According to the Social Insurance Law, employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately, pay the social insurance premiums for such employees.

 

As the interpretation and implementation of labor-related laws and regulations are still evolving, Xiaotai cannot assure you that Xiaotai’s employment practices do not and will not violate labor-related laws and regulations in China, which may subject Xiaotai to labor disputes or government investigations. If Xiaotai is deemed to have violated relevant labor laws and regulations, Xiaotai could be required to provide additional compensation to Xiaotai’s employees and Xiaotai’ business, financial condition and results of operations could be materially and adversely affected.

 

THE SPECIAL MEETING

 

Date, Time and Place of the Special Meeting

 

The Special Meeting will be held at 10:00 a.m., local time, on _____, 2019, at the offices of Hunter Taubman Fischer & Li, LLC, 1450 Broadway, 26th Floor, New York, NY 10018, to consider and vote upon the Reverse Split Proposal, the Capital Increase Proposal, the Name Change Proposal, the Election of Directors Proposal, the Acquisition Proposal, the Spin-off Proposal and/or, if necessary, the Adjournment Proposal to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the Special Meeting, iFresh is not authorized to consummate the Reverse Split, the Capital Increase, the Name Change, the Acquisition and/or the Spin-off.

 

Purpose of the Special Meeting

 

At the Special Meeting, iFresh is asking its stockholders as of the record date of [______], 2019 (the “Record Date”) to consider and vote upon:

 

(1) a proposal to effect a reverse split of our issued and outstanding common stock by a ratio of not less than one-for-two and not more than one-for-ten and then a forward stock split of our issued and outstanding common stock by a ratio of not less than one-for-two and not more than one-for-ten immediately following the reverse split at any time prior to [____], 2019, with the exact ratio to be set at a whole number within this range as determined by the Board in its sole discretion— we refer to this proposal as the “Reverse Split Proposal”; 

 

(2) a proposal to adopt an amendment to the Company’s Certificate of Incorporation to increase the number of shares of Common Stock that the Company has authority to issue from 100,000,000 to 1,000,000,000 and the number of shares of Preferred Stock that the Company has authority to issue from 1,000,000 to 10,000,000; and consequently, to increase the total number of shares of all classes of capital stock that the Company has authority to issue from 101,000,000 to 1,010,000,000 — we refer to this proposal as the “Capital Increase Proposal”;

 

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(3) a proposal to change the Company’s corporate name to “Terran Financial Services Group”— we refer to this proposal as the “Name Change Proposal”;

 

(4) a proposal to adopt the Exchange Agreement and to approve the transactions contemplated by such agreement — we refer to this proposal as the “Acquisition Proposal”;

 

(5) a proposal to adopt the Purchase Agreement and to approve the transactions contemplated by such agreement — we refer to this proposal as the “Spin-off Proposal”;

 

(6) a proposal to elect [ ] (the “Director Nominees”) to serve on the Company’s Board for a term of one year (“Election of Directors Proposal”); and

 

(7) a proposal to adjourn the Special Meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the Special Meeting, IFMK is not authorized to consummate the transactions contemplated by the Reverse Split Proposal, the Name Change Proposal, the Spin-off Proposal and Acquisition Proposal — we refer to this proposal as the “Adjournment Proposal.”

 

Record Date; Shares Entitled to Vote; Quorum

 

Stockholders will be entitled to vote or direct votes to be cast at the Special Meeting if they owned shares of IFMK common stock on the Record Date. Stockholders will have one vote for each share of IFMK common stock owned at the close of business on the Record Date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted. On the Record Date, there were [___________ ] shares of IFMK common stock outstanding.

 

A quorum of IFMK stockholders is necessary to hold a valid meeting. A quorum will be present at the Special Meeting if a majority of the outstanding shares entitled to vote at the meeting are represented in person or by proxy. Abstentions and broker non-votes will count as present for the purposes of establishing a quorum.

 

Vote Required; Abstentions and Broker Non-Votes

 

The affirmative vote of the holders of a majority of the outstanding shares of our common stock is required to approve the Reverse Split Proposal. The affirmative vote of the holders of a majority of votes cast by our shareholders that are present in person or by proxy at our special meeting is required to approve the Acquisition Proposal, the Spin-off Proposal and Election of Directors Proposal. Approval of the Adjournment Proposal whether or not a quorum is present, requires the affirmative vote of a majority of the votes cast by our shareholders entitled to vote.

 

Although the Name Change and Capital Increase Proposals in themselves do not require stockholder vote, the Charter Amendment which includes the reverse split will require approval of majority of the outstanding shares of our common stock.

 

Abstentions and broker non-votes will have the same effect as a vote “against” the Acquisition Proposal, the Spin-off Proposal, the Reverse Split Proposal, the Capital Increase Proposal, the Name Change Proposal and the Adjournment Proposal, if presented.

  

Shares Held by IFMK’s Directors and Executive Officers

 

As of the Record Date, the directors and executive officers of IFMK as a group owned and were entitled to vote [ _____] shares of the common stock of the Company, representing approximately [ ] % of the outstanding shares of IFMK common stock on that date. IFMK expects that its directors and executive officers will vote their shares in favor of the Capital Increase Proposal, the Election of Directors Proposal, the Reverse Split Proposal, the Name Change Proposal, the Spin-off Proposal and the Acquisition Proposal. On June 7, 2019, we and NYM Holding, Inc., entered into a Purchase Agreement with Go Fresh 365 Inc., solely owned by Mr. Long Deng, IFMK’s Chief Executive Officer. The Purchase Agreement provides for the sale of 100% of the equity interest in NYM to GO Fresh 365 Inc. for cash consideration of $9.1 million. The transactions contemplated by the Purchase Agreement are a condition to the closing of the Acquisition and would take place contemporaneously with the closing of the Acquisition.

 

Voting of Proxies

 

If your shares are registered in your name with our transfer agent, Continental Stock Transfer, you may cause your shares to be voted by returning a signed proxy card, or you may vote in person at the special meeting. Additionally, you may submit electronically over the Internet or by phone a proxy authorizing the voting of your shares by following the instructions on your proxy card. You must have the enclosed proxy card available, and follow the instructions on the proxy card, in order to submit a proxy electronically over the Internet or by telephone. Based on your proxy cards or Internet and telephone proxies, the proxy holders will vote your shares according to your directions.

 

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If you plan to attend the Special Meeting and wish to vote in person, you will be given a ballot at the meeting. If your shares are registered in your name, you are encouraged to vote by proxy even if you plan to attend the Special Meeting in person. If you attend the Special Meeting and vote in person, your vote by ballot will revoke any proxy previously submitted.

 

Voting instructions are included on your proxy card. All shares represented by properly executed proxies received in time for the Special Meeting will be voted at the Special Meeting in accordance with the instructions of the stockholder. Properly executed proxies that do not contain voting instructions will be voted “FOR” approval of the Reverse Split Proposal, “FOR” approval of the Capital Increase Proposal, “FOR” approval of the Name Change Proposal, “FOR” approval of the Acquisition Proposal, “FOR” approval of the Spin-off Proposal, “FOR” the election to the Board of all of the nominees described in the Election of Directors Proposal, and “FOR” the Adjournment Proposal, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to approve the Exchange Agreement at the time of the Special Meeting.

 

If your shares are held in “street name” through a broker, bank or other nominee, you may vote through your broker, bank or other nominee by completing and returning the voting form provided by your broker, bank or other nominee, or by the Internet or telephone through your broker, bank or other nominee if such a service is provided. To vote via the Internet or telephone through your broker, bank or other nominee, you should follow the instructions on the voting form provided by your broker, bank or other nominee. If you do not return your banks, broker’s or other nominee’s voting form, do not vote via the Internet or telephone through your broker, bank or other nominee, if possible, or do not attend the special meeting and vote in person with a proxy from your broker, bank or other nominee, it will have the same effect as if you voted “AGAINST” the Reverse Split Proposal, the Capital Increase Proposal, the Acquisition Proposal, the Spin-off Proposal, the Name Change Proposal, and the Adjournment Proposal, if presented. Abstentions and broker non-votes will have no direct effect on the outcome of the Election of Directors Proposal.

 

Revocability of Proxies

 

If you are a stockholder of record, you may change your vote or revoke your proxy at any time before it is voted at the Special Meeting by:

 

  Submitting a new proxy electronically over the Internet or by telephone after the date of the earlier submitted proxy;

 

  Signing another proxy card with a later date and returning it to us prior to the Special Meeting; or

 

  Attending the Special Meeting and voting in person.

 

Please note that to be effective, your new proxy card, internet or telephonic voting instructions or written notice of revocation must be received by us prior to the Special Meeting and, in the case of internet or telephonic voting instructions, must be received before 11:59 p.m. Eastern time on ____, 2019. If you have submitted a proxy, your appearance at the Special Meeting, in the absence of voting in person or submitting an additional proxy or revocation, will not have the effect of revoking your prior proxy.

 

If you hold your shares of common stock in “street name,” you should contact your bank, broker or other nominee for instructions regarding how to change your vote. You may also vote in person at the special meeting if you obtain a valid “legal” proxy from your bank, broker or other nominee. Any adjournment, recess or postponement of the Special Meeting for the purpose of soliciting additional proxies will allow IFMK stockholders who have already sent in their proxies to revoke them at any time prior to their use at the Special Meeting as adjourned, recessed or postponed.

 

Board of Directors’ Recommendation

 

After careful consideration, the Board has determined that the Reverse Split Proposal, the Capital Increase Proposal, the Acquisition Proposal, the Spin-off Proposal, the Name Change Proposal, Election of Directors Proposal, and the Adjournment Proposal are fair to, and in the best interest of, the Company and its stockholders. They unanimously recommend that you vote or give instruction to vote:

 

  FOR” the Reverse Split Proposal;

 

  FOR” the Capital Increase Proposal;
     
  ●  “FOR” the Name Change Proposal; 
     
  “FOR” the election to the Board of all of the nominees described in the Election of Directors Proposal; 

 

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  FOR” the Acquisition Proposal;
     
 

FOR” the Spin-off Proposal;

 

  FOR” the Adjournment Proposal, if presented.

 

The Acquisition, the Spin-off, the Name Change, the Reverse Split, the Capital Increase, and the Election of Directors proposals are conditioned upon the adoption of each other.

 

Solicitation of Proxies

 

The expense of soliciting proxies in the enclosed form will be borne by IFMK. Proxies may also be solicited by some of our directors, officers and employees, personally or by telephone, facsimile, email or other means of communication. No additional compensation will be paid for such services.

 

Anticipated Date of Completion of the Restructure

 

Assuming timely satisfaction of necessary closing conditions, including the approval by our stockholders of the proposals to approve both the Exchange Agreement and the Purchase Agreement, we anticipate that the Reverse Split, the Capital Increase, the Name Change, the Acquisition, and the Spin-off will be consummated in the fourth calendar quarter of 2019.

 

Other Matters

 

At this time, we know of no other matters to be submitted at the Special Meeting.

 

House holding of Special Meeting Materials 

 

Unless we have received contrary instructions, we may send a single copy of this proxy statement and notice to any household at which two or more stockholders reside if we believe the stockholders are members of the same family. Each stockholder in the household will continue to receive a separate proxy card. This process, known as “house holding”, reduces the volume of duplicate information received at your household and helps to reduce our expenses.

 

Who Can Answer Your Questions About Voting Your Shares? 

 

If you are a stockholder and have any questions about how to vote or direct a vote in respect of your shares of IFMK common stock, you may call Long Deng at (718) 628 6200.

 

THE ACQUISITION

 

Parties Involved in the Acquisition

 

iFresh Inc.

 

iFresh Inc., through its wholly owned subsidiary, NYM Holding Inc., is a fast growing Asian/Chinese grocery supermarket chain in the North Eastern U.S. providing food and other merchandise hard to find in mainstream grocery stores.

 

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Since NYM was formed in 1995, it has targeted the Chinese and other Asian populations (collectively, the “Asian Americans”) in the U.S. with a deep cultural understanding of its consumers’ unique consumption habits. iFresh currently has nine (9) retail supermarkets across New York, Massachusetts and Florida, with over 6,920,500 sales transactions in the fiscal year ended March 31, 2018. NYM also has three stores under construction which are expected to open in the fourth quarter in 2018. In addition to retail supermarkets, iFresh operates two in-house wholesale businesses, Strong America Inc. (“Strong America”) and New York Mart Group (“NYMG”), that offer more than 6,000 wholesale products and service to iFresh retail supermarkets and over 1,000 external customers including wholesale stores, retail supermarkets and restaurants. iFresh has a stable supply of food from farms in New Jersey and Florida, ensuring reliable supplies of popular vegetables, fruits and seafood. iFresh’s wholesale businesses and long term relationships with various farms insulate iFresh from supply interruptions, allowing it remain competitive even during difficult markets.

 

Xiaotai

 

Xiaotai is a “peer-to-peer” lending company in China providing an internet lending information intermediary platform that provides borrowers access to a wide variety of loan products. The loan products that it arranges currently generally range from one month to twenty-four months and are either unsecured loans which are lent either based on a borrower’s creditworthiness and assessed repayment ability, or loans secured by automobiles and delinquent assets. Through its internet lending information intermediary platform, we connect individual lenders with individual and small business borrowers. Xiaotai currently conducts its business operations exclusively in China.

 

Supported by its proprietary finance technology, Xiaotai developed the Zhizi risk control system, which is a comprehensive risk control system and entitles the Company to receive a Level III Certificate for Protection of State Information Security awarded by the PRC Ministry of Public Security, the highest level of recognition granted to non-bank institutions in the finance industry for stringent information security management and risk controls. Leveraging its advanced finance technology and innovative, reliable risk control procedures in serving borrowers and investors through its website and mobile applications, it provides efficient and effective solutions to address largely underserved personal financing and investment demands of the rapidly-growing middle class population in China. 

 

The Exchange Agreement

 

The subsections that follow this subsection describe the material provisions of the Exchange Agreement, but do not purport to describe all of the terms of the Exchange Agreement. The following summary is qualified in its entirety by reference to the complete text of the Exchange Agreement, a copy of which is attached as Annex A hereto, which is incorporated herein by reference. Shareholders and other interested parties are urged to read the Exchange Agreement carefully and in its entirety (and, if appropriate, with the advice of financial and legal counsel) because it is the primary legal document that governs the Acquisition.

 

The Exchange Agreement contains representations, warranties and covenants that the respective parties made to each other as of the date of the Exchange Agreement or other specific dates. The assertions embodied in those representations, warranties and covenants were made for purposes of the contract among the respective parties and are subject to important qualifications and limitations agreed to by the parties in connection with negotiating the Exchange Agreement. The representations, warranties and covenants in the Exchange Agreement are also modified in important part by the disclosure schedules and annexes attached thereto which are not filed publicly and which are subject to a contractual standard of materiality different from that generally applicable to shareholders. The disclosure schedules were used for the purpose of allocating risk among the parties rather than establishing matters as facts. We do not believe that the disclosure schedules contain information that is material to an investment decision.

 

General Description of the Exchange Agreement

 

On June 7, 2019, we entered into the Exchange Agreement with Xiaotai and the Seller, pursuant to which, among other things and subject to the terms and conditions contained therein, we will acquire all of the outstanding issued shares and other equity interests in Xiaotai from certain shareholders of Xiaotai.

 

Pursuant to the Exchange Agreement, in exchange for all of the outstanding shares of Xiaotai, we will issue 254,813,383 shares of our common stock (the “Exchange Shares”) to the Seller. The Exchange Shares will be allocated among the Sellers pro-rata based on each Seller’s ownership of Xiaotai prior to the closing.

 

Post-Restructure Ownership of Xiaotai and IFMK

 

Immediately after the Acquisition and the simultaneous Spin-Off, IFMK will own 100% of Xiaotai. The Sellers will own approximately 94% of IFMK and existing IFMK shareholders will own approximately 6% of the Company.

 

The above ownership percentages with respect to IFMK following the Acquisition and simultaneous Spin-Off and do not take into account any potential new issuances of the Company’s securities.

 

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Closing of the Acquisition

 

The closing of the Acquisition is expected to take place on the third business day following the day  on which the last of the conditions of the closing (described under the subsection entitled “— Conditions to Closing of the Acquisition”) have been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing, but subject to the fulfillment or waiver of those conditions) or such other date as may be mutually agreed to by us and Xiaotai. Assuming timely satisfaction of the necessary closing conditions, we currently expect the closing to occur promptly after the special meeting of our shareholders is concluded. 

 

Conditions to Closing of the Acquisition

 

The obligation of the parties to complete the Acquisition is subject to the fulfillment or written waiver of certain closing conditions, including but not limited to:

 

  the approval of the Exchange Agreement and the transactions contemplated thereby (including the Acquisition) by a majority of votes cast by our shareholders that are present in person or by proxy at our special meeting;

 

  the receipt of any other required governmental and regulatory approvals and consents;

 

  the receipt of any other required third person approvals in order to consummate the Acquisition;

 

KeyBank’s unconditional written consent approving the Acquisition;

 

all of the conditions to the obligations of each party to consummate the Spin-off described in the Purchase

Agreement shall have been satisfied;

 

  there is no applicable law or order in effect which makes illegal or prevents or prohibits the transactions contemplated by the Exchange Agreement, and there is no pending third party non-Affiliate legal proceeding to enjoin or otherwise restrict the closing; No pending action shall have been brought by third parties to enjoin or otherwise restrict the consummation of the closing; and

 

  the appointment of person designated by Xiaotai prior to the closing to the Board immediately after the closing.

 

In addition, unless waived by the Company, the obligations of Xiaotai and the Seller to consummate the Acquisition are subject to the fulfillment or written waiver of certain closing conditions, including:

 

  the accuracy of our representations and warranties (subject in certain cases to certain materiality, knowledge and other qualifications) in the Exchange Agreement or any certificated delivered by us on or as of the date of the Exchange Agreement or on or prior to the closing date, except for (i) those representations and warranties that address matters only as of a particular date (which representations and warranties shall have been accurate as of such date) and (ii) any failures to be true and correct that do not materially and adversely affect our ability to consummate the Acquisition;

 

  we shall have performed in all material respects all of our obligations and complied in all material respects with all of our agreements and covenants under the Exchange Agreement to be performed or complied with by us on or prior to the closing date;

 

  no fact, event, occurrence, change or effect shall have occurred with respect to us (including our subsidiaries) since the signing date of the Exchange Agreement that would materially adversely affect our business or our ability to consummate the Acquisition;

 

  delivery by us of certain other closing deliveries, including:

 

  - a certificate from our executive officer, dating the closing date, certifying the satisfaction of the three conditions aforementioned;
     
  - a certificate from our secretary certifying as to certain corporate matters; and
     
  - good standing certificates for us and our subsidiaries, to the extent applicable, from the relevant jurisdictions of organization;
     
  - an opinion from our legal counsel in form and substance satisfactory to the Company;

  

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  - an amended and restated certificate of incorporation reflecting the ownership of the newly issued shares to the Sellers;
     
  - board resolutions approving the issuance of shares to the Sellers at closing, and the appointment of certain directors;

 

  effectiveness of certain ancillary documents, including:

 

  - the entrance by the applicable parties into the Lock-Up Agreement or the Non-Competition and Non-Solicitation Agreement; and

 

  - the Seller shall have received written resignations, effective as of the closing, of each of our directors and officers as requested by the Sellers prior to the closing.

 

  Immediately prior to the closing, the newly issued shares shall meet the initial listing requirements to be listed on NASDAQ, there shall be no actions pending or threatened against us with respect to any intention by any third party to suspend, prohibit or terminate the quoting of the newly issued shares on NASDAQ, such shares have no deficiencies, whether or not disclosed and are in compliance with the listing and corporate governance rules of NASDAQ.

 

In addition, unless waived by us, our obligation to consummate the Acquisition is subject to the fulfillment of certain closing conditions, including:

 

  the accuracy of the representations and warranties of Xiaotai and the Seller (subject in certain cases to certain materiality, knowledge and other qualifications) in the Exchange Agreement or any certificated delivered by them on or as of the date of the Exchange Agreement or on or prior to the closing date, except for (i) those representations and warranties that address matters only as of a particular date (which representations and warranties shall have been accurate as of such date) and (ii) any failures to be true and correct that (without giving effect to any qualifications or limitations as to materiality or material adverse effect), individually or in the aggregate, have not had and would not reasonably be expected to have a material adverse effect on, or with respect to, Xiaotai and any of its direct and indirect subsidiaries or adversely affects the Xiaotai’s or Sellers’ ability to consummate the transactions contemplated hereby.

 

  Xiaotai and the Seller shall have performed in all material respects all of their obligations and complied in all material respects with all of such parties’ agreements and covenants under the Exchange Agreement to be performed or complied with by such parties on or prior to the closing date;

 

  no fact, event, occurrence, change or effect shall have occurred with respect to Xiaotai or any of its subsidiaries since the date of the Exchange Agreement since the signing date of the Exchange Agreement that would materially adversely affect Xiaotai’s or any of its’ Subsidiaries’ business or its ability to consummate the Acquisition;

 

  receipt by us of certain other closing deliveries, including:

 

  - a certificate from Xiaotai’s executive officer, dating the closing date, certifying the satisfaction of the three conditions aforementioned;
     
  - a certificate from each of the Seller, dating the closing date, certifying the satisfaction of the three conditions aforementioned;

 

  delivery by Xiaotai and the Seller of certain other closing deliveries, including:

 

  - a certificate from Xiaotai’s secretary certifying as to certain corporate matters;
     
  - good standing certificates for Xiaotai and its subsidiaries, to the extent applicable, from their jurisdiction of organization and any other jurisdiction where they are qualified to do business as a foreign entity;
     
  - a certified copy of Xiaotai’s charter from the British Virgin Islands;

 

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  - employment agreements with certain key personnel of Xiaotai’s operating subsidiary; and
     
  - a legal opinion from Xiaotai’s counsel;
     
  - share certificates and transfer instruments for Xiaotai shares purchased by us in the Acquisition; and
     
  - Board resolutions duly executed Xiaotai
     
  - a conflict of interest policy for Xiaotai
     
  - certain ancillary documents.

 

We cannot provide assurance as to when or if all of the closing conditions will be satisfied or waived by the appropriate party. As of the date of this proxy statement, we have no reason to believe that any of these conditions will not be satisfied.

 

Representations and Warranties

 

The Exchange Agreement contains a number of representations and warranties made by us, on the one hand, and Xiaotai and the Sellers on the other hand, made solely for the benefit of the other, which in certain cases are subject to specified exceptions and qualifications contained in the Exchange Agreement or in information provided pursuant to certain disclosure schedules to the Exchange Agreement. The representations and warranties are customary for transactions similar to the Acquisition.

 

In the Exchange Agreement, Xiaotai made certain customary representations and warranties to us. These representations and warranties, among others, related to the following: (1) corporate matters, including due organization, existence and good standing; (2) authority and binding effect relative to execution and delivery of the Exchange Agreement and other ancillary agreements; (3) capitalization; (4) subsidiaries; (5) governmental approvals; (6) non-contravention; (7) financial statements; (8) absence of certain changes; (9) compliance with laws; (10) permits and licenses; (11) litigation; (12) material contracts; (13) intellectual property; (14) taxes and tax returns; (15) real property; (16) personal property; (17) title to and sufficiency of assets; (18) employee matters; (19) benefit plans; (20) environmental matters; (21) transactions with related persons; (22) insurance; (23) top customers and suppliers; (24) books and records; (25) accounts receivable; (26) certain business practices; (27) Investment Company Act of 1940; (28) finders and investment bankers; (29) independent investigation; (30) information supplied; and (31) disclosure. Each of the Sellers also made certain customary representations and warranties to us on a several and joint basis, including representations and warranties related to the following: (1) corporate matters, including due organization, existence and good standing; (2) authority and binding effect relative to execution and delivery of the Exchange Agreement and other ancillary agreements; (3) ownership of Xiaotai shares to be purchased by us; (4) governmental approvals; (5) non-contravention; (6) litigation; (7) investment representations; (8) finders and investment bankers; (9) independent investigation; (10) information supplied; and (11) disclosure.

 

In the Exchange Agreement, we made certain customary representations and warranties to Xiaotai. These representations and warranties, among others, related to the following: (1) corporate matters, including due organization, existence and good standing; (2) authority and binding effect relative to execution and delivery of the Exchange Agreement and other ancillary agreements; (3) governmental approvals; (4) non-contravention; (5) capitalization; (6) SEC filings and financial statements; (7) absence of certain changes; (8) compliance with laws; (9) actions, orders and permits; (10) taxes and returns; (11) properties; (12) material contracts; (13) transactions with related persons; (14) Investment Company Act of 1940; (15) finders, brokers and investment bankers; (16) ownership of the Exchange Shares; (17) certain business practices; (18) insurance; and (19) independent investigation.

 

Certain of the representations and warranties are qualified by knowledge and/or materiality or material adverse effect. For the purposes of the Exchange Agreement, material adverse effect means, with respect to any specified person, any fact, event, occurrence, change or effect that has had, or would reasonably be expected to have, individually or in the aggregate, a material adverse effect upon (a) the business, assets, liabilities, results of operations, prospects or condition (financial or otherwise) of such person and its subsidiaries, taken as a whole, or (b) the ability of such person or any of its subsidiaries on a timely basis to consummate the transactions contemplated by the Exchange Agreement or any of the ancillary documents. However, it excludes any changes or effects directly or indirectly attributable to, resulting from, relating to or arising out of the following: (i) general changes in the financial or securities markets or general economic or political conditions in the country or region in which such person or any of its subsidiaries do business; (ii) changes, conditions or effects that generally affect the industries in which such person or any of its subsidiaries principally operate; (iii) changes in U.S. generally accepting accounting principles or mandatory changes in the regulatory accounting requirements applicable to any industry in which such person and its subsidiaries principally operate; (iv) conditions caused by acts of god, terrorism, war (whether or not declared) or natural disaster; and (v) any failure in and of itself by such person and its subsidiaries to meet any internal or published budgets, projections, forecasts or predictions of financial performance for any period (except that the underlying cause of any such failure may be considered in determining whether a material adverse effect has occurred or would reasonably be expected to occur to the extent not excluded by another exception herein); provided that any event, occurrence, fact, condition, or change referred to in clauses (i) – (iv) above shall be taken into account in determining whether a material adverse effect has occurred or could reasonably be expected to occur to the extent that such event, occurrence, fact, condition, or change has a disproportionate effect on such person or any of its subsidiaries compared to other participants in the industries in which such person or any of its subsidiaries primarily conducts its businesses. 

 

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Termination

 

The Exchange Agreement may be terminated prior to the closing by:

 

  the mutual written consent of Xiaotai and us;

 

  ●  written notice by either Xiaotai or us if the closing has not occurred by the six-month anniversary of the date of the Exchange Agreement, which date is also referred to herein as the outside date, so long as no breach of the Exchange Agreement by such terminating party or its affiliates (or, with respect to Xiaotai, the Seller) caused the closing not to have occurred by such date; 

 

  written notice by either us or Xiaotai if any governmental authority of competent jurisdiction has issued a final and non-appealable order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Exchange Agreement, so long as no breach of the Exchange Agreement by such terminating party or its affiliates (or, with respect to Xiaotai, the Sellers) was a substantial cause of, or substantially resulted in, such action by such governmental authority;

 

  written notice by Xiaotai for a breach of our representations, warranties, covenants or agreements in the Exchange Agreement which would result in the related closing condition not being met and such breach is incapable of cure or is not cured within the earlier of 20 days after notice of such breach or the outside date;

 

  written notice by us for a breach of Xiaotai’s or the Seller’s representations, warranties, covenants or agreements in the Exchange Agreement which would result in the related closing condition not being met and such breach is incapable of cure or is not cured within the earlier of 20 days after notice of such breach or the outside date;

 

  written notice by us if there shall have been a material adverse effect on Xiaotai or its subsidiaries which is uncured and continuing for 30 days after notice of such material adverse effect or the outside date;

 

  written notice by Xiaotai if there shall have been a material adverse effect on us or our subsidiaries which is uncured and continuing for 30 days after notice of such material adverse effect or the outside date; or

 

  written notice by us if the requisite shareholder vote in favor of the Exchange Agreement and the Acquisition is not obtained at our special meeting.

 

If the Exchange Agreement is terminated, all further obligations of the parties under the Exchange Agreement will terminate and will be of no further force and effect and no party will have any further liability thereunder to any other party, except that certain obligations related to public announcements, confidential information, fees and expenses, and termination fees and general provisions will continue in effect, and no party shall be relieved of liability for any fraud claims or breach of the Exchange Agreement prior to such termination.

 

Fees and Expenses

 

In the event that we terminate the Exchange Agreement for breach by Xiaotai or a material adverse effect on Xiaotai or its subsidiaries which is uncured and continuing or for the failure to obtain the requisite shareholder vote in favor of the Exchange Agreement and the Acquisition at our special meeting, Xiaotai will be required to pay us as liquidated damages a termination fee equal to the transaction expenses incurred by or on behalf of us or any of our affiliates in connection with the Exchange Agreement or the transactions contemplated hereby. In the event Xiaotai terminates the Exchange Agreement for breach by us or a material adverse effect on us or our subsidiaries which is uncured and continuing, we will be required to pay Xiaotai as liquidated damages a termination fee equal to the transaction expenses incurred by or on behalf of Xiaotai or any of its affiliates in connection with the Exchange Agreement or the transactions contemplated hereby.

 

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Other than the termination fee described above, each party will bear its own expenses in connection with the Exchange Agreement and the transactions contemplated thereby.

 

Amendment or Waiver of the Exchange Agreement

 

The Exchange Agreement may be amended, supplemented or modified by written agreement of Xiaotai and us. If permitted under applicable law, we and Xiaotai may waive any inaccuracies in the representations and warranties made to such party contained in the Exchange Agreement and waive compliance with any agreements or conditions for the benefit of such party contained in the Exchange Agreement.

 

Efforts to Obtain Shareholder Approval and Consummate the Acquisition; Regulatory Matters

 

Unless the Exchange Agreements terminated in accordance with its terms, we have agreed to call a special meeting of our shareholders, for the purpose of such shareholders considering and voting on the approval and adoption of the Exchange Agreement and the Acquisition and the other transactions contemplated thereby, including, if required, the amendment and restatement of our charter, the appointment of directors and committee members in accordance with the requirements of the Exchange Agreement and any other matters required to be voted upon by such shareholders in connection with the transactions contemplated in the Exchange Agreement. The Board has approved the Exchange Agreement and the Acquisition and directed that the Exchange Agreement and the Acquisition be submitted to our shareholders for their consideration.

 

Moreover, each party to the Exchange Agreement has agreed to execute and deliver such documents and take such further actions as may be reasonably necessary or desirable to carry out the provisions of the Exchange Agreement and the transactions contemplated thereby, including the Acquisition. Upon the terms and subject to the conditions of the Exchange Agreement, each of the parties to the Exchange Agreement will use all commercially reasonable efforts under the circumstances to take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective the transactions contemplated by the Exchange Agreement(including the Acquisition), as soon as reasonably practicable, including preparing and filing as soon as practicable all documentation to effect all necessary notices, reports and other filings.

 

The parties are also required to, as soon as reasonably practicable, cooperate and use their commercially reasonable efforts to prepare and file with governmental authorities which requests for approval of, and have such governmental authorities approve, the transactions contemplated by the Exchange Agreement. Each party also agreed to use its commercially reasonable efforts to obtain any required consents of third parties for the transactions contemplated by the Exchange Agreement. However, in no event will a party be required to agree to any term, condition or modification with respect to obtaining any governmental authority or third-party consent in connection with the transactions contemplated by the Exchange Agreement that would, or would be reasonably likely to, result in a material adverse effect to such party or its affiliates or require such party to cease, sell or otherwise dispose of, or hold separate, any material assets or businesses.

 

We cannot assure you that any of the approvals of governmental authorities or other third parties described above will be obtained, and, if obtained, we cannot assure you as to the date of such approvals or the absence of any litigation challenging any such approvals. We are not aware of, and Xiaotai and the Sellers have not identified to us, any material governmental authority or third-party approvals or actions that are required for completion of the Acquisition, except for the approval of NASDAQ for listing of additional shares. It is presently contemplated that [if any such additional approvals or actions are required,] those approvals or actions will be sought, but there can be no assurance that any additional approvals or actions will be obtained.

 

Other Covenants of the Parties

 

Xiaotai covenanted to us that during the period from the date of the Exchange Agreement until the earlier of the closing or termination of the Exchange Agreement, it will and will cause its subsidiaries to conduct their respective businesses in the ordinary course of business consistent with past practice, to comply with all applicable laws and to preserve their respective organizational documents, securities, businesses, personnel and assets, all consistent with past practice. We similarly covenanted to Xiaotai to do the same. We also agreed to keep current and timely file all of our public filings and comply in all material respects with applicable securities laws and to use our commercially reasonable efforts to maintain the list of our securities on NASDAQ, and Xiaotai agreed to provide us with periodic financial statements until the closing, and to not trade our securities while they are in possession of material nonpublic information.

 

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The Exchange Agreement also contains customary mutual covenants relating to the preparation of a proxy statement, the granting of access to information, public announcements with respect to the transactions contemplated by the Exchange Agreement, confidentiality, notification of breaches and other certain events, exclusivity with respect to the transactions contemplated by the Exchange Agreement (and with respect to any alternative transactions), litigation support, the retention of books and records, supplemental disclosure schedule, and purchaser policies. The Sellers also agreed that after the closing they would cause IFMK to engage its auditor to complete an attestation pursuant to Section 404(b) of SOX and Item 308(b) of Regulation S-K no later than June 30, 2019 or such earlier date as is required by SEC rules or other applicable law, with such report to be included in the combined company’s applicable annual report.

 

Board of Directors and Management Following the Acquisition

 

Immediately following the closing of the Acquisition, the current chief executive officer and Chairman of IFMK shall resign and the chief executive officer of Xiaotai shall become the chief executive officer and chairman of IFMK. See section entitled “Post-Closing Board of Directors and Executive Officers.”

 

Survival

 

The representations and warranties made by Xiaotai and the Sellers in the Exchange Agreement generally survive for a period of one year after the closing, with certain representations relating to taxes, benefit plans, environmental matters and information supplied surviving until 60 days after the expiration of the applicable statute of limitations and certain fundamental representations relating to due organization and good standing, authorization and binding agreement, capitalization, subsidiaries, finders and investment bankers and independent investigation surviving indefinitely. Fraud claims against Xiaotai or the Sellers survive indefinitely. The covenants, obligations and agreements of Xiaotai and the Sellers survive until fully performed. Our representations and warranties, as well as our covenants and agreements to be performed prior to the closing, generally survive for a period of eighteen months after the closing, with the representation relating to Taxes surviving until 60 days after the expiration of the relevant statute of limitations. Our covenants and agreements to be performed after the closing survive until fully performed.

 

Governing Law and Dispute Resolution

 

The Exchange Agreement is governed by New York law. Any disputes under the Exchange Agreement, other than claims for injunctive or equitable relief (including specific performance to strictly enforce the terms of the Exchange Agreement), will be subject to arbitration by the American Arbitration Association to be held in Manhattan, New York. Any claims that are brought before a court will be subject to exclusive jurisdiction of the state and federal courts in New York, New York (and appeals courts), and each party waived its rights to a jury trial in connection therewith. The parties are entitled to an injunction, specific performance and other equitable relief to prevent breaches of the Exchange Agreement in addition to any other remedy to which they are entitled at law or in equity.

 

Related Agreements

 

This section describes the material provisions of certain additional agreements to be entered into pursuant to the Exchange Agreement (the “Related Agreements”) but does not purport to describe all of the terms thereof. The following summary is qualified in its entirety by reference to the complete text of each of the Related Agreements.

 

Lock-Up Agreements

 

At the closing of the Acquisition, the Company will enter into a Lock-Up Agreement with the Seller with respect to the Exchange Shares received by the Sellers in the Acquisition. In such Lock-Up Agreement, each Seller will agree, subject to certain exceptions set forth therein, that such Seller will not, from the closing of the Acquisition until the six-month or first anniversary of the closing, as the case may be (or if earlier, the date on which the Company consummates a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of the Company’s shareholders having the right to exchange either equity holdings in us for cash, securities or other property) (the “Lock-up Period’), (i) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any Exchange Shares, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Exchange Shares or (iii) publicly disclose the intention to do any of the foregoing, whether any such transaction described in clauses (i), (ii), or (iii) above is to be settled by delivery of Exchange Shares or other securities, in cash or otherwise. Each Seller will be allowed to transfer any of its Exchange Shares by gift, will or intestate succession or to any affiliate, shareholder, members, party or trust beneficiary, provided in each such case that the transferee thereof agrees to be bound by the restrictions set forth in the Lock-up Agreement. Additionally, each Seller will be allowed to pledge its Exchange Shares to an unaffiliated third party as a guarantee to secure loans made by such third party to the post-closing company or any of its consolidated subsidiaries.

 

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Non-Competition and Non-Solicitation Agreements

 

At the closing of the Acquisition, each Seller and individuals associated with such Sellers that are involved in the management of Xiaotai (together with such Seller, referred to as the “Subject Parties”) will enter into a Non-Competition and Non-Solicitation Agreement in favor of us and Xiaotai and our respective successors, affiliates and subsidiaries (referred to as the “Covered Parties”), relating to the post-Acquisition company’s business. Under the Non-Competition and Non-Solicitation Agreements, for a period from the closing to two years after the closing, each Subject Party and its affiliates will not, without our prior written consent, anywhere in the Peoples’ Republic of China directly or indirectly engage in (or own, manage, finance or control, or become engaged or serve as an officer, director, employee, member, partner, agent, consultant, advisor or representative of, an entity that engages in) the business of directly or indirectly providing online leading intermediary facilitation services in the Peoples’ Republic of China (the “Business”), other than through the Covered Parties. However, the Subject Parties and their respective affiliates will be permitted under the Non-Competition and Non-Solicitation Agreements to own passive portfolio company investments in a competitor, so long as the Subject Parties and their affiliates and their respective shareholders, directors, officer, managers and employees who were involved with the business of Xiaotai and its subsidiaries are not involved in the management or control of such competitor. Additionally, family members and associates of Subject Parties will be permitted to continue their existing activities as specified in the agreement, even if competitive, as long as the Subject Parties are not involved in the management or control of such competitor. The Subject Parties also will agree during such restricted period to not, without our prior written consent, (i) solicit or hire the Covered Parties’ employees, consultants or independent contractors as of the closing (or during the year prior to the closing) or otherwise interfere with the Covered Parties’ relationships with such persons, (ii) solicit or divert the Covered Parties’ customers as of the closing (or during the year prior to the closing) relating to Xiaotai’s business or otherwise interfere with the Covered Parties’ contractual relationships with such persons, or (iii) interfere with or disrupt any Covered Parties’ vendors, suppliers, distributors, agents or other service providers for a purpose competitive with a Covered Party as it relates to the Business. The Subject Parties will also agree in each Non-Competition and Non-Solicitation Agreement to not disparage the Covered Parties and to keep confidential and not use the confidential information of the Covered Parties.

 

Effect of the Acquisition

 

Pursuant to the Exchange Agreement, in exchange for all of the outstanding shares of Xiaotai, we will issue 254,813,383 shares of common stock (the “Exchange Shares”) to the Sellers. The Exchange Shares will be allocated among the Sellers pro-rata based on each Seller’s ownership of Xiaotai prior to the closing.

 

Effect if the Acquisition is Not Completed

 

If the Acquisition is not approved by IFMK stockholders or if the Acquisition is not completed for any other reason, IFMK stockholders will not receive any payment or other compensation for their shares of common stock. Instead, IFMK will remain an independent public company, its common stock will continue to be listed and traded on NASDAQ (assuming the Company can meet all of NASDAQ’s continued listing standards) and registered under the Exchange Act and IFMK will continue to file periodic reports with the SEC. In addition, if the Acquisition is not completed, IFMK expects that management will operate the business in a manner similar to that in which it is being operated today and that IFMK’s stockholders will continue to be subject to the same risks and opportunities to which they are currently subject, including, without limitation, risks related to the highly competitive industry in which IFMK operates and adverse economic conditions.

 

Furthermore, if the Acquisition is not completed, and depending on the circumstances that would have caused the Acquisition not to be completed, the price of IFMK’s common stock may decline significantly. If that were to occur, it is uncertain when, if ever, the price of IFMK’s common stock would return to the price at which it trades as of the date of this proxy statement.

 

Accordingly, if the Acquisition is not completed, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of IFMK’s common stock. If the Acquisition is not completed, the Board will continue to evaluate and review the Company’s business operations, properties, dividend policy and capitalization, among other things, make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance stockholder value. If the Exchange Agreement is not approved by IFMK’s stockholders or if the Acquisition is not completed for any other reason, there can be no assurance that any other transaction acceptable to IFMK will be offered or that IFMK’s business, prospects or results of operation will not be adversely impacted.

 

In addition, under specified circumstances, IFMK may be required to reimburse Xiaotai’s expenses or pay Xiaotai a termination fee, upon the termination of the Exchange Agreement, as described under “Fees and Expenses” beginning on page 13.

 

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Reasons for the Acquisition

 

In evaluating the Acquisition and recommending that IFMK’s stockholders vote in favor of approval of the Acquisition, the Board, in consultation with IFMK’s senior management, outside legal counsel and financial advisor, considered numerous positive factors relating to the Exchange Agreement, the Acquisition and the other transactions contemplated thereby including the following material factors:

 

  Challenges facing IFMK’s current grocery store business, including the significant accumulated deficit, operating loss and negative operating cash flow due to the downward food retail market in New York;
     
  The prospective risks to IFMK relating to the risks and uncertainties of maintaining its competitive position in the highly competitive food retail market.

 

  The other strategic alternatives available to IFMK, such as continuing to operate as an independent company and pursuing its strategic plan and the possibility of growing its business through acquisitions and internal growth, that the Board believed was less attractive than Xiaotai’s proposal to IFMK’s stockholders under the circumstances.
     
  The processes conducted by IFMK over approximately the last year prior to entering into the Exchange Agreement, involving a broad group of potential acquirers and which was conducted with the assistance of IFMK’s financial advisor(s) and which led to no other competitive and actionable proposals given the facts and circumstances present at that time.
     
  The terms and conditions of the Exchange Agreement and related transaction documents, including:

 

  the requirement that the Exchange Agreement be approved by the requisite vote of the shareholders of IFMK.

 

  the Sellers’ agreement to enter into lock-up agreement in favor of the Company; and

 

  the Sellers’ and Xiaotai executive officers’ agreement to enter into non-competition and non-solicitation agreement in favor of us and our respective successors, affiliates and subsidiaries relating to the post-Acquisition company’s business.

 

  The potential beneficial synergy resulting from the Acquisition;

 

  The fact that the Board received and reviewed a fairness opinion from Benchmark affirming the Acquisition transactions as fair.

 

  The fact that resolutions approving the Exchange Agreement were unanimously approved by IFMK’s Special Committee, which is solely comprised of independent directors.

 

In the course of reaching the determinations and decisions and making the recommendation described above, the Board, in consultation with IFMK’s senior management, outside legal counsel and financial advisor, considered the risks and potentially negative factors relating to the Exchange Agreement, the Acquisition and the other transactions contemplated thereby, including the following material factors:

 

  The possibility that the share price of IFMK could decline after the Acquisition, reducing the overall value proposition of the transaction.

 

  The possibility that the consummation of the Acquisition may be delayed or not occur at all, and the adverse impact such event would have on IFMK and its business.

 

  The possible disruption to IFMK’s business that may result from announcement of the Acquisition and the resulting distraction of management’s attention from the day-to-day operations of the business.

 

  The potential negative effect of the pendency of the Acquisition on IFMK’s business, including uncertainty about the effect of the proposed Acquisition on the Company’s employees, customers and other parties, which may impair its ability to attract, retain and motivate key personnel, and could cause customers, suppliers and others to seek to change existing business relationships with IFMK.

 

  That if the Acquisition is not consummated, IFMK may be required to pay its own expenses associated with the Exchange Agreement and the transactions contemplated thereby.

 

  The Board believed that, overall, the potential benefits of the Acquisition to IFMK’s stockholders outweighed the risks and uncertainties of the Acquisition.

 

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The foregoing discussion of factors considered by the Board is not intended to be exhaustive, but includes the material factors considered by the Board. In light of the variety of factors considered in connection with its evaluation of the Acquisition, the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determinations and recommendations. Moreover, each member of the Board applied his or her own personal business judgment to the process and may have given different weight to different factors. The Board did not undertake to make any specific determination as to whether any factor, or any particular aspect of any factor, supported or did not support its ultimate determination. The Board based its recommendation on the totality of the information presented.

 

Background of the Acquisition

 

The terms of the Exchange Agreement are the result of extensive arm’s-length negotiations among the management teams of IFMK and Xiaotai, and their representatives, under the guidance of each company’s board of directors and the special committee of IFMK, and involving outside advisors retained by each of the companies. IFMK followed a careful process assisted by experienced outside financial and legal advisors to rigorously examine the potential transaction.

 

The following is a brief description of the background of these negotiations, the Exchange Agreement and related transactions.

 

In early 2018, management informally discussed the Company’s financial position and the challenges facing the Company, including IFMK’s continued decrease in revenues since fiscal year 2017 and expenses related to maintenance of a Nasdaq listed public company, the management determined the current business cannot be operated in a profitable manner. IFMK management, upon considering the Company’s financial position determined that it was in the best interest of the Company to explore strategic alternatives, including a merger or acquisition in order to maximize shareholder value.

 

From March 2018 through January 2019, Mr. Deng approached and reviewed approximately three potential acquisition target companies. Mr. Deng evaluated companies situated in a broad range of business sectors. The companies Mr. Deng reviewed included Dragon Seeds LLC, a farm based in Vero Beach, Florida, specializing in Mibao dragon fruit, Fujian Fuding Seagull Sea Products Limited and Xiaotai Technology Co. Ltd. Representatives of IFMK held in-person or telephonic discussions with representatives of these companies, conducted due diligence review of several of these companies and discussed the potential transaction internally. Representatives of IFMK reviewed these potential targets based on criteria commonly used in evaluating a proposed acquisition, which included business outlook of the particular sector in which the target companies operate, experience of the management teams and competitive positions, along with the potential for revenue and earnings growth and cash flow generation. IFMK focused on industries exhibiting growth or the potential for near-term growth, and within those sectors, companies that would benefit from being a division of a publicly-traded company. Mr. Deng Long, reported the discussions with these target companies to the other members of the board of directors at board meetings in January 2019.

 

After reviewing these potential targets and engaging in discussions with the representatives of the potential targets, the Company entered into a letter of intent with Xiaotai on January 9, 2019.

 

Description of negotiation process with candidates other than Xiaotai

 

Established in 1993, Fujian Fuding Seagull Fishing Food Co., Ltd. (“Fuding Seagull”) is a leading company in the seafood industry in Fujian province. Fuding Seagull told IFMK management that it had sales of approximately 1.2 billion RMB in 2017 and 1.3 billion RMB in 2016.

 

iFresh entered into a letter of intent to acquire 75% of equity interest of Fuding Seagull on March 20, 2018. The acquisition price negotiated was approximately RMB 525 million, with a combination of cash and stock. According to the letter of intent, the Company would proceed with full due diligence and expected to sign a definitive agreement within 90 days. However, by December 2018, IFMK management was advised that Fuding Seagull were unable to finish its audit according to USGAAP in the short term. IFMK management then decided to give up this transaction.

 

Dragon Seeds LLC (“Dragon Seeds”), operated a farm specializing in Mibao dragon fruit based in Vero Beach, Florida, IFMK entered into an exclusive supply agreement with Dragon Seeds. IFMK management were told that the management team of Dragon Seeds have over twenty years of operational experience growing, harvesting, packing and distributing dragon fruit. Upon preliminary due diligence, IFMK entered into a non-binging letter of intent with Dragon Seeds on May 2, 2018. Pursuant to this letter of intent, iFresh was expected to acquire 70% ownership of Dragon Seeds in consideration for a combination of cash and stock to be determined after the completion of due diligence. The management thought the acquisition would be a good addition for iFresh, supporting the continued strategy of vertically integrating the supply chain, satisfying the increasing demands of Asian Americans for fresh and culturally unique products. The final terms of the transaction were supposed to be approved by the Audit iFresh’s Board of Directors. However, by January 2019, IFMK management was not able to reach an agreement with Dragon Seeds on evaluation of Dragon Seeds. IFMK management then decided to give up this transaction.

 

Description of negotiation process with Xiaotai

 

In mid-2018, management of Zhejiang Xiaotai Technology Co. Ltd, the operating entity of Xiaotai, decided to explore the possibility of going public in U.S. Since then, Xiaotai senior management started exploring different pathways to go public in U.S. In August 2018, Xiaotai senior management, Mr. Fan Guo, CEO and Ms. Suchun Wu, COO met with Mr. Long Yi, a business acquaintance of Mr. Guo with experience of U.S. capital market and Mr. Jian Zou, a financial consultant proficient in US GAAP to discuss pros and cons of different pathways to go public in U.S. On November 15, 2018, Xiaotai publicly filed a registration statement on Form F-1 in connection with public offering of its ordinary shares and listing on NYSE MKT.

 

From October to December 2018, Xiaotai and Mr. Zou, kept in touch and had discussions regarding the various means for Xiaotai to go public.

 

In late December 2018, Mr. Xin He, formal CFO of IFMK and Leo Jie, a financial consultant of IFMK, talked with Mr. Yi about a potential merger with IFMK, Mr. Yi conveyed this information to Mr. Guo and Ms. Wu, and then introduced Xiaotai to Mr. Long Deng over the phone. Mr. Deng and Mr. Fan Guo, briefly introduced their respective companies to each other and explored the possibility of a potential merger or acquisition.

 

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On or about January 6, 2019, Mr. Yi, Mr. Fan Guo, Ms. Wu and Mr. Long Deng met in person in the IFMK headquarters in New York. At the meeting, the parties discussed the businesses and financials of each companies in detail.

 

On or about January 7, 2019, IFMK provided an initial draft letter of intent to Xiaotai. On January 9, 2019, IFMK and Xiaotai signed the non-binding letter of intent.

 

On January 16, 2019, the board of directors of IFMK held a special meeting to discuss the proposed Acquisition where Mr. Deng reported the discussion with all the potential acquisition targets and the reason for management’s recommendation to further pursue with Xiaotai. The board also discussed qualification of Mr. Long Yi to serve as the IFMK’s Chief Financial Officer to fill in the vacancy by Mr. Xin He’s resignation due to Mr. Yi’s lengthy experience in the area of mergers and acquisitions and his knowledge of FinTech industry in China.

 

On January 17, 2019, the Board appointed Mr. Long Yi as the Company’s CFO.

 

In the following several weeks, IFMK management and the financial advisors of IFMK conducted due diligence review of the financial and operational information provided by Xiaotai, including the audited financial statement for the fiscal years ended December 31, 2017 and 2016 and six month ended June 30, 2018 and 2017 included in the registration statement on Form F-1 Xiaotai submitted to the SEC. Xiaotai management also reviewed the public filings of IFMK and conducted lien search and other financial and legal due diligence review.

 

On January 31, 2019, the board of directors of IFMK agreed to form a special committee of the board consisting exclusively of independent directors to evaluate the proposed Acquisition on behalf of IFMK’s public shareholders.

 

On or about February 21, 2019, Mr. Long Yi visited the headquarters of Xiaotai in Hanghzou and met with Baofeng Pan, founder of Xiaotai, Mr. Fan Guo, and Ms. Suchun Wu. During the tour, Mr. Yi talked to various employees and asked questions about Xiaotai’s risk control policy and procedures, operation of the platform, potential markets, employee numbers and other pertinent information. After the tour, Mr. Yi had a meeting with the senior management of Xiaotai. During the meeting, Mr. Yi briefly introduced IFMK’s financial status, business model and management team. Ms. Wu made a presentation regarding Xiaotai’s business, its results of operation as well as competition landscape, regulatory compliance efforts etc. After the presentation, Mr. Yi asked Ms. Wu questions about Xiaotai’s history, operational results in the past two years, company structure, market, competitors, compliance history, financials, customers, management and other matters of interest. After the meeting, Mr. Yi reviewed Xiaotai’s business licenses, certifications and risk control procedures.

 

On February 15, 2019, IFMK and Xiaotai, along with their respective legal counsels and Xiaotai’s independent auditors, had a kick-off conference call discussing the deal structure, the NASDAQ requirements as well as the approximate timeframe of the potential transaction.

 

On February 15, 2019, the Special Committee of IFMK retained The Benchmark Company, LLC ("Benchmark") as its financial advisor to render a written opinion as to whether the consideration to be paid by IFMK in connection with the Acquisition is fair to IFMK’s shareholders from a financial point of view.

 

On or about March 14, 2019, IFMK convened conference call which included participants from Xiaotai, iFresh and Xiaotai’s respective U.S. counsels, and Xiaotai’s financial advisors discussing the basic structure of the Acquisition and initial draft of the share exchange agreement provided by iFresh counsel.

  

From January 2019 to May 2019, in addition to formal meetings, members of the special committee had multiple telephone and email discussions about the proposed Acquisition and raised questions with regard to Xiaotai’s historical financials and projections, public disclosure requirement of the proposed Acquisition, impact of the proposed Acquisition and Spin-Off to IFMK’s shareholders, and other issues. The special committee requested management to obtain further background checks of Xiaotai’s key executives and shareholders, and other pertinent information.

 

On or about May 20, 2019, Xiaotai provided financial statements for fiscal year ended 2018 and the financial statements and indicted to IFMK management that such statements were final. Xiaotai’s also provided Xiaotai’s internal forecasts for fiscal years 2019 to 2022. Based on the analysis and Xiaotai’s draft financial statements, IFMK management and Xiaotai agreed that Xiaotai’s valuation should be between $200 million to $300 million.

 

On June 3, 2019, the Special Committee convened to further discuss the proposed Acquisition as well as the Spin-off. At this meeting, Benchmark was invited to deliver a presentation of their analysis and conclusions. In the board presentation, Benchmark discussed their analysis and  methodologies used to determine whether the considerations to be paid and received by the Company in connections with the transactions are fair to the Company’s shareholders from a financial point of view. The Special Committee raised relevant questions to Benchmark about their analysis.

 

On June 6, 2019, Benchmark delivered the draft fairness opinion on the proposed Acquisition and the board presentation and the final opinion on the next morning.

 

On June 7, 2019, the Special Committee, following intensive prior discussions and deliberation, recommended the board to approve the Exchange Agreement. The board then approved the execution of the Exchange Agreement, the Purchase Agreement, as well as the Acquisition, Name Change, Reverse Split, Capital Increase and the Adjournment proposals to be submitted to the shareholders for voting.

 

On June 7, 2019, following the executed written consents of the Special Committee and full board of IFMK, the Exchange Agreement was executed.

 

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Opinion of Benchmark to the Board of Directors of IFMK

 

IFMK engaged Benchmark to render an opinion as to whether the consideration to be paid by the Company in connection with the Acquisition  is fair, from a financial point of view, to IFMK’s stockholders. Benchmark is an investment bank that works regularly in the evaluation of businesses and their securities in connection with acquisitions, corporate restructuring, and financings. The board decided to use its services as Benchmark represented to the Company that it has requisite experience in similar matters. Benchmark rendered its oral opinion to the Special Committee on June 3, 2019 (which was subsequently confirmed in writing by delivery of Benchmark’s written opinion) that the consideration to be paid by the Company in connection with the Acquisition was fair, from a financial point of view, to IFMK’s stockholders.

 

Benchmark’s opinion was provided to the Special Committee and the Board in connection with their consideration of the Acquisition and only addressed the fairness, from a financial point of view, of the  consideration to be paid by the Company in connection with the Acquisition to IFMK’s stockholders pursuant to the Exchange Agreement, in each case as of the date of the opinion, and did not address any other aspect or implication of the Acquisition.

 

The summary of Benchmark’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the written opinion, which is included as Annex C to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Benchmark in preparing its opinion. However, neither Benchmark’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to any stockholder as to how such stockholder should act or vote with respect to any matter relating to the proposed Acquisition.

 

In arriving at its opinion, Benchmark reviewed and considered certain related documents, and a variety of business and financial information as it deemed relevant. Among other things, Benchmark reviewed and considered:

 

  1. the latest draft of the Exchange Agreement provided to it on June 6, 2019;

 

  2. certain information relating to the historical, current and future operations, financial condition and prospects of Xiaotai, made available to us by the Company, including financial statements that included actual income statement for the year ending 12/31/2018 and the 3 months ending 3/31/2019, a balance sheet as of 3/31/2019, and a projected model with income statements for the 9 months ended 12/31/2019 and the calendar years 2020-2022;

 

  3. discussions with certain members of the management of the Company and certain of the Company’s advisors and representatives regarding the business, operations, financial condition and prospects of the Company, the Acquisition and related matters;

 

  4. a certificate addressed to it from senior management of the Company which contains, among other things, representations regarding the accuracy of the information, data and other materials (financial or otherwise) provided to, or discussed with, Benchmark by or on behalf of the Company;

 

  5. the current and historical market prices for certain of the Company’s publicly traded securities, and the current and historical market prices, trading characteristics and financial performance of the publicly traded securities of certain other companies that we deemed to be relevant;

 

  6. the publicly available financial terms of certain transactions that it deemed to be relevant; and

 

  7. such other information, economic and market criteria and data, financial studies, analyses and investigations and such other factors as Benchmark deemed relevant.

 

In arriving at its opinion, Benchmark relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to it, discussed with or reviewed by it, or publicly available, and do not assume any responsibility with respect to such data, material and other information. In addition, management of the Company has advised Benchmark, and Benchmark have assumed, that the financial projections reviewed by Benchmark have been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such management as to the future financial results and condition of the Company or Xiaotai and Benchmark express no opinion with respect to such projections or the assumptions on which they are based. Benchmark have relied upon and assumed, without independent verification, that there has been no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of the Company, Xiaotai or Purchaser since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to it that would be material to its analyses or its opinion, and that there is no information or any facts that would make any of the information reviewed by us incomplete or misleading. Benchmark has further relied upon the assurance of the management of the Company that they are unaware of any facts that would make the information provided to Benchmark incomplete or misleading in any material respect. In connection with its review and arriving at its opinion, Benchmark did not assume any responsibility for the independent verification of any of the foregoing information and relied on the completeness and accuracy as represented by the Company. In addition, Benchmark have relied upon and assumed, without independent verification, that the final form of the Exchange Agreement will not differ in any material respect from the latest draft of the Exchange Agreement provided to it as identified above. In addition, Benchmark did not make any independent evaluation or appraisal of the assets or liabilities of the Company or Xiaotai nor was Benchmark furnished with any such independent evaluations or appraisals. Benchmark’s opinion is necessarily based upon financial, economic, market and other conditions as they existed on, and should be evaluated as of, the date hereof. Although subsequent developments might affect its opinion, Benchmark does not have any obligation to update, revise or reaffirm its opinion.

 

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Benchmark has assumed that the Acquisition will be consummated on terms substantially similar to those set forth in the Purchase Agreement identified above.

 

Benchmark have not been requested to, and did not, (a) initiate or participate in any discussions or negotiations with, or solicit any indications of interest from, third parties with respect to the Acquisition, the securities, assets, businesses or operations of the Company or Xiaotai or any other party, or any alternatives to the Acquisition, (b) negotiate the terms of the Acquisition, or (c) advise the Committee, the Board or any other party with respect to alternatives to the Acquisition. Benchmark’s opinion is provided for the benefit of the special committee and board of directors of the Company (solely in their capacities as such) and is not for the benefit of, and may not be used for any other purpose and does not constitute a recommendation to the shareholders of the Company as to how to vote or act with respect to the Acquisition or otherwise.

 

In the ordinary course of its business, Benchmark may have actively traded the equity or debt securities of the Company and may continue to actively trade such equity or debt securities. In addition, certain individuals who are employees of, or are affiliated with, Benchmark may have in the past and may currently be stockholders of the Company.

 

The following is a brief summary of the material analyses performed by Benchmark in connection with its opinion. The analyses and factors described below must be considered as a whole; considering any portion of such analyses or factors, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Benchmark’s opinion. Some of the summaries of the financial analyses include information presented in tabular format. The tables are not intended to stand alone, and in order to more fully understand the financial analyses used by Benchmark, the tables must be read together with the full text of each summary. Considering the data set forth below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Benchmark’ financial analyses.

 

In connection with its determination as to the fairness from a financial point of view to IFMK’s  stockholders, Benchmark completed a series of financial analyses to derive a range of potential values for Xiaotai in order to:

 

1)Calculate the implied value of the equity interests being purchased in the Acquisition; and

 

2)Compare these implied values to the consideration to be paid by the Company in connection with the Acquisition.

 

In determining the implied Equity Value of Xiaotai, Benchmark utilized three widely utilized valuation methods, each of which is described briefly below and should be read and analyzed in its entirety and with no individual table being taken out of context, and included:

 

  Selected Public Company Analysis;
     
  Precedent Transaction Analysis; and
     
  Discounted Cash Flow Analysis.

 

Valuation Summary

 

Based on the latest projected financials and a pro-forma balance sheet provided to Benchmark by the Company, Benchmark estimate that the value of the Xiaotai equity interests being acquired in the Acquisition to be in the range of $57.5 million to $550.3 million. This estimate is based on the following, among other factors:

 

Accelerating revenue growth in 2019-2022, with revenue increasing from $43.4 million in 2018 to $93.6 million in 2019 and up to $479.3 million in 2022

 

High profitability, with net income increasing from $7.3 million in 2018 to $28.5 million in 2019 and up to $269.6 million in 2022

 

The results of the Selected Public Company Analysis, Precedent Transactions Analysis, and Discounted Cash Flow Analysis

 

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Following the Spin-off, the equity value attributable to IFMK current shareholders is expected to range from as low as $8.75 million (net cash) to as high as $18.7 million (30-day stock price high). This would translate into a post-acquisition stake of as low as 1.4% to as high as 24.6%, compared to the 6.0% stake that would result from the Acquisition.

 

Estimated Value of the Xiaotai equity interests

 

Valuation Methodology  Range 
         
Selected Public Company Analysis  $57,456,318   $159,215,095 
           
Precedent Transaction Analysis  $77,932,851   $347,189,880 
           
DCF Analysis  $491,077,515   $550,271,513 

 

IFMK Shareholders  Low   High 
Pre-Acquisition / Post-Spinoff Shares   16,737,684    16,737,684 
Stock Price (30-day)  $1.01   $1.12 
IFMK Pre-Acquisition / Post-Spinoff Value  $8,750,000   $18,746,206 
Xiaotai Equity Value (Max)  $550,271,513      
Xiaotai Equity Value (Min)       $57,436,318 
IFMK Shareholders Post-Acquisition Stake (%)   1.6%   24.6%

 

Selected Public Company Analysis

 

Benchmark analyzed the valuation of 9 publicly-traded companies with primary operations in pear-to-pear and online lending in China. The selected companies included the following, none of which is identical to Xiaotai:

 

Chong Sing Holdings FinTech Group Ltd.

 

Differ Group Holding Co. Ltd.

 

Hexindai Inc.

 

Jianpu Technology Inc.

 

Lexinfintech Holdings Ltd.

 

PPDAI Group, Inc.

 

Sun Hung Kai & Co. Ltd.

 

X Financial

 

Yirendai Ltd.

  

Based on the selected companies’ average EV/Revenue, EV/EBITDA and P/E, Xiaotai’s equity interests are estimated to range in value from $57.4 million to $159.2 million, implying a post-acquisition stake for IFMK shareholders of 5.2% to 24.6%.

 

Selected Public Company Analysis  $159,215,095   $57,456,318 
IFMK Pre-Acquisition / Post-Spinoff Value  $8,750,000   $18,746,206 
IFMK Shareholders Post-Acquisition Stake (%)   5.2%   24.6%

 

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Precedent Transaction Analysis

 

Benchmark analyzed the valuation of 6 M&A transactions completed over the last 5 years involving target companies with primary operations in peer to peer or online lending in Asia where sufficient financial information on the target was available. The precedent transactions involved the following companies, none of which is identical to Xiaotai:

 

  Finsure Finance & Insurance Pty Ltd.

 

  The Hokuetsu Bank, Ltd.

 

  The 77 Card Co., Ltd.

 

  Meritz Capital Co., Ltd.

 

  Shanghai Huarui Financial & Leasing Co., Ltd.

 

  UCS Co., Ltd.

 

Based on the precedent transactions’ average EV/Revenue, EV/EBITDA and P/E, Xiaotai’s equity interests are estimated to range in value from $77.9 million to $347.2 million, implying a post-acquisition stake for IFMK shareholders of 2.5% to 19.4%.

 

Precedent Transaction Analysis  $347,189,880   $77,932,851 
IFMK Pre-Acquisition / Post-Spinoff Value  $8,750,000   $18,746,206 
IFMK Shareholders Post-Acquisition Stake (%)   2.5%   19.4%

 

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Discounted Cash Flow Analysis

 

Benchmark estimated a range of values for Xiaotai using a discounted cash flow analysis of their estimated free cash flows for the years 2019 to 2022, as provided by the Company. The key assumptions utilized in their analysis include the following:

 

  Discount rates (WACC or Weighted-Average Cost of Capital) ranging from 15.1% to 19.1%
     
  Terminal value of $457 million

  

The DCF analysis estimated a range of enterprise values from $491.1 million to $550.3 million, which implies a post-acquisition stake for IFMK shareholders of 1.6% to 3.7%.

 

 

DCF Analysis  $550,271,513   $491,077,515 
IFMK Pre-Acquisition / Post-Spinoff Value  $8,750,000   $18,746,206 
IFMK Shareholders Post-Acquisition Stake (%)   1.6%   3.7%

  

Interests of IFMK’s Directors and Officers in the Acquisition

 

As of the Record Date, the directors and executive officers of IFMK as a group owned and were entitled to vote [______] shares of the common stock of the Company, representing [_____]% of the outstanding shares of IFMK common stock on that date. IFMK expects that its directors and executive officers will vote their shares in favor of the Reverse Split Proposal, the Capital Increase Proposal, the Election of Directors Proposal, the Name Change Proposal, the Spin-off Proposal and the Acquisition Proposal. On June 7, 2019, we and NYM Holding, Inc., entered into a Purchase Agreement with Go Fresh 365 Inc., solely owned by Mr. Long Deng, IFMK’s Chief Executive Officer. The Purchase Agreement provides for the sale of 100% of the equity interest in NYM to GO Fresh 365 Inc. for cash consideration of $9.1 million. The transactions contemplated by the Purchase Agreement are a condition to the closing of the Acquisition and would take place contemporaneously with the closing of the Acquisition.

 

Besides the equity ownership of IFMK detailed above, the directors and executive officers of the Company do not have interests different than the other stockholders of IFMK.

 

Closing and Effective Time of the Acquisition

 

We are working to complete the Reverse Split, the Capital Increase, the Name Change and the Restructure as quickly as possible, and we expect to complete all these transactions in the fourth quarter of 2019. However, IFMK cannot assure you when or if the Acquisition will occur. The Acquisition is subject to stockholder approvals and other conditions, and it is possible that factors outside the control of both IFMK and Xiaotai could result in the Acquisition being completed at a later time, or not at all. There may be a substantial amount of time between the Special Meeting and the completion of the Acquisition.

 

Appraisal Rights

 

IFMK stockholders do not have appraisal rights in connection with the Acquisition under the DGCL.

 

Accounting Treatment

 

Both IFMK and Xiaotai prepare their financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). IFMK will acquire 100% of the outstanding shares of Xiaotai through issuance of 152,586,795 of its common shares. This transaction will be accounted for as a “reverse acquisition” since, immediately following completion of the transaction, the shareholders of Xiaotai immediately prior to the transaction will have effective control of the Company, through its approximately 88% ownership interest in the post-merger entity. For accounting purpose, Xiaotai will be deemed to be the accounting acquirer and IFMK will be deemed to be the accounting acquiree in the transaction.

 

Regulatory Approvals Required for the Acquisition

 

The Acquisition and the transactions contemplated by the Exchange Agreement are not subject to any additional federal or state regulatory requirement or approval, except for the approval of NASDAQ for listing of additional shares and the filings with the State of Delaware necessary to effectuate the transactions contemplated by the Exchange Agreement.

 

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Required Vote

 

Adoption of the Acquisition Proposal requires the affirmative vote of a majority of the voting shares of our common stock represented in person or by proxy at the meeting and entitled to vote thereon. Adoption of both the Acquisition and Spin-off proposals are conditioned upon the adoption of the Reverse Split, Name Change, and Capital Increase proposals as well as election of all the directors in the Election of Directors proposal.

 

THE SPIN-OFF

 

Overview

 

On June 7, 2019, we and NYM Holding, Inc., entered into a Purchase Agreement with Go Fresh 365 Inc., solely owned by Mr. Long Deng, IFMK’s Chief Executive Officer. The Purchase Agreement provides for the sale of 100% of the equity interest in NYM to GO Fresh for cash consideration of $9.1 million. The transactions contemplated by the Purchase Agreement are a condition to the closing of the Acquisition and would take place contemporaneously with the closing of the Acquisition.

 

The Purchase Agreement is attached to this proxy statement as Annex B. You are encouraged to read this proxy statement in its entirety, including the section entitled “Unaudited Pro Forma Condensed Combined Financial Data” and all the annexes hereto.

 

Background of the Spin-off

 

The transactions contemplated by the Purchase Agreement are the result of negotiations between the representatives of IFMK and Go Fresh. The parties negotiated the terms of the Purchase Agreement at the same time as the negotiations taking place with respect to the Acquisition. See “The Acquisition Proposal - Background of the Acquisition.

 

During the fiscal year ended March 31, 2018, we have experienced decrease of net profit. Although our net sales was $136.7 million for the year ended March 31, 2018, an increase of $5.8 million, or 4.4%, from $ 130.1 million for the year ended March 31, 2017, we had a net loss of $0.8 million for the year ended March 31, 2018, a decrease of $2.0 million, or 166%, from $1.2 million of net income for the year ended March 31, 2017, mainly attributable to the increase of selling, general and administrative expenses as well as damage made by Hurricane Irma. In addition, IFMK had negative working capital of $19.8 million and $18.4 million as of December 31, 2018 and March 31, 2018, respectively.

 

IFMK did not meet the financial covenants required in the credit agreement with KeyBank National Association (“KeyBank”) as of December 31, 2018 and March 31, 2018. As of December 31, 2018, the Company has outstanding loan facilities of approximately $21.7 million due to KeyBank. Failure to maintain these loan facilities will have a significant impact on the Company’s operations. Although the Company has been timely repaying the KeyBank facility in accordance with its terms, the Company was in default under the Credit Agreement as of December 31, 2018 and March 31, 2018. Specifically, events of default have occurred and are continuing under the Credit Agreement by reason of IFMK’s failure to maintain (a) a senior funded debt to earnings before interest, tax, depreciation and amortization (“EBITDA”) of not greater than 3.00 to 1.00 for the quarters ending March 31, 2018, June 30, 2018, September 30, 2018, December 31, 2018, and March 31, 2019, and (b) a Fixed Charge Coverage Ratio of not less than 1.10 to 1.00 for the quarters ending September 30, 2018, December 31, 2018, and March 31, 2019. These conditions continue to raise substantial doubt as to the Company’s ability to remain a going concern.

 

After Xiaotai entered into the non-binding letter of intent with Xiaotai, IFMK and Xiaotai had further discussion about the direction of post-merger company. Both IFMK management and Xiaotai representative believed it will be difficult for the Company to manage two unrelated business.

 

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On January 16, 2019, the board of directors of IFMK held a special meeting to discuss the proposed Acquisition and Spin-off. At the meeting, Mr. Deng indicated that there may be strategic buyers who might be interested in acquiring all or part of the supermarket assets from IFMK. In the event no such buyer or the proposed purchase is not satisfactory to the board, he and his affiliates will purchase the supermarket business since he believes the supermarket business is better off to be operated as a private company.

 

On February 8, 2019, Mr. Long Deng sold an aggregate of 8,294,989 shares of Common Stock to HK Xu Ding Co. Limited, a Hong Kong limited liability company for an aggregate sales price of $7,050,740.65 (or $0.85 per share), pursuant to that certain Share Purchase Agreements dated January 23, 2019. Mr. Deng intended to use the proceeds from this sale to fund the purchase of the supermarket assets, if there is no third-party independent buyer for such assets.

 

On or around February 15, 2019, Mr. Deng and IFMK entered into a non-binding letter of intent regarding the proposed Spin-Off.

 

On February 25, 2019, the Special Committee of IFMK retained The Benchmark Company, LLC ("Benchmark") as its financial advisor to render a written opinion as to whether the consideration to be recieved by IFMK in connection with the Spin-off is fair to IFMK’s shareholders from a financial point of view.

 

On or around April 2019, an independent third party strategic buyer approached IFMK management orally indicating its interest in purchasing some of the assets. This buyer later changed their strategic plan and gave us this proposal.

 

In the beginning of June 2019, IFMK received an indication of interest from another independent strategic buyer who indicated they are interested in purchasing the NYM assets (including inventory) of eight stores without assumption of the KeyBank debt provided they can obtain financing for this proposed transaction. Since this is merely an interest without any indication of the prospects for financing and without any proposal regarding the Key Bank loan issue, the special committee decided it is in the best interest of the IFMK shareholders to proceed with the proposed Spin-Off with Go Fresh.

 

In anticipation of the proposed simultaneous Acquisition and Spin-Off, IFMK management approached KeyBank for their consent to the Spin-Off. On May 20, 2019, IFMK, NYM, Mr. Long Deng and KeyBank entered into a forbearance agreement (the “Forbearance Agreement”), pursuant to which KeyBank has agreed to delay the exercise of its rights and remedies under the Loan Agreement based on the existence of certain events of default until the earlier to occur of: (a) August 18th, 2019 and (b) a forbearance event of default. Pursuant to the Forbearance Agreement, KeyBank agreed to provide its limited consent to the Company creating or acquiring Xiaotai International Investment Inc. as a direct subsidiary and to provide its limited consent to the proposed Spin-Off and remove the Company as a party to the guaranty to the KeyBank loan provided that certain conditions have been satisfied prior to the consummation of such transaction.

 

On June 3, 2019, the Special Committee convened to further discuss the proposed Acquisition as well as the Spin-off. At this meeting, Benchmark was invited to deliver a presentation of their analysis and conclusions. In the board presentation, Benchmark discussed their analysis and methodologies used to determine whether the considerations to be paid and received by the Company in connection with the transactions are fair to the Company’s shareholders from a financial point of view. The Special Committee raised relevant questions to Benchmark about their analysis.

  

On June 6, 2019, Benchmark delivered the draft fairness opinion in connection with the proposed Spin-Off and the board presentation and the final opinion on the next morning.

 

On June 7, 2019, the special committee, following intensive prior discussions and deliberation, recommended the board to approve the Purchase Agreement. The board then approved the execution of the Exchange Agreement, the Purchase Agreement, as well as the Acquisition, Name Change, Reverse Split, Capital Increase and the Adjournment proposals to be submitted to the shareholders for voting.

 

On June 7, 2019, following the executed written consents of the special committee and full board of IFMK, the Purchase Agreement was executed.

 

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Opinion of Benchmark to the Board of Directors of IFMK

 

IFMK engaged Benchmark to render an opinion, as to the fairness, from a financial point of view, to IFMK’s shareholders of the consideration to be received by the Company in connection with the Spin-off. Benchmark is an investment bank that works regularly in the evaluation of businesses and their securities in connection with acquisitions, corporate restructuring, and financings. The board decided to use its services as Benchmark represented to the Company that it has requisite experience in similar matters. Benchmark rendered its oral opinion to the Special Committee on June 3, 2019 (which was subsequently confirmed in writing by delivery of Benchmark’s written opinion) that the  consideration to be received in the Spin-off was fair, from a financial point of view, to IFMK stockholders.

 

Benchmark’s opinion was provided to the Special Committee and the Board in connection with their consideration of the Spin-off and only addressed the fairness, from a financial point of view, of the consideration to be received by the Company in connection with the Spin-off to IFMK’s stockholders pursuant to the Purchase Agreement, in each case as of the date of the opinion, and did not address any other aspect or implication of the Spin-off.

 

The summary of Benchmark’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the written opinion, which is included as Annex D to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Benchmark in preparing its opinion. However, neither Benchmark’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to any stockholder as to how such stockholder should act or vote with respect to any matter relating to the proposed Spin-off  .

 

In arriving at its opinion, Benchmark reviewed and considered certain related documents, and a variety of business and financial information as it deemed relevant. Among other things, Benchmark reviewed and considered:

 

  1. the latest draft of the Purchase Agreement provided to it on June 6, 2019;

 

  2. certain information relating to the historical, current and future operations, financial condition and prospects of NYM, made available to us by the Company, including financial statements that included actual income statement for the fiscal year ending 3/31/2019 and a balance sheet as of 3/31/2019, and a financial model with projected income statements for the fiscal years 2020-2022 (ending March 31st of each respective year);;

 

  3. discussions with certain members of the management of the Company and certain of the Company’s advisors and representatives regarding the business, operations, financial condition and prospects of the Company, the Spin-off and related matters;

 

  4. a certificate addressed to it from senior management of the Company which contains, among other things, representations regarding the accuracy of the information, data and other materials (financial or otherwise) provided to, or discussed with, Benchmark by or on behalf of the Company

 

  5. the current and historical market prices for certain of the Company’s publicly traded securities, and the current and historical market prices, trading characteristics and financial performance of the publicly traded securities of certain other companies that we deemed to be relevant;

 

  6. the publicly available financial terms of certain transactions that it deemed to be relevant; and;

 

  7. such other information, economic and market criteria and data, financial studies, analyses and investigations and such other factors as Benchmark deemed relevant;

 

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In arriving at its opinion, Benchmark relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to it, discussed with or reviewed by it, or publicly available, and do not assume any responsibility with respect to such data, material and other information. In addition, management of the Company has advised Benchmark, and Benchmark have assumed, that the financial projections reviewed by Benchmark have been reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such management as to the future financial results and condition of the Company or NYM and Benchmark express no opinion with respect to such projections or the assumptions on which they are based. Benchmark have relied upon and assumed, without independent verification, that there has been no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of the Company or NYM since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to it that would be material to its analyses or its opinion, and that there is no information or any facts that would make any of the information reviewed by it incomplete or misleading. Benchmark has further relied upon the assurance of the management of the Company that they are unaware of any facts that would make the information provided to Benchmark incomplete or misleading in any material respect. In connection with its review and arriving at its opinion, Benchmark did not assume any responsibility for the independent verification of any of the foregoing information and relied on the completeness and accuracy as represented by the Company. In addition, Benchmark have relied upon and assumed, without independent verification, that the final form of the Purchase Agreement will not differ in any material respect from the latest draft of the Purchase Agreement provided to it as identified above. In addition, Benchmark did not make any independent evaluation or appraisal of the assets or liabilities of the Company or NYM nor was Benchmark furnished with any such independent evaluations or appraisals. Benchmark’s opinion is necessarily based upon financial, economic, market and other conditions as they existed on, and should be evaluated as of, the date hereof. Although subsequent developments might affect its opinion, Benchmark does not have any obligation to update, revise or reaffirm its opinion.

 

Benchmark has assumed that the Spin-off will be consummated on terms substantially similar to those set forth in the Purchase Agreement identified above.

 

Benchmark have not been requested to, and did not, (a) initiate or participate in any discussions or negotiations with, or solicit any indications of interest from, third parties with respect to the Spin-off, the securities, assets, businesses or operations of the Company or NYM or any other party, or any alternatives to the Acquisition, (b) negotiate the terms of the Spin-off, or (c) advise the special committee, the board of directors or any other party with respect to alternatives to the Spin-off. Benchmark’s opinion is provided for the benefit of the special committee and board of directors of the Company (solely in their capacities as such) and is not for the benefit of, and may not be used for any other purpose and does not constitute a recommendation to the shareholders of the Company as to how to vote or act with respect to the Spin-off or otherwise.

 

In the ordinary course of its business, Benchmark may have actively traded the equity or debt securities of the Company and may continue to actively trade such equity or debt securities. In addition, certain individuals who are employees of, or are affiliated with, Benchmark may have in the past and may currently be stockholders of the Company.

 

The following is a brief summary of the material analyses performed by Benchmark in connection with its opinion. The analyses and factors described below must be considered as a whole; considering any portion of such analyses or factors, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Benchmark’s opinion. Some of the summaries of the financial analyses include information presented in tabular format. The tables are not intended to stand alone, and in order to more fully understand the financial analyses used by Benchmark, the tables must be read together with the full text of each summary. Considering the data set forth below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Benchmark’s financial analyses.

  

In connection with its determination as to the fairness from a financial point of view to IFMK’s  stockholders, Benchmark completed a series of financial analyses to derive a range of potential values for NYM in order to:

 

1)Calculate the implied value of the equity interests being sold in the Spin-off; and

 

2)Compare these implied values to the consideration to be received by the Company in connection with the Spin-off.

 

In determining the implied Equity Value of NYM, Benchmark utilized three widely utilized valuation methods, each of which is described briefly below and should be read and analyzed in its entirety and with no individual table being taken out of context, and included:

 

  Selected Public Company Analysis;
     
  Precedent Transaction Analysis; and
     
  Discounted Cash Flow Analysis.

 

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Valuation Summary

 

Based on the latest projected financials and a pro-forma balance sheet provided to us by the Company, we estimate that the value of the Purchased Shares being sold in the Spin-off to be in the range of ($3.9) million to $27.4 million. This estimate is based on the following, among other factors:

 

Declining revenue in FY2020 (the 12 months ending 3/31/2020), with net sales decreasing from $126.1 million in FY2019 to $120.9 million in FY2020

 

Negative net income and EBITDA in FY2020-2022

 

The results of the Selected Public Company Analysis, Precedent Transactions Analysis, and Discounted Cash Flow Analysis

 

Based on information provided to us by the Company, the net consideration to be received in the Transaction is expected to be $8.75 million.

 

Estimated Value of the NYM Purchased Shares being sold

 

Valuation Methodology  Range 
         
Selected Public Company Analysis  $7,981,264   $10,244,106 
           
Precedent Transaction Analysis   13,438,297   $27,389,564 
           
DCF Analysis  $(3,917,027)  $(1,792,506)

 

Proposed Sale Transaction    
Purchase Price  $9,100,000 
Transaction-related costs and expenses  $350,000 
Consideration  $8,750,000 

 

Selected Public Company Analysis

 

We analyzed the valuation of 4 publicly-traded companies with primary operations in specialty supermarkets. The selected companies included the following, none of which is identical to NYM:

 

  Ingles Markets

 

  Smart & Final Stores

 

  Village Super Market

 

  Weis Markets

 

The selected companies had an average EV/Revenue of 0.26x and a median of 0.25x. Applying these multiples to FY2019 and the projected FY2020 sales and adjusting for $22.1 million of net debt results in an equity value range of approximately $8.0 million to $10.2 million.

 

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Precedent Transaction Analysis

 

Benchmark analyzed the valuation of 5 M&A transactions completed over the last 5 years involving target companies with primary operations in the supermarket and food retail business where sufficient financial information on the target was available. The precedent transactions involved the following companies, none of which is identical to NYM:

 

  Dahl's Foods, Inc.

 

  QSI, Inc.

 

  SUPERVALU, Inc.
     
  Demoulas Super Markets, Inc.

 

  The Fresh Market, Inc.

 

The selected M&A transactions had an average EV/Revenue of 0.39x and a median of 0.29x. Applying these multiples to FY2019 and projected FY2020 net sales of NYM and adjusting for $22.1 million of debt results in an equity value range of approximately $13.4 million to $27.4) million.

 

Discounted Cash Flow Analysis

 

Benchmark estimated a range of values for NYM using a discounted cash flow analysis of their estimated free cash flows for the years ended 3/31/2020 through 3/31/2022, as provided by the Company. The key assumptions utilized in our analysis include the following:

 

  Discount rates (WACC or Weighted-Average Cost of Capital) ranging from 11.5% to 15.5%

 

  Terminal value of $32.6 million

 

The DCF analysis estimated a range of enterprise values from $18.2 million to $20.3 million, which implies a range of equity values from approximately ($3.9) million to ($1.8).

 

Discount Rate   Enterprise Value   Net Debt   Equity Value 
 11.5%  $20,283,354   $22,075,860   $(1,792,506)
 12.5%  $19,723,303   $22,075,860   $(2,352,557)
 13.5%  $19,183,102   $22,075,860   $(2,892,758)
 14.5%  $18,661,885   $22,075,860   $(3,413,975)
 15.5%  $18,158,833   $22,075,860   $(3,917,027)

 

IFMK’s Board of Directors Reasons for the Approval of Spin-off

 

Based on its evaluation, together with the opinion of Benchmark, the Board unanimously approved the Purchase Agreement and the transactions contemplated therein and determined that it is fair to IFMK and its shareholders. The Board of directors believes that the Spin-off is in the best interest of IFMK and its shareholders because consummation of the Spin-off is a condition to completion of the Acquisition, so that, following the Restructure, the business of Xiaotai will be solely the business of IFMK. See “The Acquisition Proposal - Background of the Acquisition.

 

Certain Interests of IFMK’s Directors, Officers and Others in the Spin-off

 

When considering the Board’s recommendation that the IFMK shareholders vote in favor of the approval of the Spin-off and the adoption of the Purchase Agreement, IFMK shareholders should be aware that directors and executive officers of IFMK have interests in the Spin-off that may be different from, or in addition to, the interests of IFMK shareholders. These interests include:

  

  Pursuant to the Purchase Agreement, Long Deng, the CEO, COO & Chairman of Board of IFMK, and sole shareholder of Go Fresh, will receive 100% of the equity interest of NYM; and

  

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  the continued indemnification of current directors and officers of IFMK.

 

The Purchase Agreement

 

The subsections that follow this subsection describe the material provisions of the Purchase Agreement, but do not purport to describe all of the terms of the Purchase Agreement. The following summary is qualified in its entirety by reference to the complete text of the Purchase Agreement, a copy of which is attached as Annex B hereto, which is incorporated herein by reference. Shareholders and other interested parties are urged to read the Purchase Agreement carefully and in its entirety (and, if appropriate, with the advice of financial and legal counsel) because it is the primary legal document that governs the Spin-off.

 

The Purchase Agreement contains representations, warranties and covenants that the respective parties made to each other as of the date of the Purchase Agreement or other specific dates. The assertions embodied in those representations, warranties and covenants were made for purposes of the contract among the respective parties and are subject to important qualifications and limitations agreed to by the parties in connection with negotiating the Purchase Agreement.

 

Post-Acquisition Ownership of NYM

 

It is anticipated that, following completion of the Spin-off, Go Fresh will receive 100% of the equity interest of NYM.

 

Closing of the Purchase Agreement

 

The closing of the Purchase Agreement is expected to take place no later than the first business day following the day on which the last of the conditions to the closing (described under the subsection entitled “— Conditions to Closing of the Purchase Agreement have been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing, but subject to the fulfillment or waiver of those conditions) or such other date as may be mutually agreed to by the parties.

 

Conditions to Closing of the Purchase Agreement

 

The obligation of the parties to complete the Purchase Agreement is subject to the fulfillment of certain closing conditions, including but not limited to:

 

all of the conditions to the obligations of the parties to the agreements to consummate the Spin-off shall have been satisfied or waived in writing (where permissible) by the parties thereto;

 

KeyBank shall have provided unconditional written consent simultaneously with consummation of the transactions contemplated by the Purchase Agreement.

 

all consents required to be obtained from or made with any governmental authority in order to consummate the transactions contemplated by the Purchase Agreement shall have been obtained or made; and

 

there is no applicable law or order in effect which makes illegal or prevents or prohibits the transactions contemplated by the Purchase Agreement, and there is no pending third party legal proceeding to enjoin or otherwise restrict the closing;

 

all of the conditions to the obligations of each party to consummate the Acquisition described in the Exchange Agreement shall have been satisfied; 

 

In addition, unless waived by IFMK and Go Fresh, the obligations of IFMK and Go Fresh to consummate the Purchase Agreement are subject to the fulfillment of certain closing conditions, including:

 

receipt of share certificates and transfer documents for Go Fresh shares from IFMK;

 

the prior written consent of KeyBank National Association permitting the sale by the Company of the Company’s equity interests;

 

IFMK’s special committee shall have received a fairness opinion from Benchmark.

 

In addition, unless waived by Go Fresh, its obligation to consummate the Purchase Agreement is subject to the receipt of share certificates and transfer documents for OIM shares from IFMK.

 

We cannot provide assurance as to when or if all of the closing conditions will be satisfied or waived by the appropriate party. As of the date of this proxy statement, we have no reason to believe that any of these conditions will not be satisfied. 

 

 Amendment or Waiver of the Purchase Agreement

 

The Purchase Agreement may be amended or supplemented by written agreement of the parties of the Purchase Agreement. If permitted under applicable law, IFMK and Go Fresh may (i) extend the time for the performance of any obligation or other act of any other non-affiliated party, (ii) waive any inaccuracy in the representations and warranties by such other non-affiliated party in the Purchase Agreement or in any document delivered pursuant thereto and (iii) waive compliance by such other non-affiliated party with any covenant or condition contained in the Purchase Agreement.

 

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Termination

 

The Purchase Agreement may be terminated prior to the closing upon occurrence of certain conditions, including:

 

the mutual agreement of Go Fresh and us;

 

by written notice by either Go Fresh or the us if a Governmental Authority of competent jurisdiction shall have issued an Order or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Purchase Agreement, and such Order or other action has become final and non-appealable; provided, however, that the right to terminate the Purchase Agreement pursuant to this Section 7.1(b) shall not be available to a party if the failure by such party or its affiliates to comply with any provision of the Purchase Agreement has been a substantial cause of, or substantially resulted in, such action by such Governmental Authority.

 

If the Purchase Agreement is terminated, all further obligations of the parties under the Purchase Agreement will terminate and will be of no further force and effect and no party will have any further liability thereunder to any other party, except that certain obligations related to public announcements, confidentiality, termination and termination fees and general provisions will continue in effect, and no party shall be relieved of liability for any fraud claims or willful breach of the Purchase Agreement prior to such termination.

 

Fees and Expenses

 

Each party will bear its own expenses in connection with the Purchase Agreement and the transactions contemplated thereby.

 

Representations and Warranties

 

The Purchase Agreement contains a number of representations and warranties made by us, on the one hand, and Go Fresh on the other hand, made solely for the benefit of the other, which in certain cases are subject to specified exceptions and qualifications contained in the Purchase Agreement or in information provided pursuant to certain disclosure schedules to the Purchase Agreement. The representations and warranties are customary for transactions similar to the Purchase Agreement.

 

In the Purchase Agreement, Go Fresh made certain customary representations and warranties to us. These representations and warranties, among others, related to the following: (1) corporate matters, including due organization, existence and good standing; (2) authority and binding effect relative to execution and delivery of the Purchase Agreement and other ancillary agreements; (3) capitalization; (3) governmental approvals; and (4) non-contravention.

 

 

In the Purchase Agreement, we made certain customary representations and warranties to Go Fresh. These representations and warranties, among others, related to the following: (1) corporate matters, including due organization, existence and good standing; (2) authority and binding effect relative to execution and delivery of the Purchase Agreement and other ancillary agreements; (3) governmental approvals; (4) non-contravention; and (5) ownership of certain securities.

 

Release and Covenant Not to Sue

 

The Company and Go Fresh will release and discharge us from and against any and all actions, obligations, agreements, debts and liabilities which they now have, has ever had or may hereafter have against us arising on or prior to the closing of the Purchase Agreement or on account of or arising out of any matter occurring on or prior to such closing, including any rights to indemnification or reimbursement. The releases and restrictions shall not apply to any claims Company and Go Fresh may have against any party pursuant to the terms and conditions of the Purchase Agreement.

 

Survival and Indemnification

 

All representations and warranties of Company and Go Fresh shall survive the closing of the Purchase Agreement through and until the second anniversary of the closing date; provided, however, that the representations and warranties relating to due organization and good standing, authorization, binding agreement and ownership shall survive indefinitely. Additionally, fraud claims against Company and Go Fresh shall survive indefinitely. All covenants, obligations and agreements of Company and Go Fresh contained in the Purchase Agreement, including indemnification obligations, shall survive the closing and continue until fully performed in accordance with their terms.

 

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Company and Go Fresh have agreed to indemnify and hold harmless IFMK and its affiliates from (i) the breach of any representation or warranty made by Company and Go Fresh set forth in the Purchase Agreement or in any certificate delivered by Company and Go Fresh pursuant to the Purchase Agreement; (ii) the breach of any covenant or agreement on the part of Company and Go Fresh set forth in the Purchase Agreement or in any certificate delivered by Company and Go Fresh pursuant to the Purchase Agreement; (iii) any action by person(s) who were holders of equity securities of IFMK, including options, warrants, convertible debt or other convertible securities or other rights to acquire equity securities of IFMK, prior to the closing arising out of the sale, purchase, termination, cancellation, expiration, redemption or conversion of any such securities; or (iv) any fraud claims.

 

Governing Law and Dispute Resolution

 

The Purchase Agreement is governed by New York law. Any disputes under the Purchase Agreement, other than claims for injunctive or equitable relief (including specific performance to strictly enforce the terms of the Purchase Agreement) will be subject to arbitration by the American Arbitration Association to be held in Manhattan, New York. Any claims that are brought before a court will be subject to exclusive jurisdiction of the state and federal courts in New York, New York (and appeals courts), and each party waived its rights to a jury trial in connection therewith. The parties are entitled to an injunction, specific performance and other equitable relief to prevent breaches of the Purchase Agreement in addition to any other remedy to which they are entitled at law or in equity.

 

Required Vote

 

Adoption of the Spin-off Proposal requires the affirmative vote of a majority of the voting shares of our common stock represented in person or by proxy at the meeting and entitled to vote thereon. Adoption of the Spin-off Proposal is conditioned upon the adoption of the Reverse Split, Name Change, Acquisition and Capital Increase Proposals as well as election of all the directors in the Election of Directors proposal.

 

Recommendation

 

THE IFMK BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT IFMK SHAREHOLDERS VOTE “FOR” THE APPROVAL OF THE SPIN-OFF PROPOSAL.

  

THE REVERSE SPLIT

 

The Board has adopted resolutions (i) declaring that filing an amendment to the Company’s Certificate of Incorporation to affect the Reverse Split of our issued and outstanding common stock was advisable, and (ii) directing that a proposal to approve the Reverse Split be submitted to the holders of our common stock for their approval. The Reverse Split of our issued and outstanding common stock will be effected by a reverse split at a ratio of not less than one-for-two and not more than one-for-ten and then a forward stock split of our then issued and outstanding common stock by a ratio of not less than one-for-two and not more than one-for-ten immediately following the reverse split at any time prior to [____], 2019, with the exact ratios to be set at a whole number within this range as determined by the Board in its sole discretion. Immediately upon completion of the Reverse Split, our common stock will have a bid price of at least $4.00.

 

The Board is submitting the Reverse Split to our stockholders for approval with the intent of increasing the market price of our common stock to enhance our ability to meet the continued listing requirements of the Nasdaq Capital Market, to make our common stock sufficiently attractive for Xiaotai to consummate the Acquisition transaction and to ensure that Xiaotai will be able to meet the initial listing requirements of either Nasdaq Capital Market after consummation of the Restructure.

 

Procedure for Implementing the Reverse Stock Split

 

The Reverse Split, if approved by our stockholders, would become effective upon the filing (the “RS Effective Time”) of a certificate of amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware. The exact timing of the filing of the certificate of amendment that will affect the Reverse Split will be determined by the Board based on its evaluation as to when such action will be the most advantageous to the Company and our stockholders. In addition, the Board reserves the right, notwithstanding stockholder approval and without further action by the stockholders, to elect not to proceed with the Reverse Split if, at any time prior to filing the amendment to the Company’s Certificate of Incorporation, the Board, in its sole discretion, determines that it is no longer in our best interest and the best interests of our stockholders to proceed with the Reverse Split. If a certificate of amendment effecting the Reverse Split has not been filed with the Secretary of State of the State of Delaware by the close of business on [ ____], 2019, the Board will abandon the Reverse Split.

 

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Effect of the Reverse Split on holders of IFMK common stock

 

Depending on the ratio for the Reverse Split determined by the Board, a minimum of two and a maximum of ten shares of existing common stock will be combined into one new share of common stock. The actual number of shares issued after giving effect to the Reverse Split, if implemented, will depend on the reverse stock split ratio that is ultimately determined by the Board.

 

The Reverse Split will affect all holders of our common stock uniformly and will not affect any stockholder’s percentage ownership interest in the Company, except that as described below in “Fractional Shares,” record holders of common stock otherwise entitled to a fractional share as a result of the Reverse Split will be rounded up to the next whole number. In addition, the Reverse Split will not affect any stockholder’s proportionate voting power (subject to the treatment of fractional shares).

 

The Reverse Split may result in some stockholders owning “odd lots” of less than 100 shares of common stock. Odd lot shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the costs of transactions in “round lots” of even multiples of 100 shares

 

Beneficial Holders of Common Stock (i.e. stockholders who hold in street name)

 

Upon the implementation of the Reverse Split, we intend to treat shares held by stockholders through a bank, broker, custodian or other nominee in the same manner as registered stockholders whose shares are registered in their names. Banks, brokers, custodians or other nominees will be instructed to affect the Reverse Split for their beneficial holders holding our common stock in street name. However, these banks, brokers, custodians or other nominees may have different procedures than registered stockholders for processing the Reverse Split. Stockholders who hold shares of our common stock with a bank, broker, custodian or other nominee and who have any questions in this regard are encouraged to contact their banks, brokers, custodians or other nominees.

 

Registered “Book-Entry” Holders of Common Stock (i.e. stockholders that are registered on the transfer agent’s books and records but do not hold stock certificates)

 

Certain of our registered holders of common stock may hold some or all of their shares electronically in book-entry form with the transfer agent. These stockholders do not have stock certificates evidencing their ownership of the common stock. They are, however, provided with a statement reflecting the number of shares registered in their accounts.

 

Stockholders who hold shares electronically in book-entry form with the transfer agent will not need to take action (the exchange will be automatic) to receive whole shares of post-Reverse Split common stock, subject to adjustment for treatment of fractional shares.

 

Holders of Certificated Shares of Common Stock

 

Stockholders holding shares of our common stock in certificated form will be sent a transmittal letter by our transfer agent after the RS Effective Time. The letter of transmittal will contain instructions on how a stockholder should surrender his, her or its certificate(s) representing shares of our common stock (the “Old Certificates”) to the transfer agent in exchange for certificates representing the appropriate number of whole shares of post-Reverse Split common stock (the “New Certificates”). No New Certificates will be issued to a stockholder until such stockholder has surrendered all Old Certificates, together with a properly completed and executed letter of transmittal, to the transfer agent. No stockholder will be required to pay a transfer or other fee to exchange his, her or its Old Certificates. Stockholders will then receive a New Certificate(s) representing the number of whole shares of common stock that they are entitled as a result of the Reverse Split, subject to the treatment of fractional shares described below. Until surrendered, we will deem outstanding Old Certificates held by stockholders to be cancelled and only to represent the number of whole shares of post-Reverse Split common stock to which these stockholders are entitled, subject to the treatment of fractional shares. Any Old Certificates submitted for exchange, whether because of a sale, transfer or other disposition of stock, will automatically be exchanged for New Certificates. If an Old Certificate has a restrictive legend on the back of the Old Certificate(s), the New Certificate will be issued with the same restrictive legends that are on the back of the Old Certificate(s).

 

STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY STOCK CERTIFICATE(S) UNTIL REQUESTED TO DO SO.

 

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Fractional Shares

 

We do not currently intend to issue fractional shares in connection with the Reverse Split. Therefore, we will not issue certificates representing fractional shares. In lieu of issuing fractions of shares, we will round up to the next whole number.

 

Accounting Matters

 

The proposed amendment to the Company’s Certificate of Incorporation will not affect the par value of our common stock per share, which will remain $0.0001 par value per share. As a result, as of the RS Effective Time, the stated capital attributable to common stock and the additional paid-in capital account on our balance sheet will not change due to the Reverse Split. Reported per share net income or loss will be higher because there will be fewer shares of common stock outstanding.

 

Federal Income Tax Consequences of the Reverse Split

 

The following summary describes material U.S. federal income tax consequences of the Reverse Split to holders of our common stock.

 

Unless otherwise specifically indicated herein, this summary addresses the tax consequences only to a beneficial owner of our common stock that is a citizen or individual resident of the United States, a corporation organized in or under the laws of the United States or any state thereof or the District of Columbia or otherwise subject to U.S. federal income taxation on a net income basis in respect of our common stock (a “U.S. holder”). A trust may also be a U.S. holder if (1) a U.S. court is able to exercise primary supervision over administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person. An estate whose income is subject to U.S. federal income taxation regardless of its source may also be a U.S. holder. This summary does not address all of the tax consequences that may be relevant to any particular investor, including tax considerations that arise from rules of general application to all taxpayers or to certain classes of taxpayers or that are generally assumed to be known by investors. This summary also does not address the tax consequences to (i) persons that may be subject to special treatment under U.S. federal income tax law, such as banks, insurance companies, thrift institutions, regulated investment companies, real estate investment trusts, tax-exempt organizations, U.S. expatriates, persons subject to the alternative minimum tax, traders in securities that elect to mark to market and dealers in securities or currencies, (ii) persons that hold our common stock as part of a position in a “straddle” or as part of a “hedging,” “conversion” or other integrated investment transaction for federal income tax purposes, or (iii) persons that do not hold our common stock as “capital assets” (generally, property held for investment).

 

If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Partnerships that hold our common stock, and partners in such partnerships, should consult their own tax advisors regarding the U.S. federal income tax consequences of the Reverse Stock Split.

 

Although the matter is not clear, it is possible that United States holders whose fractional shares resulting from the reverse stock split are rounded up to the nearest whole share will recognize gain, which may be characterized as either a capital gain or as a dividend, to the extent of the value of such rounded-up amount (i.e., less than one share).

 

This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, U.S. Treasury regulations, administrative rulings and judicial authority, all as in effect as of the date of this proxy statement. Subsequent developments in U.S. federal income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have a material effect on the U.S. federal income tax consequences of the Reverse Split.

  

PLEASE CONSULT YOUR OWN TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE REVERSE SPLIT IN YOUR PARTICULAR CIRCUMSTANCES UNDER THE INTERNAL REVENUE CODE AND THE LAWS OF ANY OTHER TAXING JURISDICTION.

 

U.S. Holders

 

The Reverse Split should be treated as a recapitalization for U.S. federal income tax purposes. Therefore, a stockholder generally will not recognize gain or loss on the Reverse Split, except to the extent of cash, if any, received in lieu of a fractional share interest in the post-Reverse Split shares. The aggregate tax basis of the post-split shares received will be equal to the aggregate tax basis of the pre-split shares exchanged therefore (excluding any portion of the holder’s basis allocated to fractional shares), and the holding period of the post-split shares received will include the holding period of the pre-split shares exchanged. A holder of the pre-split shares who receives cash will generally recognize gain or loss equal to the difference between the portion of the tax basis of the pre-split shares allocated to the fractional share interest and the cash received. Such gain or loss will be a capital gain or loss and will be short term if the pre-split shares were held for one year or less and long term if held more than one year. No gain or loss will be recognized by us as a result of the Reverse Split.

 

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No Appraisal Rights

 

Under the DGCL and our charter documents, holders of our common stock will not be entitled to dissenter’s rights or appraisal rights with respect to the Reverse Split.

 

Required Vote

 

Approval of the Reverse Split Proposal requires an affirmative vote of a majority of the outstanding shares of our common stock. Adoption of the Reverse Split proposal is conditioned upon the adoption of the Acquisition, Spin-off, Capital Increase, and Name Change proposals as well as election of all the directors in the Election of Directors proposal.

  

THE CAPITAL INCREASE

 

The Capital Increase

 

Prior to the execution of the Effective Time, the Company will effectuate the Capital Increase.

 

Our Board has adopted a resolution approving, and recommends to the stockholders for their approval, a proposed amendment (the “Charter Amendment”) to the Company’s Certificate of Incorporation to authorize the Board, in its discretion, to increase our total authorized shares of capital stock from 1,100,000,000 shares to 1,010,000,000 shares, our authorized shares of Common Stock from 100,000,000 shares to 1,000,000,000 shares and our authorized shares of Preferred Stock from 1,000,000 shares to 10,000,000 shares (the “Capital Increase”).

 

Purpose and Effects of the Capital Increase

 

Of the 100,000,000 shares of Common Stock currently authorized, as of [   ], 2019, [   ] shares have been issued.

 

The Board considers the Capital Increase necessary in order to provide flexibility for potential acquisitions, capital raising and future capital requirements and for use in employee benefit plans, if any. The Company intends to seek to continue to expand its operations which will require additional capital. Such expansion may be accomplished through acquisitions for which the Company may choose to issue equity securities as all or a portion of the purchase price of the acquisition. In addition, the Company may seek to raise additional capital in the future through the issuance of equity securities, such as common stock or securities convertible into common stock.

 

Once authorized, the additional shares of Common Stock and/Preferred Stock may be issued with approval of the Board but without further approval of the stockholders unless stockholder approval is required by applicable law, rule or regulation. Accordingly, this solicitation may be the only opportunity for stockholders to approve these financings, acquisitions, benefit plans and other corporate transactions. A copy of the Charter Amendment is attached as Annex E.

 

Effective Date

 

If the proposed Share Increase is approved, the Charter Amendment would become effective when the filing of the certificate of amendment to the Certificate of Incorporation is accepted and recorded by the office of the Secretary of state of the State of Delaware.

 

Required Vote

 

Although the Capital Increase Proposal in itself does not need stockholder vote, the Charter Amendment which includes the Reverse Split Proposal will require approval of majority of the outstanding shares of our common stock. Adoption of the Capital Increase Proposal is conditioned upon the adoption of the Reverse Split, Acquisition, Spin-off and Name Change Proposals as well as election of all the directors in the Election of Directors Proposal.

 

94

 

  

THE NAME CHANGE

 

The Name Change

 

Prior to the execution of the Effective Time, the Company will effectuate the Name Change.

 

The Board has adopted resolutions (i) declaring that submitting an amendment to the Company’s Certificate of Incorporation to change the Company’s corporate name to “Terran Financial Services Group”, and (ii) directing that a proposal to approve the Name Change be submitted to the holders of our common stock for their approval.

 

If the Restructure does not occur, an amendment to the Company’s Certificate of Incorporation to affect the Name Change will not be filed with the Delaware Secretary of State, and the Company’s name will not change.

 

If the amendment to the Company’s Certificate of Incorporation to effectuate the Name Change is approved by the stockholders, and if the Restructure is consummated, the First Article of the Company’s Certificate of Incorporation will be amended to read as follows:

 

“The name of the Corporation is “Terran Financial Services Group.”  (the “Corporation”).

 

The Name Change will become effective upon filing a Certificate of Amendment to the Company’s Certificate of Incorporation, which filing will be made immediately following the closing date of the Restructure.

 

Following implementation of the Name Change, stockholders should continue to hold their existing stock certificates representing Common Stock. Stockholders will not be required to tender their stock certificates in exchange for new certificates with the new name. Stockholders should not destroy any stock certificates and should not deliver any stock certificates to the Company’s transfer agent.

 

Required Vote

 

Although the Name Change Proposal in itself does not need stockholder vote, the Charter Amendment which includes the Reverse Split Proposal will require approval of majority of the outstanding shares of our common stock. Adoption of the Name Change proposal is conditioned upon the adoption of the Reverse Split, Restructure, and Capital Increase proposals as well as election of all the directors in the Election of Directors proposal.

  

THE ELECTION OF DIRECTORS

 

The nominees listed below have been nominated by the Nominating and Corporate Governance Committee and approved by our Board to stand for election as directors of the Company. Unless such authority is withheld, proxies will be voted for the election of the persons named below, each of whom has been designated as a nominee. If, for any reason, any nominee/director becomes unavailable for election, the proxies will be voted for such substitute nominee(s) as the Board may propose.

 

Board Qualifications and Director Nominees

 

We believe that the collective skills, experiences and qualifications of our directors provide our Board with the expertise and experience necessary to advance the interests of our stockholders. While the Nominating and Corporate Governance Committee of our Board does not have any specific, minimum qualifications that must be met by each of our directors, the Nominating and Corporate Governance Committee uses a variety of criteria to evaluate the qualifications and skills necessary for each member of the Board. In addition to the individual attributes of each of our current directors described below, we believe that our directors should have the highest professional and personal ethics and values, consistent with our longstanding values and standards. They should have broad experience at the policy-making level in business, exhibit commitment to enhancing stockholder value and have sufficient time to carry out their duties and to provide insight and practical wisdom based on their past experience.

 

Directors and Executive Officers   Age   Position/Title
Baofeng Pan   35   Chairman of the Board of Directors and Director
[●]   [●]   Director
[●](1)   [●]   Independent Director
[●](2)   [●]