(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered
or to be registered pursuant to Section 12(b) of the Act:
Securities registered
or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which
there is a reporting obligation pursuant to Section 15(d):
None
Indicate the number of outstanding shares
of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:
18,329,600
outstanding common shares
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. Yes
¨
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of
“large accelerated filer,” accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check
one):
If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a)
of the Exchange Act. ☒
† The term “new or revised financial accounting standard” refers to any update issued by
the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PAST FIVE YEARS)
Indicate by check mark whether the registrant
has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court.
PART
I
Item
1. Identity of Directors, Senior Management and Advisers
Not
applicable for annual reports on Form 20-F.
Item
2. Offer Statistics and Expected Timetable
Not
applicable for annual reports on Form 20-F.
Item
3. Key Information
|
A.
|
Selected
Financial Data.
|
In
the table below, we provide you with summary financial data of our company. The selected consolidated statement of income and
other comprehensive income data for the years ended December 31, 2014, 2015 and 2016 and the selected consolidated balance sheet
data as of December 31, 2015 and 2016 are derived from our audited consolidated financial statements, which are included elsewhere
in this annual report. The selected consolidated statement of income and comprehensive income data for the year ended December
31, 2013 and the selected consolidated balance sheet data as of December 31, 2013 and 2014 are derived from our audited consolidated
financial statements, which are not included in this annual report. Historical results are not necessarily indicative of the results
that may be expected for any future period. When you read this historical selected financial data, it is important that you read
it along with the historical statements and notes and “Operating and Financial Review and Prospects” included elsewhere
in this annual report.
Selected Consolidated
Statement of Income and Other
|
|
For The Years Ended December 31,
|
|
Comprehensive Income Data
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
(In U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
72,731,706
|
|
|
$
|
59,350,721
|
|
|
$
|
42,673,139
|
|
|
$
|
28,130,305
|
|
|
$
|
21,780,782
|
|
Cost of revenues
|
|
|
53,098,552
|
|
|
|
46,891,617
|
|
|
|
35,188,331
|
|
|
|
23,757,669
|
|
|
|
19,436,755
|
|
Gross profit
|
|
|
19,633,154
|
|
|
|
12,459,104
|
|
|
|
7,484,808
|
|
|
|
4,372,636
|
|
|
|
2,344,027
|
|
Total operating expenses
|
|
|
11,082,106
|
|
|
|
7,259,279
|
|
|
|
5,779,600
|
|
|
|
3,085,437
|
|
|
|
2,649,439
|
|
Income (loss) from operations
|
|
|
8,551,048
|
|
|
|
5,199,825
|
|
|
|
1,705,208
|
|
|
|
1,287,199
|
|
|
|
(305,412
|
)
|
Other income and (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grants
|
|
|
801,125
|
|
|
|
1,027,581
|
|
|
|
1,439,186
|
|
|
|
2,714,026
|
|
|
|
1,152,983
|
|
Other income
|
|
|
479,387
|
|
|
|
225,306
|
|
|
|
64,873
|
|
|
|
112,140
|
|
|
|
85,802
|
|
Other expense
|
|
|
(55,003
|
)
|
|
|
(124,473
|
)
|
|
|
(238,413
|
)
|
|
|
(101,034
|
)
|
|
|
(137,451
|
)
|
Interest expense
|
|
|
(50,383
|
)
|
|
|
(278,363
|
)
|
|
|
(552,894
|
)
|
|
|
(468,823
|
)
|
|
|
(517,400
|
)
|
Total other income
|
|
|
1,175,126
|
|
|
|
850,051
|
|
|
|
712,752
|
|
|
|
2,256,309
|
|
|
|
583,934
|
|
Income before provision for income taxes
|
|
|
9,726,174
|
|
|
|
6,049,876
|
|
|
|
2,417,960
|
|
|
|
3,543,508
|
|
|
|
278,522
|
|
Income tax provision
|
|
|
1,448,923
|
|
|
|
1,275,633
|
|
|
|
635,859
|
|
|
|
594,240
|
|
|
|
(35,066
|
)
|
Net income
|
|
|
8,277,251
|
|
|
|
4,774,243
|
|
|
|
1,782,101
|
|
|
|
2,949,268
|
|
|
|
313,588
|
|
Earnings per common share – basic and fully diluted
|
|
$
|
0.45/0.45
|
|
|
$
|
0.30/0.30
|
|
|
$
|
0.11/0.11
|
|
|
$
|
0.19/0.19
|
|
|
$
|
0.02/0.02
|
|
|
|
As of December 31,
|
|
Selected Balance Sheet Data
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
(In U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
15,947,268
|
|
|
$
|
13,623,849
|
|
|
$
|
5,097,010
|
|
|
$
|
5,714,563
|
|
|
$
|
2,218,473
|
|
Total current assets
|
|
|
31,955,356
|
|
|
|
25,385,177
|
|
|
|
16,149,427
|
|
|
|
13,448,808
|
|
|
|
8,090,493
|
|
Total non-current assets
|
|
|
5,768,273
|
|
|
|
5,624,155
|
|
|
|
3,715,981
|
|
|
|
3,795,375
|
|
|
|
3,425,107
|
|
Total assets
|
|
|
37,723,629
|
|
|
|
31,009,332
|
|
|
|
19,865,408
|
|
|
|
17,244,183
|
|
|
|
11,515,600
|
|
Total current liabilities
|
|
|
9,220,397
|
|
|
|
9,245,817
|
|
|
|
10,684,120
|
|
|
|
14,391,502
|
|
|
|
8,508,025
|
|
Total non-current liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
4,450
|
|
|
|
-
|
|
|
|
-
|
|
Total liabilities
|
|
|
9,220,397
|
|
|
|
9,245,817
|
|
|
|
10,688,570
|
|
|
|
14,391,502
|
|
|
|
8,508,025
|
|
Total shareholders’ equity
|
|
|
28,503,232
|
|
|
|
21,763,515
|
|
|
|
9,176,838
|
|
|
|
2,852,681
|
|
|
|
3,007,575
|
|
Total liabilities and shareholders’ equity
|
|
$
|
37,723,629
|
|
|
$
|
31,009,332
|
|
|
$
|
19,865,408
|
|
|
$
|
17,244,183
|
|
|
$
|
11,515,600
|
|
We
have presented earnings per share in CCRC after giving retroactive effect to the reorganization of our company that was completed
on September 3, 2014, upon Taiying’s execution of control agreements with its sole shareholder, Beijing Taiying Anrui
Holding Co., Ltd. (“Beijing Taiying”), and WFOE. This information is pro forma because the 15,929,600 CCRC common
shares did not exist prior to the formation of CCRC in 2014.
Exchange
Rate Information
Our business is conducted in China, and
the financial records of WFOE and Taiying are maintained in RMB, their functional currency. However, we use the U.S. dollar
as our reporting currency; therefore, periodic reports made to shareholders will include current period amounts translated
into U.S. dollars using the then-current exchange rates, for the convenience of the readers. Our financial statements have
been translated into U.S. dollars in accordance with Accounting Standards Codification (“ASC”) 830-10,
“Foreign Currency Matters.” We have translated our asset and liability accounts using the exchange rate in effect
at the balance sheet date. We translated our statements of operations using the average exchange rate for the period. We
reported the resulting translation adjustments under other comprehensive income. Unless otherwise noted, we have translated
balance sheet amounts with the exception of equity at December 31, 2016 at 6.9437 RMB to $1.00 as compared to RMB 6.4907
to $1.00 at December 31, 2015. The average translation rates applied to income statement accounts for the years ended
December 31, 2016, 2015 and 2014 were RMB 6.6430, RMB 6.2175 and RMB 6.1457, respectively.
We make no representation that any RMB
or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular
rate, or at all. The Chinese government imposes control over its foreign currency reserves in part through direct regulation of
the conversion of RMB into foreign exchange and through restrictions on foreign trade. The Company does not currently engage in
currency hedging transactions.
The
following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.
Forex
Exchange Rate
|
|
(RMB per U.S. Dollar)
|
|
|
|
|
|
|
Period End
|
|
|
Average
|
|
|
|
|
|
|
|
|
2012
|
|
|
6.3086
|
|
|
|
6.3116
|
|
2013
|
|
|
6.1104
|
|
|
|
6.1905
|
|
2014
|
|
|
6.1460
|
|
|
|
6.1457
|
|
2015
|
|
|
6.4907
|
|
|
|
6.2175
|
|
2016
|
|
|
6.9437
|
|
|
|
6.6430
|
|
November 2016
|
|
|
6.8863
|
|
|
|
6.8420
|
|
December 2016
|
|
|
6.9437
|
|
|
|
6.9307
|
|
January 2017
|
|
|
6.8808
|
|
|
|
6.8974
|
|
February 2017
|
|
|
6.8683
|
|
|
|
6.7703
|
|
March 2017
|
|
|
6.8905
|
|
|
|
6.8882
|
|
April 2017 (through April 27)
|
|
|
6.8947
|
|
|
|
6.8875
|
|
|
B.
|
Capitalization
and indebtedness.
|
Not
applicable for annual reports on Form 20-F.
|
C.
|
Reasons
for Offer and use of Proceeds.
|
Not
applicable for annual reports on Form 20-F.
Risks
Related to Our Business
We
are likely to depend on third-party software, systems and services and an interruption in the services could have a material adverse
effect on our business, financial condition and results of operations.
Our
business and operations rely on China Telecom and China Mobile and may rely on other third parties to provide services, such as
IT services, or shipping and transportation services. We may experience operational problems attributable to the installation,
implementation, integration, performance, features or functionality of third-party software, access to communication networks
and fiber optics, hosted environments, systems and services. Any interruption in the availability or usage of the services provided
by China Mobile or China Telecom or other third parties could have a material adverse effect on our business, financial condition
and results of operations.
Unexpected
network interruptions, security breaches or computer virus attacks could have a material adverse effect on our business, financial
condition and results of operations.
Our
business depends on the performance and reliability of the mobile telecommunications network of China Mobile or China Telecom,
as the case may be. We may not have access to alternative networks in the event of disruptions, failures or other problems with
China Mobile or China Telecom’s wireless infrastructure.
Any
failure to maintain the satisfactory performance, reliability, security and availability of our network infrastructure may cause
significant harm to our reputation and our ability to attract and maintain clients. Major risks involved in such network infrastructure
include, among others, any breakdowns or system failures resulting in a prolonged shutdown of all or a material portion of our
servers, including failures which may be attributable to sustained power outages, or effort to gain unauthorized access to our
systems causing loss or corruption of data or malfunctions of software or hardware.
Our
network systems are vulnerable to damage from fire, flood, power loss, telecommunications failures, computer viruses, hackings
and other similar events. Any network interruption or inadequacy that causes interruptions in the availability of our services
or deterioration in the quality of access to our services could reduce our user satisfaction and our competitiveness. In addition,
any security breach caused by hacking, which involves effort to gain unauthorized access to information or systems, or to cause
intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission
of computer viruses could have a material adverse effect on our business, financial condition and results of operations. We do
not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance. See
“Risk Factors - We have limited business insurance coverage. Any future business liability, disruptions or litigation we
experience might divert management focus from our business and could significantly impact our financial results.”
Our
business is dependent upon the reliability and accessibility of China’s telecommunications and Internet infrastructure and
if they become nonfunctional our operational results could suffer as a result.
We
render our services via telecommunications and Internet networks, and therefore our ability to fulfill our contracts and generate
revenue and profits is dependent on those systems remaining available and accessible with minimal disruption or interruption.
Just as we are dependent on the reliability of our software and systems and the telecommunications networks of our principal clients,
we are also dependent on the operational reliability and capacity of China’s overall telecommunications and Internet infrastructure.
Should this infrastructure or key portions of it be disabled or become nonfunctional, we may not be able to secure alternate means
of communication or alternate means of accessing needed information. Our operational results could suffer as a result.
Our
revenues are highly dependent on a limited number of industries and any decrease in demand for outsourced services in these industries
could reduce our revenues and adversely affect our results of operations.
For the years ended December 31,
2016, 2015and 2014, a majority of our net revenues were derived from clients in the telecommunications industry. The success of
our business largely depends on continued demand for our services from clients in the telecommunications industry, as well as on
trends in the telecommunications industry to outsource customer relation management services. A downturn in any of our targeted
industries, particularly the telecommunications, a slowdown or reversal of the trend to outsource customer relation management
services in any of these industries or the introduction of regulations that restrict or discourage companies from outsourcing could
result in a decrease in the demand for our services, which in turn could harm our business, results of operations and financial
condition. Any significant reduction in or the elimination of the use of the services we provide within any of these industries
would result in reduced revenues and harm our business. Our clients may experience rapid changes in their prospects, substantial
price competition and pressure on their profitability. This, in turn, may result in increasing pressure on us from clients in these
key industries to lower our prices, which could negatively affect our business, results of operations and financial condition.
We
depend on the provincial subsidiaries of China Mobile and China Telecom for a significant portion of our revenues, and this dependency
is likely to continue. Any deterioration of such relationships may result in severe disruptions to our business operations and
the loss of the majority of our revenues.
We have derived, and believe that in the foreseeable
future we will continue to derive, a significant portion of our revenues from a limited number of clients. In 2016, the provincial
subsidiaries of China Mobile and China Telecom accounted for 10% or more of our net revenues, and in the aggregate accounted for
48% of our net revenues. In 2015, the provincial subsidiaries of China Mobile and China Telecom accounted for 10% or more of our
net revenues, and in the aggregate accounted for 64% of our net revenues. In 2014, the provincial subsidiaries of China Mobile
and China Telecom accounted for 10% or more of our net revenues, and in the aggregate accounted for 74% of our net revenues. Our
top five clients accounted for approximately 71%, 78% and 84% of our net revenues in 2016, 2015 and 2014, respectively.
We
operate under non-exclusive revenue sharing arrangements with the provincial subsidiaries of China Mobile and China Telecom for
inbound and outbound callings. We generally do not have long-term commitments from any of our clients to purchase our services.
Our agreements with provincial subsidiaries of China Mobile and China Telecom generally have one-year terms and they do not have
automatic renewal provisions. A number of factors other than our performance could cause the loss of or reduction in business
or revenue from a client and these factors are not predictable. A client may demand price reductions, change its outsourcing strategy,
switch to another outsourcing service provider or return work in-house. For example, if the provincial subsidiaries of China Mobile
or China Telecom are unwilling to continue our business relationships, we will face significant loss of business. The loss, cancellation,
deferral or renegotiation of our arrangements with the provincial subsidiaries of China Mobile or China Telecom could have a material
adverse effect on our financial condition and results of operations. Our ability to maintain close relationships with these clients
is essential to the growth and profitability of our business.
The
alteration of the revenue sharing percentage in our cooperation agreements with the provincial subsidiaries of China Mobile and
China Telecom or termination of these agreements could materially and adversely impact our business operations and financial conditions.
We
have limited negotiating leverage with the provincial subsidiaries of China Mobile or China Telecom. Our revenues and profitability
could be materially and adversely affected if the provincial subsidiaries of either China Mobile or China Telecom decide to materially
increase its revenue sharing percentage. In addition, the provincial subsidiaries of China Mobile or China Telecom could impose
monetary penalties upon us or even terminate cooperation agreements with us, for a variety of reasons, including without limitation,
the following:
|
●
|
if
the provincial subsidiaries of China Mobile or China Telecom receive a high level of
customer complaints about our call center service; or
|
|
●
|
if
we fail to meet the performance standards established by the provincial subsidiaries
of China Mobile or China Telecom from time to time.
|
Significant
changes in the policies or guidelines of the provincial subsidiaries of China Mobile or China Telecom with respect to services
provided by us may materially adversely affect our financial condition and results of operations.
Any
of the provincial subsidiaries of China Mobile or China Telecom may from time to time issue certain operating policies or guidelines,
requesting or stating preferences for certain actions to be taken by all MVAS providers using their networks. Due to our reliance
on the provincial subsidiaries of China Mobile and China Telecom, a significant change in the policies or guidelines of these
clients may result in lower revenues or additional operating costs to us. We cannot assure that our financial condition and results
of operations will not be materially adversely affected by a change in policies or guidelines by the provincial subsidiaries of
either China Mobile or China Telecom.
Our
clients may adopt technologies that decrease the demand for our services, which could harm our business, results of operations
and financial condition.
We
target clients that need our BPO services, and we depend on their continued need for our services. However, over time, our clients
may adopt new technologies that decrease the need for live customer interaction, such as interactive voice response, web-based
self-help and other technologies used to automate interactions with customers. The adoption of these technologies could reduce
the demand for our services, create pricing pressure and harm our business, results of operations and financial condition.
Failure
to attract and retain telecommunications operators to work with us will negatively affect our ability to grow revenues and market
share.
The
amount of fees we can charge the provincial subsidiaries of China Mobile or China Telecom depends upon the size of potential customers,
the outbound cold calling success rate, and the quality of our data mining work. Telecommunications operators choose us to provide
BPO services in part because of the effectiveness and quality of the services we offer. If we fail to maintain or increase the
satisfaction level of our customers, or fail to solidify our brand name and reputation as a quality provider of call center services
and content services, telecommunications operators may be unwilling to pay the fees at a level necessary for us to remain profitable.
Changes
in the regulation of the Chinese telecommunications industry could result in new burdens and expenses on service providers like
us.
Our principal customers are telecommunications
companies that operate in a highly regulated environment. Major telecommunications companies in China are state-owned or controlled,
and their business decisions and strategies are affected by government budgeting and spending plans. In addition, in December
2001, the Ministry of Industry and Information Technology of China promulgated a set of regulations governing telecommunications
providers, and these regulations were amended in 2015 with a classification system that covers, among other things, Type 2 (hereafter
defined) value added service providers such as us. Changes in the regulatory system may impose new costs and burdens on us, or
affect us indirectly by imposing new burdens and obligations onto our customers that, in turn, may be passed on to us under our
agreements with customers. If such changes occur, our financial performance may be adversely affected.
Further
restructuring of China’s telecommunications sector may have an adverse impact on our business prospects and results of operations.
Historically,
China’s telecommunications sector has been subject to a number of state-mandated restructurings. For example, in 2002 China
Telecom was split geographically into a northern division (consisting of 10 provinces) and a southern division (consisting of
21 provinces).
In
May 2008, China announced a new restructuring plan for the country’s telecommunications carriers. This restructuring plan
reorganized the operations of Chinese telecommunications carriers, creating three major carriers that have both mobile and fixed-line
services. Moreover, in 2013, the Chinese government started to permit mobile virtual network operators to lease and repackage
mobile services for sale to end customers. Such changes will lead to further intensified competition in China’s telecommunications
industry. As a result, more call center outsourcing solution providers will be competing for projects and telecommunications carriers
may be able to exact lower prices for our solutions and services. If we cannot effectively compete with our competitors, our profit
margin will be reduced, and our results of operations may be materially and adversely affected. Furthermore, telecommunications
carriers may also find it more cost-effective to keep or establish their own BPO operations, instead of outsourcing to third-party
providers. If the outsourcing of such services is reduced or reversed, our financial condition and results of operations may be
materially and adversely affected.
Call
center services, particularly telemarketing services, may fall into disfavor among the public, reducing demand for our services.
Telemarketing
services, particularly outbound call center services, may fall into public disfavor if the recipients of calls find them annoying,
burdensome or otherwise overbearing. While we strive to render our services in a professional, polite and courteous manner, we
cannot control the public perception of telemarketing generally. Moreover, we do not always have control over the nature or subject
matter of outbound calls that our customers require us to make. Public hostility to telemarketing services generally, or to the
particular types of calls our customers would like us to make, could result in decreased demand for such services, and thus be
detrimental to our revenues and profits.
The
growth of our business may be adversely affected due to public concerns over the security and privacy of confidential user information.
The
growth of our business may be inhibited if public concerns over the security and privacy of confidential user information transmitted
over the Internet and wireless networks are not adequately addressed. Our services may decline and our business may be adversely
affected if significant breaches of network security or user privacy occur.
The
intellectual property of our customers may be damaged, misappropriated, stolen or lost while in our possession, subjecting us
to litigation and other adverse consequences.
In
the course of providing services to our clients, we may have possession of or access to their intellectual property, including
databases, software, certificates of authenticity and similar valuable items of intellectual property. If our clients’ intellectual
property is damaged, misappropriated, stolen or lost, we could suffer adverse impacts to our business, including but not limited
to:
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claims
under client agreements or applicable law, or other liability for damages;
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delayed
or lost revenue due to adverse client reaction;
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negative
publicity; and
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litigation
that could be costly and time-consuming.
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Our
limited operating history makes it difficult to evaluate our future prospects and results of operations.
We
have a limited operating history. Taiying was established in 2007, CBPO, WFOE and CCRC were established in 2014. As our operating
history is limited, the revenues and income potential of our business and markets are unproven. Our limited operating history
and the early stage of development of the industry in which we operate makes it difficult to evaluate our business and future
prospects. Although we expect our revenues to grow, we cannot assure that we will maintain our profitability or that we will not
incur net losses in the future. Any significant failure to realize anticipated revenue growth could result in significant operating
losses. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage
companies in evolving markets such as the growing market for call center services in the PRC. In addition, we face numerous risks,
uncertainties, expenses and difficulties frequently encountered by companies at an early stage of development. We will continue
to encounter risks and difficulties in implementing our business model, including (among other risks and difficulties) potential
failure to:
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offer
additional call center services to attract and retain a larger customer base;
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increase
our revenue and market share by targeting specific markets with positive consumer demographics;
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expand
our operations and service network to other provinces;
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attract
additional customers and increase spending per customer;
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attract
a wider client base and explore new mobile marketing opportunities to target segmented
consumer groups;
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increase
visibility of our brand and maintain customer loyalty;
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respond
to competitive market conditions;
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anticipate
and adapt to changing conditions in the markets in which we operate as well as changes
in government regulations, mergers and acquisitions involving our competitors, technological
developments and other significant competitive and market dynamics;
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manage
risks associated with intellectual property rights;
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maintain
effective control of our costs and expenses;
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raise
sufficient capital to sustain and expand our business;
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attract,
train, retain and motivate qualified personnel, continue to train, motivate and retain
our existing employees, attract and integrate new employees, including into our senior
management; and
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upgrade
our technology to support additional research and development of new call center services.
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We
cannot predict whether we will be successful in addressing any or all of these risks. If we are unsuccessful in addressing these
risks and uncertainties, our business, financial condition and results of operation may be materially and adversely affected.
Our
dependence on the timing of the billing systems of the provincial subsidiaries of China Mobile and China Telecom may require us
to estimate portions of our reported revenues and cost of revenues for our services. As a result, subsequent adjustments may have
to be made to our financial statements.
It
takes the provincial subsidiaries of China Mobile or China Telecom an average of 90 days to tender payment for our services after
each month’s end. As a result, estimated revenues may account for a larger proportion of our reported revenues. As we do
not bill our subscribers directly, we depend on the billing systems of the provincial subsidiaries of China Mobile or China Telecom
to record the volume of our services provided, bill our customers, collect payments and remit to us our portion of the fees. We
record revenues based on monthly statements from the provincial subsidiaries of China Mobile or China Telecom confirming the value
of the services we provide that are billed by the provincial subsidiaries of China Mobile or China Telecom during the month. To
the extent we have not received monthly statements from the operators, we must rely on our own internal records for a portion
of our reported revenues. In such an instance, our internal estimates would be based on our own internal data of expected revenues
and related fees from services provided. As a result of reliance on our internal estimates, we may overstate or understate our
revenues and cost of revenues for the relevant reporting period, and may be required to make adjustments in our financial reports
when we actually receive the telecommunications operators’ monthly statements for such a period. We endeavor to reduce the
discrepancy between our revenue estimates and the revenues calculated by the telecommunications operators and their subsidiaries,
but we cannot assure that such efforts will be successful. If we are required to make adjustments to our quarterly financial statements
in subsequent quarters, it could adversely affect market sentiment toward us.
In
addition, we generally do not have the ability to independently verify or challenge the accuracy of the billing systems of the
telecommunications operators. We cannot assure that negotiations between us and the provincial subsidiaries of China Mobile or
China Telecom to reconcile billing discrepancies would be resolved in our favor or that our results of operations would not be
adversely affected as a result of such negotiations.
The
markets in which we operate are highly competitive and fragmented. The competition could limit our ability to increase market
share, and materially adversely affect our business operations, financial condition and results of operations.
We
operate in a highly fragmented market and expect competition to persist and intensify in the future. The outsourcing industry
is extremely competitive, and outsourcers have historically competed based on pricing terms. Accordingly, we could be subject
to pricing pressure and may experience a decline in our average selling prices for our call center services. We compete with these
companies primarily on the basis of brand, type and timing of service offerings, content, customer service, business partners
and channel relationships. We also compete for experienced and talented employees. While we believe that we have certain advantages
over our competitors, some of them may have greater financial, human and other resources, longer operating histories, greater
technological expertise, more recognizable brand names and more established relationships than we do in the industries that we
currently serve or may serve in the future. Some of our competitors may enter into strategic or commercial relationships among
themselves or with larger, more established companies in order to increase their ability to address client needs. Increased competition,
pricing pressure or loss of market share could reduce our operating margin, which could harm our business, results of operations
and financial condition. Furthermore, our competitors may be able to develop or exploit new technologies faster than we can, or
offer a broader range of services than we are presently able to offer.
We
could face decreasing revenues and lower profitability if we are forced to significantly reduce the price of our services. We
split a pre-determined percentage of our revenue with the provincial subsidiaries of China Mobile and China Telecom for most of
our services. However, increasing competition among telecommunication companies in the PRC may lead to a reduction in telecommunication
services fees that can be charged by such companies. If either the provincial subsidiaries of China Mobile or China Telecom experience
a reduction in telecommunication services fees, such a reduction will negatively impact revenue generated by the provincial subsidiaries
of China Mobile or China Telecom. Under such circumstances, we may be required to reduce the price of our services; or the provincial
subsidiaries of China Mobile or China Telecom may demand an increase of its share of profit sharing under our agreements with
their subsidiaries or seek competitors that charge less for services than we do, all or any of which could adversely affect our
financial results.
If
we fail to compete successfully against new and existing competitors, we may not be able to increase our market share, and our
profitability may be adversely affected.
We
do and will continue to face significant competition in the PRC in the BPO business. We compete for clients primarily on the basis
of our brand name, delivery method, price and the range of services that we offer. We also compete for overall advertising spending
with other alternative advertising media companies, such as the Internet, newspapers, television, magazines and radio.
Increased
competition will provide advertisers with a wider range of media and advertising service alternatives, which could force us to
offer lower prices for our services, resulting in reduced operating margins and profitability and a loss of market share. Some
of our existing and potential competitors may have competitive advantages, such as significantly greater financial, marketing
or other resources. We cannot assure that we will be able to successfully compete against new or existing competitors.
If
we are unable to respond successfully to technological or industry developments, our business may be materially adversely affected.
Rapid advances in technology, industry standards
and customer demands characterize the telecommunications industry. New technologies, industry standards or market demands may
render our existing services or technologies less competitive or even obsolete. Telecommunications operators in the PRC are currently
in the process of implementing 4G telecommunications services and introducing 5G telecommunications services by 2020. Responding
and adapting to 4G, 5G and other technological developments and standard changes in our industry may require substantial time,
effort and capital investment. If we are unable to respond successfully to technology, industry and market developments, such
developments may materially adversely affect our business, results of operations and competitiveness.
Our
operating margin will suffer if we are not able to maintain our pricing, utilize our employees and assets efficiently or maintain
and improve the current mix of services that we deliver.
Our operating margin is largely a function of the prices
that we are able to charge for our services, the new programs we are able to develop, the efficient use of our assets, the utilization
of our employees, and the geographical location from which we deliver services. For example, China Mobile Beijing has transferred
a portion of its call center service business to our Shandong Province location in an effort to reduce costs and Xiaoju Technology
Co., Ltd. (DiDi) has transferred a portion of its call center service business to our Shandong and Jiangsu Province locations.
Our business model is predicated on our ability to objectively quantify the value that we provide to our clients. If we fail to
succeed on any of these objectives, we may experience a decline in our current operating margin.
The
rates we are able to charge for our services, our ability to manage our assets efficiently and the location from which we deliver
our services are affected by a number of factors, including, without limitation:
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our
clients’ perceptions of our ability to add value through our services;
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our
ability to objectively differentiate and verify the value we offer to our clients;
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the
introduction of new services by us or our competitors;
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our
ability to estimate demand for our services;
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our
ability to control costs and improve the efficiency of our employees; and
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general
economic and political conditions.
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Wage
increases in China may prevent us from sustaining our competitive advantage and could reduce our profit margins.
Wage costs for our call center professionals
and other employees form a significant part of our costs. For instance, in 2016, 2015 and 2014, our compensation and benefit expenses
in respect of our professionals was $51.43 million, $43.62 million and $31.62 million, accounting for 71%, 73% and 74% of our
total revenues, respectively. Because of rapid economic growth and increased competition for skilled employees in China, we may
need to increase our levels of employee compensation more rapidly than in the past to remain competitive in retaining the quality
and number of employees that our business requires. Increases in the wages and other compensations we pay our employees in China
could reduce our competitive strength; especially if increase in wage costs of our call center professionals exceeds increase
in our call center professionals’ billing rate, we may suffer a reduction in profit margins. In addition, the future issuance
of equity-based compensation to our professional staff and other employees would also result in additional stock dilution for
our shareholders.
We
depend on our key personnel, and our business and growth prospects may be severely disrupted if we lose their services.
Our
future success depends heavily upon the continued service of our key executives. In particular, we rely on the expertise and experience
of Gary Wang, our founder, chairman and chief executive officer. We rely on his industry expertise and experience in our business
operations, and in particular, his business vision, management skills, and working relationship with our employees, our other
major shareholders, the regulatory authorities, and many of our clients. If he became unable or unwilling to continue in his present
position, or if he joined a competitor or formed a competing company in violation of his employment agreement, we may not be able
to replace him easily, our business may be significantly disrupted and our financial condition and results of operations may be
materially adversely affected.
We
do not maintain key man life insurance on any of our senior management or key personnel. The loss of any one of them would have
a material adverse effect on our business and operations. Competition for senior management and our other key personnel is intense
and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or
key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a
competing company, they may compete with us for customers, business partners and other key professionals and staff members of
our company. Although each of our senior management and key personnel has signed a confidentiality and non-competition agreement
in connection with his employment with us, we cannot assure that we will be able to successfully enforce these provisions in the
event of a dispute between us and any member of our senior management or key personnel.
In
addition, we compete for qualified personnel with other call center companies, and we face competition in attracting skilled personnel
and retaining the members of our senior management team. These personnel possess technical and business capabilities, including
expertise relevant to the BPO market, which are difficult to replace. There is intense competition for experienced senior management
with technical and industry expertise in the BPO industry, and we may not be able to retain our key personnel. Intense competition
for these personnel could cause our compensation costs to increase, which could have a material adverse effect on our results
of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals
and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified
employees, we may be unable to meet our business and financial goals.
If
we fail to attract and retain enough sufficiently trained customer service associates and other personnel to support our operations,
our business, results of operations and financial condition will be seriously harmed.
We
rely on large numbers of customer service associates, and our success depends to a significant extent on our ability to attract,
hire, train and retain qualified customer service associates. Companies in the BPO market, including us, experience high employee
attrition. Our attrition rate for our customer service associates who remained with us following a 90-day training and orientation
period was on average approximately 5% per month. A significant increase in the attrition rate among our customer service
associates could decrease our operating efficiency and productivity. Our failure to attract, train and retain customer service
associates with the qualifications necessary to fulfill the needs of our existing and future clients would seriously harm our
business, results of operations and financial condition.
Our
senior management lacks experience in managing a public company and complying with laws applicable to operating as a U.S. public
company domiciled in the British Virgin Islands and failure to comply with such obligations could have a material adverse effect
on our business.
Prior
to the completion of our initial public offering, Taiying operated as a private company located in the PRC. In connection with
our initial public offering, the senior management of Taiying formed CCRC in the British Virgin Islands, CBPO in Hong Kong and
made WFOE a CCRC subsidiary in the PRC. They also entered Taiying and WFOE into certain agreements that gave CCRC effective control
over the operations of Taiying by virtue of its ownership of CBPO and CBPO’s ownership of WFOE. In the process of taking
these steps to prepare our company for its initial public offering, Taiying’s senior management became the senior management
of CCRC. None of CCRC’s senior management has experience managing a public company or managing a British Virgin Islands
company.
As a result of our initial public offering,
the Company became subject to laws, regulations and obligations that dis not previously apply to it, and our senior management
currently has limited experience in complying with such laws, regulations and obligations. For example, CCRC will need to comply
with the British Virgin Islands laws applicable to companies that are domiciled in that country. The senior management is only
experienced in operating the business of Taiying in compliance with Chinese laws. Similarly, by virtue of the initial public offering,
CCRC is required to file annual reports in compliance with U.S. securities and other laws. These obligations can be burdensome
and complicated, and failure to comply with such obligations could have a material adverse effect on CCRC. In addition, we expect
that the process of learning about such new obligations as a public company in the United States will require our senior management
to devote time and resources to such efforts that might otherwise be spent on the operation of our BPO business.
Our
quarterly operating results are difficult to predict and may fluctuate significantly from period to period in the future.
Our
quarterly operating results may differ significantly from period to period due to factors such as, without limitation:
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client
losses or program terminations;
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variations
in the volume of business from clients resulting from changes in our clients’ operations;
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delays
or difficulties in expanding our operational facilities and infrastructure;
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changes
to our pricing structure or that of our competitors;
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inaccurate
estimates of resources and time required to complete ongoing programs;
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inaccurate
estimates of amounts billed by our clients for the services we provided during such period;
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ability
to hire and train new employees;
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seasonal
changes in the operations of our clients;
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a
deterioration of economic conditions in the PRC;
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potential
changes to the regulation of the advertising, Internet and wireless communications industries
in the PRC; and
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seasonality
of economic activities in the PRC, such as the anticipated decrease in outbound calling
during January and February each year due to the Chinese Lunar New Year holiday, and
the anticipated decrease in revenues during July and August due to overall slow commercial
activities during the summer months.
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As
a result, you may not be able to rely on period-to-period comparisons of our operating results as an indication of our future
performance. If our revenues for a particular quarter are lower than we expect, we may be unable to reduce our operating expenses
for that quarter by a corresponding amount, which would harm our operating results for that quarter relative to our operating
results from other quarters.
We
have limited business insurance coverage. Any future business liability, disruption or litigation we experience might divert management
focus from our business and could significantly impact our financial results.
Availability
of business insurance products and coverage in the PRC is limited, and most such products are expensive in relation to the coverage
offered. We have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring
such insurances on commercially reasonable terms make it impractical for us to maintain such insurances. As a result, we do not
have any business liability, disruption or litigation insurance coverage for our operations in the PRC. Accordingly, a business
disruption, litigation or natural disaster may result in substantial costs and divert management’s attention from our business,
which would have an adverse effect on our results of operations and financial condition.
We
may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional
financing when needed.
We
may need to obtain additional debt or equity financing to fund future capital expenditures. While we do not anticipate seeking
additional financing in the immediate future, any additional equity financing may result in dilution to the holders of our outstanding
shares of capital stock. Additional debt financing may put us in situations that would restrict our freedom to operate our business,
such as situations that:
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limit
our ability to pay dividends or require us to seek consent for the payment of dividends;
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increase
our vulnerability to general adverse economic and industry conditions;
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require
us to dedicate a portion of our cash flow from operations to payments on our debt, thereby
reducing the availability of our cash flow to fund capital expenditures, working capital
and other general corporate purposes; and
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limit
our flexibility in planning for, or reacting to, changes in our business and our industry.
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We
cannot guaranty that we will be able to obtain additional financing on terms that are acceptable to us, or any financing at all.
Potential
disruptions in the capital and credit markets may adversely affect our business, including the availability and cost of short-term
funds for liquidity requirements, which could adversely affect our results of operations, cash flows and financial condition.
Potential
changes in the global economy may affect the availability of business and consumer credit. We may need to rely on the credit markets,
particularly for short-term borrowings from banks in the PRC, as well as the capital markets, to meet our financial commitments
and short-term liquidity needs if internal funds from our operations are not available to be allocated to such purposes. Disruptions
in the credit and capital markets could adversely affect our ability to draw on such short-term bank facilities. Our access to
funds under such credit facilities is dependent on the ability of the banks that are parties to those facilities to meet their
funding commitments, which may be dependent on governmental economic policies in the PRC. Those banks may not be able to meet
their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes
of borrowing requests from us and other borrowers within a short period of time.
Long-term
disruptions in the credit and capital markets could result from uncertainty, changing or increased regulations, reduced alternatives
or failures of financial institutions could adversely affect our access to the liquidity needed for our business. Any disruption
could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other
funding for our business needs can be arranged. Such measures may include deferring capital expenditures, and reducing or eliminating
discretionary uses of cash.
Continued
market disruptions could cause broader economic downturns, which may lead to decreased cellular telephone usage, decreased commercial
activities in general, and increased likelihood that customers will be unable to pay for our services. Further, bankruptcies or
similar events by China Telecom, China Mobile, their subsidiaries or significant customers, or our other clients may cause us
to incur bad debt expense at levels higher than historically experienced. These events would adversely impact our results of operations,
cash flows and financial position.
Rapid
growth and a rapidly changing operating environment may strain our limited resources.
We may not have adequate operational,
administrative and financial resources to sustain the growth we want to achieve. Taiying was incorporated in December 2007. As
of December 31, 2016, we had a total of approximately 5,963 full-time employees and 1,820 part-time employees and interns.
We have experienced rapid growth in our employee headcount. This expansion has resulted, and will continue to result, in substantial
demands on our management resources. To manage our growth, we must develop and improve our existing administrative and operational
systems and our financial and management controls and further expand, train and manage our work force. As we continue these efforts,
we may incur substantial costs and expend substantial resources due to, among other things, different technology standards, legal
considerations and cultural differences.
Our
future success also depends on our product development, customer service, sales and marketing. If we fail to manage our growth
and expansion effectively, the quality of our services and our customer support may deteriorate and our business may suffer. This
could prompt either or both of the provincial subsidiaries of China Mobile or China Telecom to discontinue their respective outsourcing
relationships with us. We cannot assure that we will be able to efficiently or effectively manage the growth of our operations,
recruit top talent and train our personnel. Any failure to efficiently manage our expansion may materially and adversely affect
our business and future growth.
Our
bank accounts are not insured or protected against loss.
WFOE
and the Operating Companies maintain cash accounts with various banks and trust companies located in the PRC. Such cash accounts
are not insured or otherwise protected. Should any bank or trust company holding such cash deposits become insolvent, or if WFOE
or an operating company of ours is otherwise unable to withdraw funds, this entity would lose the cash on deposit with that particular
bank or trust company.
We
may not pay dividends.
We have not previously paid any cash dividends,
and we do not anticipate paying any dividends on our common shares. Although we have achieved net profitability in 2016, 2015
and 2014, we cannot assure that our operations will continue to result in sufficient revenues to enable us to operate at profitable
levels or to generate positive cash flows. Furthermore, there is no assurance that our Board of Directors will declare dividends
even if we are profitable. Dividend policy is subject to the discretion of our Board of Directors and will depend on, among
other things, our earnings, financial condition, capital requirements and other factors. If we determine to pay dividends
on any of our common shares in the future, we will be dependent, in large part, on receipt of funds from Taiying. See “Dividend
Policy.”
Our
growth strategy may prove to be disruptive and divert management resources, which could adversely affect our existing businesses.
Our
growth strategy includes the continued expansion of Taiying’s call center operations and may include strategic acquisitions
of competitive operators. We do not have any understanding, commitment or agreement in place with regard to any such acquisitions
at this time. The implementation of such strategies may involve large transactions and present financial, managerial and operational
challenges, including diversion of management attention from existing businesses, difficulty with integrating personnel and financial
and other systems, increased expenses, including compensation expenses resulting from newly-hired employees, assumption of unknown
liabilities and potential disputes. We also could experience financial or other setbacks if any of our growth strategies encounter
problems of which we are not presently aware.
We
expect to allocate a portion of the net proceeds from our initial public offering to such acquisitions, but we have not yet located
any potential targets, and we may be unable to do so. Further, even if we find a target we believe to be suitable, we may be unable
to negotiate acquisition terms that are satisfactory to us. In the event we are unable to complete acquisitions, we will reserve
the right to reallocate such funds to our working capital. If this happens, we would have broad discretion over the ultimate use
of such funds, and we could use such funds in ways with which investors might disagree.
Furthermore, any such acquisitions must
comply with all PRC laws and regulations applicable to such transactions. The regulatory environment that governs mergers and acquisitions
in the PRC has continued to evolve in recent years and remains subject to interpretation by the agencies that have responsibility
for reviewing or approving such transactions. Compliance with such regulations in the process of structuring, negotiating and closing
such transactions will require us to expend company resources that would otherwise be available for and used in the management
and operation of the Company, all of which could have an adverse effect on our operations and financial results.
The misappropriation of our intellectual property could have a material
adverse effect on our business, financial condition and results of operations.
Our intellectual property rights are important to our
business. We rely on a combination of trade secrets, confidentiality procedures and contractual provisions to protect our intellectual
property. We presently hold two patents, one registered trademark and have been granted registered computer software ownership
rights to fifty pieces of intellectual property rights by the China State Copyright Bureau. In addition, we enter into confidentiality
agreements with some of our employees and consultants, and control access to and distribution of our documentation and other licensed
information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology
without authorization, or to develop similar technology independently. Since the Chinese legal system in general, and the intellectual
property regime in particular, is relatively weak, it is often difficult to enforce intellectual property rights in China. In
addition, confidentiality agreements may be breached by counterparties, and there may not be adequate remedies available to us
for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our
contractual rights in China or elsewhere. In addition, policing any unauthorized use of our intellectual property is difficult,
time-consuming and costly and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property.
In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial
costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation.
Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business,
financial condition and results of operations.
Risks
Relating to Our Corporate Structure
WFOE’s
contractual arrangements with Taiying may result in adverse tax consequences to us.
We
could face material and adverse tax consequences if the PRC tax authorities determine that WFOE’s contractual arrangements
with Taiying were not made on an arm’s length basis and adjust our income and expenses for PRC tax purposes in the form
of a transfer pricing adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of adjustments
recorded by Taiying, which could adversely affect us by increasing Taiying’s tax liability without reducing WFOE’s
tax liability, which could further result in late payment fees and other penalties to Taiying for underpaid taxes, all of which
could have a material adverse effect on our results of operations and financial condition.
WFOE’s
contractual arrangements with Taiying may not be as effective in providing control over Taiying as direct ownership.
We
conduct substantially all of our operations, and generate substantially all of our revenues, through contractual arrangements
with Taiying that provide us, through our ownership of WFOE, with effective control over Taiying. We depend on Taiying to
hold and maintain contracts with our customers. Taiying also own substantially all of our intellectual property, facilities
and other assets relating to the operation of our business, and employ the personnel for substantially all of our business. Neither
our company nor WFOE has any ownership interest in Taiying. Although we have been advised by our PRC legal counsel, that
each contract under WFOE’s contractual arrangements with Taiying is valid, binding and enforceable under current PRC laws
and regulations, these contractual arrangements may not be as effective in providing us with control over Taiying as direct ownership
of Taiying would be. In addition, Taiying may breach the contractual arrangements. For example, Taiying may decide not to
make contractual payments to WFOE, and consequently to our company, in accordance with the existing contractual arrangements. In
the event of any such breach, we would have to rely on legal remedies under PRC law. These remedies may not always be effective,
particularly in light of uncertainties in the PRC legal system.
PRC
laws and regulations governing our businesses and the validity of certain of our contractual arrangements are uncertain. If
we are found to be in violation of such PRC laws and regulations, we could be subject to sanctions. In addition, changes in such
PRC laws and regulations may materially and adversely affect our business.
Foreign
ownership of a call center BPO and related business, is subject to restrictions under current PRC laws and regulations. For example,
foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider
and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain
a good track record.
We
are a BVI company and our PRC subsidiary WFOE is considered a foreign-invested enterprise. To comply with PRC laws and regulations,
we conduct our business in China through WFOE, Taiying and its subsidiaries based on a series of contractual arrangements by and
among WFOE, Taiying and its shareholders, which enable us to:
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exercise
effective control over Taiying and its subsidiaries;
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receive
substantially all of the economic benefits and bear the obligation to absorb substantially
all of the losses of Taiying; and
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have
an exclusive option to purchase all or part of the equity interests in Taiying when and
to the extent permitted by PRC law.
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Because
of these contractual arrangements, we are the primary beneficiary of Taiying and hence consolidate its financial results as our
variable interest entity.
In
the opinion of our PRC legal counsel, (a) our current ownership structure of our WFOE and Taiying, both comply with all existing
PRC laws and regulations; and (b) each of the contractual arrangements is valid, binding and enforceable in accordance with
its terms and applicable PRC Laws, and will not result in any violation of PRC laws or regulations currently in effect. However,
our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application
of PRC Laws and future PRC Laws, and there can be no assurance that the PRC authorities may take a view that is contrary to or
otherwise different from our PRC legal counsel.
It
is uncertain whether any new PRC laws, rules or regulations relating to contractual arrangements structures will be adopted or
if adopted, what they would provide. Further, the effectiveness of newly enacted laws, regulations or amendments may be delayed,
resulting in detrimental reliance by foreign investors. If CCRC, WFOE or Taiying are found to be in violation of any existing
or future PRC laws, rules or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant
PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including,
sanctions, fines, revoking the business and operating licenses of WFOE or Taiying, requiring us to discontinue or restrict our
operations, restricting our right to collect revenue, requiring us to restructure our operations or taking other regulatory or
enforcement actions against us. If we are not able to restructure our ownership structure and operations in a satisfactory manner,
we would no longer be able to consolidate the financial results of Taiying in our consolidated financial statements. In addition,
any litigation in the PRC may be protracted and result in substantial costs and diversion of resources and management attention.
Any of these events would have a material adverse effect on our business, financial condition and results of operations.
The
shareholder of Taiying has potential conflicts of interest with us, which may adversely affect our business.
Neither
WFOE nor we own any portion of the equity interests of Taiying. Instead, we rely on WFOE’s contractual obligations to enforce
our interest in receiving payments from Taiying. Conflicts of interests may arise between Taiying’s shareholder and
our company if, for example, its interests in receiving dividends from Taiying were to conflict with our interest requiring these
companies to make contractually obligated payments to WFOE. As a result, we have required Taiying and its sole shareholder
to execute irrevocable powers of attorney to appoint the individual designated by us to be his attorney-in-fact to vote on their
behalf on all matters requiring shareholder approval by Taiying and to require Taiying’s compliance with the terms of its
contractual obligations. We cannot assure, however, that when conflicts of interest arise, the shareholder will act completely
in our interests or that conflicts of interests will be resolved in our favor. In addition, this shareholder could violate
its agreements with us by diverting business opportunities from us to others. If we cannot resolve any conflicts of interest
between us and Taiying’s shareholder, we would have to rely on legal proceedings, which could result in substantial costs
and diversion of management attention and resources, all of which could have a material adverse effect on our business, financial
condition and results of operations.
PRC regulations relating to the establishment of offshore
special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability
to inject capital into our PRC subsidiary, limit our subsidiary’s ability to increase its registered capital, distribute
profits to us, or otherwise adversely affect us.
On
July 4, 2014, China’s State Administration for Foreign Exchange (“SAFE”) issued the Circular of the State
Administration of Foreign Exchange on Issues concerning Foreign Exchange Administration over the Overseas Investment and Financing
and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or Circular 37, which became effective as of July 4,
2014. According to Circular 37, prior registration with the local SAFE branch is required for PRC residents to contribute
domestic assets or interests to offshore companies, known as a special purpose vehicle (SPV). Moreover, Circular 37 applies retroactively.
As a result, PRC residents who have contributed domestic assets or interests to a SPV, but failed to complete foreign exchange
registration of overseas investments as required before July 4, 2014 shall send a letter to SAFE and its branches for explanation.
SAFE and its branches shall, under the principle of legality and legitimacy, conduct supplementary registration, and impose administrative
punishment on those in violation of the administrative provisions on the foreign exchange pursuant to the law.
We
attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply, with the relevant requirements.
However, we cannot provide any assurances that all of our shareholders who are PRC residents will make or obtain any applicable
registrations or comply with other requirements required by Circular 37 or other related rules. The failure or inability of our
PRC resident shareholders to make any required registrations or comply with other requirements may subject such shareholders to
fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans to (including
using the proceeds from our initial public offering) WFOE or Taiying, limiting their ability to pay dividends or otherwise distributing
profits to us.
We
rely on dividends paid by WFOE for our cash needs.
We
rely primarily on dividends paid by WFOE for our cash needs, including the funds necessary to pay dividends and other cash distributions,
if any, to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities
organized in the PRC is subject to limitations as described herein. Under British Virgin Islands law, we may only pay dividends
from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities,
as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense
that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value
of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books
of account, and our capital. If we determine to pay dividends on any of our common shares in the future, as a holding company,
we will be dependent on receipt of funds from WFOE. See “Dividend Policy.”
Pursuant
to the Implementation Rules for the new Chinese enterprise income tax law, effective on January 1, 2008, dividends payable
by a foreign investment entity to its foreign investors are subject to a withholding tax of up to 10%. Pursuant to Article 10
of the Arrangement Between the Mainland of China and the Hong Kong Special Administration Region for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with respect to Taxes on Income effective December 8, 2006, dividends payable by a foreign
investment entity to its Hong Kong investor who owns 25% or more of the equity of the foreign investment entity is subject to
a withholding tax of up to 5%.
The
payment of dividends by entities organized in the PRC is subject to limitations, procedures and formalities. Regulations in the
PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards
and regulations in China. WFOE is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards
each year to its compulsory reserves fund until the accumulative amount of such reserves reaches 50% of its registered capital.
The transfer to this reserve must be made before
distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and
can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital
by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares
currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
As of December 31, 2016 and 2015, the accumulated appropriations to statutory reserves amounted to $2,067,835 and $1,288,617
respectively.
WFOE
is required to allocate a portion of its after-tax profits, as determined by its board of directors, to the general reserve, and
the staff welfare and bonus funds, which may not be distributed to equity owners.
Pursuant to the “Wholly Foreign-Owned
Enterprise Law of the P.R. China (2016 Revision)” and “Implementing Rules for the Law of the People’s Republic
of China on Wholly Foreign Owned Enterprises (2014 Revision)”, WFOE is required to allocate a portion of its after-tax profits
in accordance with its Articles of Association, to the general reserve, and the staff welfare and bonus funds. No lower than 10%
of an enterprise’s after tax-profits should be allocated to the general reserve. When the general reserve account balance
is equal to or greater than 50% of the WFOE’s registered capital, no further allocation to the general reserve account is
required. According to the Articles of Association of WFOE, WFOE’s board of directors determines the amount contributed
to the staff welfare and bonus funds. The staff welfare and bonus fund is used for the collective welfare of the staff of WFOE.
These reserves represent appropriations of retained earnings determined according to PRC law.
As
of the date of this annual report, the amounts of these reserves have not yet been determined, and we have not committed to establishing
such amounts at this time. Under current PRC laws, WFOE is required to set aside reserve amounts, but has not yet done so. WFOE
has not done so because PRC authorities grant companies flexibility in making a determination. PRC law requires such a determination
to be made in accordance with the company’s organizational documents and WFOE’s organizational documents do not require
the determination to be made within a particular timeframe. Although we have not yet been required by PRC authorities to make
such determinations or set aside such reserves, PRC authorities may require WFOE to rectify its noncompliance and we may be fined
if we fail to do so after receiving a warning within its set time period.
Additionally,
PRC law provides that a PRC company must allocate a portion of after-tax profits to the general reserve and the staff welfare
and bonus funds reserve prior to the retention of profits or the distribution of profits to foreign invested companies. Therefore,
if for any reason, the dividends from WFOE cannot be repatriated to us or not in time, our cash flow may be adversely impacted
or we may become insolvent.
WFOE
is required to make a payment under its agreement to bear the losses of Taiying, thus our liquidity may be adversely affected,
which could harm our financial condition and results of operations.
On
September 3, 2014, WFOE entered into an Entrusted Management Agreement with Taiying. Pursuant to the Entrusted Management
Agreement, WFOE agreed to bear the losses of Taiying. If Taiying suffers losses and WFOE is required to absorb all or a portion
of such losses, WFOE will be required to seek reimbursement from Taiying. In such event, it is unlikely that Taiying will be able
to make such reimbursement and WFOE may be unable to recoup the loss WFOE absorbed at such time, if ever. Further, under the Entrusted
Management Agreement, WFOE may absorb the losses at a time when WFOE does not have sufficient cash to make such payment and at
a time when WFOE or we may be unable to borrow such funds on terms that are acceptable, if at all. As a result, any losses absorbed
under the Entrusted Management Agreement may have an adverse effect on our liquidity, financial condition and results of operations.
Our business may be materially and adversely affected
if any of our Operating Companies declare bankruptcy or become subject to a dissolution or liquidation proceeding.
The Enterprise Bankruptcy Law of China
provides that an enterprise may be liquidated if the enterprise fails to settle its debts as and when they fall due and if the
enterprise’s assets are, or are demonstrably, insufficient to clear such debts.
Our Operating Companies hold certain assets
that are important to our business operations. If any of our Operating Companies undergoes a voluntary or involuntary liquidation
proceeding, unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate
our business, which could materially and adversely affect our business, financial condition and results of operations.
Our
failure to obtain prior approval of the China Securities Regulatory Commission (“CSRC”) for the listing and trading
of our common shares on a foreign stock exchange could have a material adverse effect upon our business, operating results, reputation
and trading price of our common shares.
On
August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce of the People’s Republic of China (“MOFCOM”),
the State Assets Supervision and Administration Commission, the State Administration of Taxation, the State Administration for
Industry and Commerce, the CSRC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors (the “New M&A Rule”) which became effective on September 8, 2006 and was amended on June 22,
2009. The New M&A Rule contains provisions that require that an offshore special purpose vehicle (SPV) formed for listing
purposes and controlled directly or indirectly by PRC companies or individuals shall obtain the approval of the CSRC prior to
the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published
procedures specifying documents and materials required to be submitted to it by an SPV seeking CSRC approval of overseas listings.
However,
the application of the New M&A Rule remains unclear with no consensus currently existing among leading PRC law firms regarding
the scope and applicability of the CSRC approval requirement. Our PRC counsel, has given us the following advice, based on their
understanding of current PRC laws and regulations:
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We
currently control our PRC affiliate, Taiying, by virtue of WFOE’s VIE agreements
with Taiying, but not through equity interest or asset acquisition which are stipulated
in the New M&A Rule; and
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In
spite of the lack of clarity on this issue, the CSRC has not issued any definitive rule
or interpretation regarding whether offerings like our initial public offering are subject
to the New M&A Rule.
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The
CSRC has not issued any such definitive rule or interpretation, and we have not chosen to voluntarily request approval under the
New M&A Rule. If prior CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other
PRC regulatory authorities. These authorities may impose fines and penalties upon our operations in the PRC, limit our operating
privileges in the PRC, delay or restrict the repatriation of the proceeds from our initial public offering into the PRC, or take
other actions that could have a material adverse effect upon our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our common shares.
Failure to comply with the Individual Foreign Exchange
Rules relating to the overseas direct investment or the engagement in the issuance or trading of securities overseas by our Chinese
resident stockholders may subject such stockholders to fines or other liabilities.
Other than Circular
37, our ability to conduct foreign exchange activities in China may be subject to the interpretation and enforcement of the Implementation
Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January 2007 (as amended and supplemented,
the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any Chinese individual seeking
to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must
make the appropriate registrations in accordance with SAFE provisions. Chinese individuals who fail to make such registrations
may be subject to warnings, fines or other liabilities.
We may not be
fully informed of the identities of all our beneficial owners who are Chinese residents. For example, because the investment in
or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage
accounts, it is unlikely that we will know the identity of all of our beneficial owners who are Chinese residents. Furthermore,
we have no control over any of our future beneficial owners and we cannot assure you that such Chinese residents will be able to
complete the necessary approval and registration procedures required by the Individual Foreign Exchange Rules.
It is uncertain how the Individual Foreign Exchange Rules will be interpreted or enforced and whether such
interpretation or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we
cannot be sure whether the failure by any of our Chinese resident stockholders to make the required registration will subject our
subsidiaries to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of this offering
into the China, restriction on remittance of dividends or other punitive actions that would have a material adverse effect on our
business, results of operations and financial condition.
We
are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging
growth companies will make our common shares less attractive to investors.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long
as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that
are applicable to other public companies that are not emerging growth companies, including not being required to comply with the
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation
and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for
up to five years, although we could lose that status sooner if our revenues exceed $1 billion, if we issue more than $1 billion
in non-convertible debt in a three year period, or if the market value of our commons shares held by non-affiliates exceeds $700
million as of any December 31 before that time, in which case we would no longer be an emerging growth company as of the following
December 31. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions.
If some investors find our common shares less attractive as a result, there may be a less active trading market for our commons
shares and our share price may be more volatile.
Under
the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting
standards and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging
growth companies.
We
are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies.
As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at
different times, which may make it more difficult for you to evaluate our performance and prospects.
We
are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the
Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those
of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We
will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive
officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider
short-swing profit disclosure and recovery regime.
As
a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are
meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors.
However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange
Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic
reporting companies, you should not expect to receive the same information about us and at the same time as the information provided
by U.S. domestic reporting companies.
Substantial
uncertainties exist with respect to the enactment timetable and final content of draft PRC Foreign Investment Law and how it may
impact the viability of our current corporate structure, corporate governance and business operations.
MOFCOM
published a discussion draft of the proposed Foreign Investment Law in January 2015 (the “Draft FIL”) aiming
to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity
Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise
Law, together with their implementation rules and ancillary regulations. The Draft FIL 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. MOFCOM is currently soliciting comments on
this draft and substantial uncertainties exist with respect to its enactment timetable, final content, interpretation and implementation.
Among
other things, the Draft FIL expands the definition of foreign investment and introduces the principle of “actual control”
in determining whether a company is considered a foreign-invested enterprise, or an FIE. The Draft FIL specifically provides that
entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set
up in a foreign jurisdiction would nonetheless be, upon market entry clearance, treated as a PRC domestic investor provided that
the entity is “controlled” by PRC entities and/or citizens. Once an entity is determined to be an FIE, it will be
subject to the foreign investment restrictions or prohibitions set forth in a “negative list,” to be separately issued
by the State Council later. Unless the underlying business of the FIE falls within the negative list, which calls for market entry
clearance, prior approval from the government authorities as mandated by the existing foreign investment legal regime would no
longer be required for establishment of the FIE. Under the Draft FIL, VIEs that are controlled via contractual arrangement
would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. Therefore, for any companies
with a VIE structure in an industry category that is on the “negative list” the VIE structure may be deemed legitimate
only if the ultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the
actual controlling person(s) is/are of foreign nationalities, the VIEs will be treated as FIEs and any operation in the industry
category on the “negative list” without market entry clearance may be considered as illegal.
The
call center services, which we conduct through our VIE, are currently subject to foreign investment restrictions set forth in
the Catalogue of Industries for Guiding Foreign Investment, or the Catalogue, issued by the National Development and Reform Commission
and the Ministry of Commerce that was amended in 2015 and became effective in April 2015. The Draft FIL, if enacted as proposed,
may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.
Foreign
Operational Risks
We
are dependent on the state of the PRC’s economy as all of our business is conducted in the PRC and a decline would have
a material adverse effect on our business, financial condition and results of operations.
Currently,
all of our business operations are conducted in the PRC, and all of our customers are also located in the PRC. Accordingly, any
material slowdown in the PRC economy may cause our customers to reduce expenditures or delay the building of new facilities or
projects. This may in turn lead to a decline in the demand for the services we provide. Any such decline would have a material
adverse effect on our business, financial condition and results of operations.
A
general economic downturn, a recession or a sudden disruption in business conditions in the PRC may affect consumer spending on
discretionary items, including cellular telephone services and MVAS, which could adversely affect our business.
Consumer
spending is generally affected by a number of factors, including general economic conditions, the level of unemployment, inflation,
interest rates, energy costs, gasoline prices and consumer confidence generally, all of which are beyond our control. Consumer
purchases of discretionary items tend to decline during recessionary periods, when disposable income is lower, and may impact
sales of our services. In addition, sudden disruption in business conditions as a result of a terrorist attack, retaliation and
the threat of further attacks or retaliation, war, adverse weather conditions and climate changes or other natural disasters,
pandemic situations or large scale power outages can have a short or, sometimes, long-term impact on consumer spending. A downturn
in the economy in the PRC, including any recession or a sudden disruption of business conditions in the PRC, could adversely affect
our business, financial condition or results of operation.
Since
our operations and assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets
of our company, our directors and executive officers.
Our
operations and assets are located in the PRC. In addition, all of our executive officers and directors are non-residents of the
U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors
to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.
Although
we do not import goods into or export goods out of the PRC, fluctuation of the Renminbi (“RMB”) may indirectly affect
our financial condition by affecting the volume of cross-border money flow.
Although
we use the United States dollar for financial reporting purposes, all of the transactions effected by WFOE and Taiying are denominated
in the PRC’s currency, the RMB. The value of the RMB fluctuates and is subject to changes in the PRC’s political and
economic conditions. We do not currently engage in hedging activities to protect against foreign currency risks. Even if we choose
to engage in such hedging activities, we may not be able to do so effectively. Future movements in the exchange rate of the RMB
could adversely affect our financial condition as we may suffer financial losses when transferring money raised outside of China
into the country or paying vendors for services performed outside of China.
If
any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than
the U.S. dollar amount that you will actually ultimately receive.
If
you are a United States holder, you will be taxed on the U.S. dollar value of your dividends, if any, at the time you receive
them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted into U.S. dollars. Specifically,
if a dividend is declared and paid in a foreign currency, the amount of the dividend distribution that you must include in your
income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign currency, determined at the spot rate
of the foreign currency to the U.S. dollar on the date the dividend distribution is includible in your income, regardless of whether
the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency decreases before you actually convert
the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than the U.S. dollar amount that you will
actually ultimately receive.
We
may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.
Based
on the nature of our business activities, we may be classified as a passive foreign investment company (“PFIC”), by
the U.S. Internal Revenue Service (“IRS”), for U.S. federal income tax purposes. Such characterization could result
in adverse U.S. tax consequences to you if you are a U.S. investor. For example, if we are a PFIC, a U.S. investor will become
subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and
will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for U.S.
tax purposes if either:
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75%
or more of our gross income in a taxable year is passive income; or
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the
average percentage of our assets by value in a taxable year that produce or are held
for the production of passive income (which includes cash) is at least 50%.
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The
calculation of the value of our assets is based, in part, on the then market value of our common shares, which is subject to change.
In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raised in
our initial public offering. We cannot assure that we will not be a PFIC for any taxable year. See “Taxation – United
States Federal Income Taxation-Passive Foreign Investment Company.”
Introduction
of new laws or changes to existing laws by the PRC government may adversely affect our business.
The
PRC legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal
guidelines. Unlike common law jurisdictions such as the U.S., decided cases (which may be taken as reference) do not form part
of the legal structure of the PRC and thus have no binding effect. Furthermore, in line with its transformation from a centrally
planned economy to a more market-oriented economy, the PRC government is still in the process of developing a comprehensive set
of laws and regulations. As the legal system in the PRC is still evolving, laws and regulations or their interpretation may be
subject to further changes. Such uncertainty and prospective changes to the PRC legal system could adversely affect our results
of operations and financial condition.
Governmental
control of currency conversion may affect the value of your investment.
The
PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance
of currency out of the PRC, which may take as long as six months in the ordinary course. We receive the majority of our revenues
in Renminbi. Under our current corporate structure, our income is derived from payments from WFOE. Shortages in the
availability of foreign currency may restrict the ability of WFOE to remit sufficient foreign currency to pay dividends or other
payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the PRC SAFE by complying with certain procedural
requirements. However, approval from appropriate government authorities is required where Renminbi is to be converted into
foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign
currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders. See “Business
Overview – Regulations on Foreign Currency Exchange and Dividend Distribution.”
Fluctuation
of the Renminbi could materially affect our financial condition and results of operations
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes
in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value
of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band
against a basket of certain foreign currencies. This change in policy has resulted in an appreciation of the Renminbi against
the U.S. dollar. While the international reaction to the Renminbi revaluation has generally been positive, there remains international
pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more rapid
appreciation of the Renminbi against the U.S. dollar. Any material revaluation of Renminbi may materially and adversely affect
our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our common shares in
U.S. dollars. For example, an appreciation of Renminbi against the U.S. dollar would make any new Renminbi denominated investments
or expenditures more costly to us, to the extent that we need to convert U.S. dollars into Renminbi for such purposes. See “Exchange
Rate Information.”
Our business benefits from certain government grants and incentives,
and such grants decreased significantly during 2016. Expiration, reduction or discontinuation of, or changes to, these incentives
will increase our burden and reduce our net income.
The Company has received grants from various
governmental agencies after meeting certain conditions, such as locating call centers in their jurisdictions or obtaining certain
technological certifications. Government grants represented 22% of our net income during 2015. In 2016, grants represented 10%
of net income.
The Company has benefitted from such grants
and subsidies. In particular, The Company recently received:
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A one-time subsidy of $186,663 in 2016 from Department of Finance of Shandong Province for enterprise special support fund;
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A one-time subsidy of $3,274 in 2016 from Taian Finance Bureau for Undergrads Internship Subsidy;
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A one-time subsidy of $481 in 2016 from Taian Tax Bureau for the Individual Tax payment;
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A one-time subsidy of $13,985 in 2016 from Taian Finance Bureau for the Unemployment Insurance Fund payment;
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A one-time subsidy of $7,527 in 2016 from Taian
Finance Bureau for the Brand Technology Creativity Award;
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A one-time subsidy of $270,962 in 2016 from Chongqing Yongchuan
District People’s Government for the office renovation fees. The amount was included in deferred revenue as the performance
obligation is not fulfilled;
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A one-time subsidy of $130,226 in 2016 from
Chongqing Finance Bureau for Undergrads Internship Subsidy;
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A one-time subsidy of $119,890 in 2016 from
Chongqing Finance Bureau for the Unemployment Insurance Fund payment;
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A one-time subsidy of $86,953 in 2016 from Chongqing
Finance Bureau for the Loan Interest Subsidy
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A one-time subsidy of $2,629 in 2016 from Chongqing
Finance Bureau;
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A one-time subsidy of $66,081 in 2016 from Yantai Finance Bureau;
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A one-time subsidy of $2,045 in 2016 from Yantai Finance Bureau for the Unemployment Insurance Fund payment;
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A one-time subsidy of $7,529 in 2016 from Taizhou Finance Bureau;
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A one-time subsidy of $140,273 in 2016 from Taizhou Finance Bureau for Tax Refund;
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A one-time subsidy of $12,163 in 2016 from Huaian Finance Bureau;
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A one-time subsidy of $12,131 in 2016 from Huaian Finance Bureau for the Unemployment Insurance Fund payment;
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A one-time subsidy of $9,275 in 2016 from Nanjing Gaochun District Finance Bureau for Tax Refund;
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A one-time subsidy of $7,817 in 2015 from Taian Finance Bureau for Undergrads Intership Subsidy;
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A one-time subsidy of $211 in 2015 from Taian Tax Bureau for the Individual Tax payment;
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A one-time subsidy of $48,251 in 2015 from Taian Finance Bureau for Construction of Training System and Brand Building;
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A one-time tax credit of $350,265 in 2015 from Local File (Great Development of West China) Investment Promotion for Four Exemptions and Four Reductions on Business Tax and Value Added Tax;
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A one-time subsidy of $9,811 in 2015 from Chongqing Yongchuan District Finance Bureau;
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A one-time subsidy of $23,603 in 2015 from Chongqing Finance Bureau for Chongqing Undergrads Intership Subsidy;
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A one-time subsidy of $76,968 in 2015 from Chongqing Finance Bureau for the Unemployment Insurance Fund payment;
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A one-time subsidy of $33,775 in 2015 from Chongqing Finance Bureau; and
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A one-time subsidy of $476,880 in 2015 from Nanchang Qingshanhu District Dongzhen People’s Government for the office rental and renovation fees.
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In addition, in 2016, 2015 and 2014, the
Chinese government granted Taiying a 15% income tax rate, which is less than the standard 25% income tax rate in the PRC.
The
local PRC government authorities may reduce or eliminate these incentives through new legislation at any time in the future. In
the event Taiying is no longer exempt from lowered income taxation, its applicable tax rate would increase from 15% to up to 25%,
the standard business income tax rate in the PRC. In addition, the termination of one-time subsidies for call center business
development could increase the burden of constructing and operating call centers of such size in the future. The reduction or
discontinuation of any of these economic incentives could negatively affect our business and operations.
PRC’s labor law restricts our ability to reduce
our workforce in the PRC in the event of an economic downturn and may increase our production costs.
In December 2012, the National People’s
Congress of the PRC enacted the Decision to Amend the Labor Contract Law, according to the decision, the new Labor Contract Law
became effective on July 1, 2013. To clarify certain details in connection with the implementation of the Labor Contract
Law, the PRC State Council promulgated the Implementing Rules for the Labor Contract Law on September 18, 2008, which came
into effect immediately. The legislation formalized workers’ rights concerning overtime hours, pensions, layoffs, employment
contracts and the role of trade unions. Considered one of the strictest labor laws in the world, among other things, this new
law provides for specific standards and procedures for the termination of an employment contract and places the burden of proof
on the employer. In addition, the law requires the payment of a statutory severance pay upon the termination of an employment
contract in most cases, including the case of the expiration of a fixed-term employment contract. Further, the law requires an
employer to conclude an “employment contract without a fixed-term” with any employee who either has worked for the
same employer for 10 consecutive years or more or has had two consecutive fixed-term contracts with the same employer. An “employment
contract without a fixed term” can no longer be terminated on the ground of the expiration of the contract, although it
can still be terminated pursuant to the standards and procedures set forth under the new law. Because of the lack of precedent
for the enforcement of such a law, the standards and procedures set forth under the law in relation to the termination of an employment
contract have raised concerns among foreign investment enterprises in the PRC that such an “employment contract without
a fixed term” might in fact become a “lifetime, permanent employment contract.” Finally, under the new law,
downsizing of either more than 20 people or more than 10% of the workforce may occur only under specified circumstances, such
as a restructuring undertaken pursuant to the PRC’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties
in production and/or business operations, or where there has been a material change in the objective economic circumstances relied
upon by the parties at the time of the conclusion of the employment contract, thereby making the performance of such employment
contract not possible. To date, there has been very little guidance or precedent as to how such specified circumstances for downsizing
will be interpreted and enforced by the relevant PRC authorities. All of our employees working for us exclusively within the PRC
are covered by the new law and thus, our ability to adjust the size of our operations when necessary in periods of recession or
less severe economic downturns may be curtailed. Accordingly, if we face future periods of decline in business activity generally
or adverse economic periods specific to our business, this new law can be expected to exacerbate the adverse effect of the economic
environment on our results of operations and financial condition.
We
may be subject to fines and legal sanctions by SAFE or other PRC government authorities if we or our employees who are PRC citizens
fail to comply with PRC regulations relating to employee stock options granted by offshore listed companies to PRC citizens.
On February 15, 2012, SAFE promulgated
the Circular of the State Administration of Foreign Exchange on Issues Concerning the Administration of Foreign Exchange Used for
Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas, or Circular 7. Under Circular
7, Chinese citizens who are granted share options by an offshore listed company are required, through a Chinese agent or Chinese
subsidiary of the offshore listed company, to register with SAFE and complete certain other procedures, including applications
for foreign exchange purchase quotas and opening special bank accounts. We and our Chinese employees who have been granted share
options are subject to Circular 7. Failure to comply with these regulations may subject us or our Chinese employees to fines and
legal sanctions imposed by SAFE or other PRC government authorities and may prevent us from further granting options under our
share incentive plans to our employees. Such events could adversely affect our business operations.
Changes
in PRC’s political and economic policies could harm our business.
Substantially
all of our business operations are conducted in the PRC. Accordingly, our results of operations, financial condition and prospects
are subject to economic, political and legal developments in the PRC. China’s economy differs from the economies of most
developed countries in many respects, including with respect to the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources.
The
PRC economy has historically been a planned economy subject to governmental plans and quotas and has, in certain aspects, been
transitioning to a more market-oriented economy. Although we believe that the economic reform and the macroeconomic measures
adopted by the PRC government have had a positive effect on the economic development of PRC, we cannot predict the future direction
of these economic reforms or the effects these measures may have on our business, financial position or results of operations. In
addition, the PRC economy differs from the economies of most countries belonging to the Organization for Economic Cooperation
and Development (“OECD”). These differences include, without limitation:
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level
of government involvement in the economy;
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level
of capital reinvestment;
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control
of foreign exchange;
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methods
of allocating resources; and
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balance
of payments position.
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As
a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the PRC
economy were similar to those of the OECD member countries. See “Business Overview– Industry and Market Background.”
Since
1979, the Chinese government has promulgated many new laws and regulations covering general economic matters. Despite these
efforts to develop a legal system, the PRC’s system of laws is not yet complete. Even where adequate law exists in
the PRC, enforcement of existing laws or contracts based on existing law may be uncertain or sporadic, and it may be difficult
to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The
relative inexperience of the PRC’s judiciary, in many cases, creates additional uncertainty as to the outcome of any lawsuit. In
addition, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes.
Our activities in the PRC will also be subject to administration review and approval by various national and local agencies of
the PRC’s government. Because of the changes occurring in the PRC’s legal and regulatory structure, we may not
be able to secure the requisite governmental approval for our activities. Although we have obtained all required governmental
approvals to operate our business as currently conducted, to the extent we are unable to obtain or maintain required governmental
approvals, the PRC government may, in its sole discretion, prohibit us from conducting our business. See “Business
Overview – Industry and Market Background.”
If
relations between the United States and China worsen, our share price may decrease and we may have difficulty accessing U.S. capital
markets.
At various times during recent years, the United
States and China have had disagreements over political and economic issues. Controversies may arise in the future between these
two countries. Any political or trade controversy between the United States and China could adversely affect the market price
of our common shares and our ability to access U.S. capital markets.
If we become directly subject to the recent scrutiny,
criticism and negative publicity involving U.S.-listed China-based companies, we may have to expend significant resources to investigate
and resolve the matter which could harm our business operations, this offering and our reputation and could result in a loss of
your investment in our shares, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have
substantially all of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by
investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity
has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny,
criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value
and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement
actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our company, our business and this offering. If we become the subject of
any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources
to investigate such allegations and/or defend the Company. This situation may be a major distraction to our management. If such
allegations are not proven to be groundless, our company and business operations will be severely hampered and your investment
in our shares could be rendered worthless.
The
Chinese government could change its policies toward private enterprise or even nationalize or expropriate private enterprises,
which could result in the total loss of our investment in that country.
Our
business is subject to political and economic uncertainties and may be adversely affected by political, economic and social developments
in the PRC. Over the past several years, the PRC government has pursued economic reform policies including the encouragement
of private economic activity and greater economic decentralization. The PRC government may not continue to pursue these policies
or may alter them to our detriment from time to time with little, if any, prior notice.
Changes
in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency
conversion, restrictions or prohibitions on dividend payments to shareholders, devaluations of currency or the nationalization
or other expropriation of private enterprises could have a material adverse effect on our business. Nationalization or expropriation
could even result in the total loss of our investment in the PRC and in the total loss of any investment in us.
Because
our operations are located in the PRC, information about our operations is not readily available from independent third-party
sources.
Because
Taiying and WFOE are based in the PRC, our shareholders may have greater difficulty in obtaining information about them on a timely
basis than would shareholders of a U.S.-based company. Their operations will continue to be conducted in the PRC and shareholders
may have difficulty in obtaining information about them from sources other than the companies themselves. Information available
from newspapers, trade journals, or local, regional or national regulatory agencies such as issuance of construction permits and
contract awards for development projects will not be readily available to shareholders and, where available, will likely be available
only in Chinese. Shareholders will be dependent upon management for reports of their progress, development, activities and expenditure
of proceeds.
Risks
Related to Ownership of Our Common Shares
The
market price for our common shares may be volatile, which could result in substantial losses to investors.
The trading prices for our common shares have
fluctuated since we first listed our common shares. Since our common shares became listed on the NASDAQ on December 21, 2015,
the trading price of our common shares has ranged from $4.39 to $22.00 per common share, and the last reported trading price
on April 27, 2017 was $14.66 per common share. The market price of our common shares may fluctuate significantly in response
to numerous factors, many of which are beyond our control, including:
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actual
or anticipated fluctuations in our revenue and other operating results;
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the
financial projections we may provide to the public, any changes in these projections
or our failure to meet these projections;
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actions
of securities analysts who initiate or maintain coverage of us, changes in financial
estimates by any securities analysts who follow our company, or our failure to meet these
estimates or the expectations of investors;
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announcements
by us or our competitors of significant products or features, technical innovations,
acquisitions, strategic partnerships, joint ventures, or capital commitments;
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price
and volume fluctuations in the overall stock market, including as a result of trends
in the economy as a whole;
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lawsuits
threatened or filed against us;
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price
and volume fluctuations in the overall stock market, including as a result of trends
in the economy as a whole; and
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other
events or factors, including those resulting from war or incidents of terrorism, or responses
to these events
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In
addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action
litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us
to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
If
our financial condition deteriorates, we may not meet continued listing standards on the NASDAQ Capital Market.
The
NASDAQ Capital Market requires companies to fulfill specific requirements in order for their shares to continue to be listed.
In order to qualify for continued listing on the NASDAQ Capital Market, we must meet the following criteria:
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Our
shareholders’ equity must be at least $2,500,000; or the market value of our listed
securities must be at least $35,000,000; or our net income from continuing operations
in our last fiscal year (or two of the last three fiscal years) must have been at least
$500,000;
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The
market value of our shares must be at least $1,000,000;
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The
minimum bid price for our shares must be at least $1.00 per share;
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We
must have at least 300 shareholders;
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We
must have at least 2 market makers; and
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We
must have adopted NASDAQ-mandated corporate governance measures, including a Board of
Directors comprised of a majority of independent directors, an Audit Committee comprised
solely of independent directors and the adoption of a code of ethics among other items.
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If
our shares are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our
shares. In addition, if our common shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have
our common shares quoted on the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau,
Inc. The Bulletin Board and the “pink sheets” are generally considered to be less efficient markets than the NASDAQ
Capital Market. In addition, if our common shares are not so listed or are delisted at some later date, our common shares may
be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers
that sell low-priced securities to persons other than established customers and institutional accredited investors and require
the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness
of broker-dealers to sell or make a market in our common shares might decline. If our common shares are not so listed or are delisted
from the NASDAQ Capital Market at some later date or become subject to the penny stock regulations, it is likely that the price
of our shares would decline and that our shareholders would find it difficult to sell their shares.
We
incur increased costs as a result of being a public company.
As
a public company, we incur legal, accounting and other expenses that we did not incur as a private company. For example, we must
now engage U.S. securities law counsel and U.S. auditors that we did not require as a private company, and we have annual payments
for listing on Nasdaq. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and Nasdaq,
have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase
our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly.
In addition, we incur additional costs associated with our public company reporting requirements. While it is impossible to determine
the amounts of such expenses, we expect that we incur expenses of between $500,000 and $1 million per year that we did not experience
as a private company.
The obligation to disclose information publicly may
put us at a disadvantage to competitors that are private companies which could have an adverse effect on our results of operations.
Upon completion of this offering, we will
be a reporting company in the United States. As a reporting company, we will be required to file periodic reports with the Securities
and Exchange Commission upon the occurrence of matters that are material to our company and shareholders. In some cases, we will
need to disclose material agreements or results of financial operations that we would not be required to disclose if we were a
private company. Our competitors may have access to this information, which would otherwise be confidential. This may give them
advantages in competing with our company. Similarly, as a U.S.-listed public company, we will be governed by U.S. laws that our
competitors, which are mostly private Chinese companies, are not required to follow. To the extent compliance with U.S. laws increases
our expenses or decreases our competitiveness against such companies, our public listing could affect our results of operations.
Our classified board structure may prevent a change
in control of our company.
Our board of directors is divided into
three classes of directors. Directors of the first class hold office for a term expiring at the next annual meeting of shareholders,
directors of the second class hold office for a term expiring at the second succeeding annual meeting of shareholders and directors
of the third class hold office for a term expiring as the third succeeding annual meeting shareholders. Directors of each
class are chosen for three-year terms upon the expiration of their current terms. The staggered terms of our directors may reduce
the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be
in the best interest of our shareholders. See “Management – C. Board Practices.”
Our
classified board structure may prevent a change in control of our company.
Our board of directors is divided
into three classes of directors. Directors of the first class hold office for a term expiring at the next annual meeting
of shareholders, directors of the second class hold office for a term expiring at the second succeeding annual meeting of
shareholders and directors of the third class hold office for a term expiring as the third succeeding annual meeting
shareholders. Directors of each class are chosen for three-year terms upon the expiration of their current terms. The
staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even
though a tender offer or change in control might be in the best interest of our shareholders. See “Management
– Composition of Board and Board Committees.”
Shares
eligible for future sale may adversely affect the market price of our common shares, as the future sale of a substantial amount
of outstanding common shares in the public marketplace could reduce the price of our common shares.
The
market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the
perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through
future offerings of our common shares. An aggregate of 18,329,600 of our shares are currently outstanding. The 2,400,000
shares sold in our initial public offering are freely transferable without restriction or further registration under the Securities
Act. The remaining 15,929,600 shares are “restricted securities” as defined in Rule 144. These shares may
be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under
the Securities Act.
Our
employees, officers and/or directors control a sizeable amount of our common shares, decreasing your influence on shareholder
decisions.
Our
employees, officers and/or directors, in the aggregate, beneficially own approximately 28.1% of our outstanding shares.
As a result, our employees, officers and directors possess substantial ability to impact our management and affairs and the outcome
of matters submitted to shareholders for approval. These shareholders, acting individually or as a group, could exert substantial
influence over matters such as electing directors and approving mergers or other business combination transactions. This concentration
of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our
shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price
of our common shares. These actions may be taken even if they are opposed by our other shareholders. See “Share Ownership.”
As
the rights of stockholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as
a shareholder
.
Our
corporate affairs are governed by our memorandum and articles of association, the British Virgin Islands Business Companies Act,
2004 (the “BVI Act”), and the common law of the British Virgin Islands. The rights of shareholders to take legal action
against our directors, actions by minority stockholders and the fiduciary responsibilities of our directors under British Virgin
Islands law are to a large extent governed by the common law of the British Virgin Islands and by the BVI Act. The common law
of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as
well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The
rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly
established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular,
the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such
as Delaware) have more fully developed and judicially interpreted bodies of corporate law.
As
a result of all of the above, holders of our shares may have more difficulty protecting their interests through actions against
our management, directors or major shareholders than they would as shareholders of a U.S. company.
British
Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability
to protect their interests
.
British
Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
The circumstances in which any such action may be brought, and the procedures and defenses that may be available with respect
to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those
of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to
them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize
or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and
to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions
of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments
obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal
judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were
to sue us successfully, they may not be able to recover anything to make up for the losses suffered.
The
laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little
or no recourse if the shareholders are dissatisfied with the conduct of our affairs
.
Under
the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the
provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders
may bring an action to enforce the constituent documents of the corporation, in our case, our Memorandum and Articles of Association.
Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the Memorandum and
Articles. There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company
law, since the common law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to
English company law known as the rule in
Foss v. Harbottle
, a court will generally refuse to interfere with the management
of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s
affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted
properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently
disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then
the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained
of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts
that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights
of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval
of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders
under the laws of many states in the United States.
Item
4. Information on the Company
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A.
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History and Development of the Company.
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Corporate
History – Taiying, WFOE, CBPO and CCRC
Taiying was incorporated on December 18,
2007 as a domestic Chinese limited company. We formed CBPO, WFOE and CCRC in 2014, in anticipation of registering the common shares
of CCRC in our initial public offering. In connection with the formation of CCRC, CBPO and WFOE, we caused WFOE to become the wholly-owned
foreign entity of CBPO as of August 2014 and to enter into certain control agreements with Taiying and its shareholder, pursuant
to which we, by virtue of our ownership of CBPO and CBPO’s ownership of WFOE, control Taiying.
Corporate History – Central BPO, JTTC HTCC, SCBI, JCBI,
ATIT, STTNB, STTCB, JTIS, NTEB, JXTT, XTCC, BTTC and ZSEC
Taiying
incorporated the following subsidiaries on the dates indicated below:
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Central
BPO – January 28, 2010;
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JTTC
– February 25, 2010;
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JCBI
– December 12, 2013;
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ATIT
– December 26, 2013;
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STTCB
– February 22, 2013;
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NTEB
– December 25, 2014;
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JXTT
– January 8, 2015;
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XTTC
– March 20, 2015; and
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BTTC
– June 30, 2015
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ZSEC
– June 16, 2016
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Purpose and Significance of Taiying and its Subsidiaries, Central
BPO, JTTC, HTCC, SCBI, JCBI, ATIT, STTNB, STTCB, JTIS, NTEB, JXTT, XTTC, BTTC and ZSEC
Taiying
and its subsidiaries operate call centers throughout China. Below is a list of the call centers Taiying and each subsidiary operates,
along with the revenue allocated to each call center for 2016.
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Central
BPO operates a call center located in Chongqing
and accounted for approximately 29.93% of revenue in 2016.
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JTTC
operates a call center located in Taizhou city, Jiangsu province, and accounted for approximately 6.30% of revenue in 2016.
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SCBI
operates a call center located in Yantai city, Shandong province, and accounted for approximately 5.94% of revenue in
2016.
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JCBI
operates a call center located in Kunshan city, Jiangsu province, and accounted for approximately 1.50% of revenue in
2016.
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ATIT
operates a call center located in Hefei city, Anhui province, and accounted for approximately 1.80% of revenue in 2016.
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STTNB operates a call center located in
Nanning city, Guangxi province, and accounted for approximately 3.96% of revenue in 2016.
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STTCB does not operate a call center as the
services were outsourced from Central BPO.
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HTCC operates a call center located in Sanhe
city, Hebei province, and is accounted for approximately 3.82% of revenue in 2016.
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JTIS operates a call center located in Huaian city, Jiangsu province, and is accounted for approximately 7.63% of revenue in 2016.
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NTEB does not operate any call center as it provides technological support to other call centers. Accordingly, NTEB does not generate any external revenues.
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JXTT operates a call center located in Nanchang city, Jiangxi province, and is accounted for approximately 5.08% of revenue in 2016.
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XTTC operates a call center located in Changji City, Xinjiang Uygur Autonomous Region, and is accounted for approximately 10.55% of revenue in 2016.
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Taiying operates a call center located in Taian City, Shandong province, which accounted for approximately 23.50% of revenue in 2016.
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BTTC does not operate any call center. It does not generate any external revenues.
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ZSEC did not operate any call center, and did not generate any revenue currently. Taiying began to send employees to work at a customer’s facilities, in order to develop the BPO service area around Zaozhuang City, Shandong Province.
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The
principal executive offices of our main operations are located at 1366 Zhongtianmen Dajie, Xinghuo Science and Technology Park,
Hugh-tech Zone, Taian City, Shandong Province, People's Republic of China 271000. Our telephone number at this address is (+86)
538 691 8899. Our registered office in the Brithish Virgin Islands is at the offices of NovaSage Chambers, P.O. Box 4389, Road
Town, Tortola, British Virgin Islands, British Virgin Islands. Our agent for service of process in the United States is Vcorp
Agent Services, Inc. located at 25 Robert Pitt Dr., Suite 204, Monsey, New York 10952. Our corporate website is
www.ccrc.com
.
Initial
Public Offering
In December 2015, we completed our
initial public offering, in which we offered and sold an aggregate of 2,400,000 common shares. We received approximately $8.8 million
in proceeds before expenses and less placement fee. Our common shares are listed on the NASDAQ Capital Market under the symbol “CCRC.”
Overview
We
are a BPO service provider focusing on the complex, voice-based segment of customer care services, including customer relationship
management, technical support, sales, customer retention, marketing surveys and research for certain major enterprises in the
PRC. Our call center BPO services enable our clients to increase revenue, reduce operating costs, improve customer satisfaction,
and enhance overall brand value and customer loyalty. Our largest customers are the provincial subsidiaries of two of the three
telecommunications carriers in the PRC, China Mobile and China Telecom. We also provide outsourcing services to our clients whereby
they can lease our employees to work at their offices. We operate our business through contractual arrangements between our wholly-owned
subsidiary, WFOE and our variable interest entity, Taiying.
Taiying
was founded in 2007 by a group of call center industry veterans who have experience running one of the largest paging service
call center network in northern China. Our service programs are delivered through a set of standardized best practices and sophisticated
technologies by our highly trained call center professionals.
We
seek to establish long-term, strategic relationships with our clients by delivering quantifiable value solutions that help improve
our clients’ revenue generation, reduce operating costs, and improve customer satisfaction. To achieve these objectives,
we work closely with our clients to understand what drives their economic value, and then we demonstrate how our performance on
their programs will align with that value. After we initiate the client program, we measure our performance each quarter on key
metrics that we have agreed upon with the client, such as first-time call resolution, the rate at which we are successful in completing
a sale on behalf of our client and customer satisfaction, and then convert our performance into quantifiable value. We then share
this information with our clients to enable them to compare the quantifiable value we have delivered to the value they have received
from other BPO providers or their in-house operations. By entering into contracts containing pricing terms that our clients agree
are based on the value we create per dollar spent by the client, rather than a pricing model focused solely on being able to deliver
the least expensive service offering, or a cost-based commodity pricing model which we believe is most often emphasized in our
industry, we believe we can increase our ability to withstand competitive pricing pressure and to win and retain clients.
We
believe our investments in the quality of our people and processes can lead to quantifiably superior results for our clients.
We have high standards for our employees and we make significant investments in all areas of our human capital, including training,
quality assurance, coaching and our performance management system. We employ a scorecard system that uses objective metrics to
review an employee’s performance to provide clarity of purpose and to ensure accountability for individual results. This
scorecard system is linked to a compensation structure for our employees that is heavily based on individual performance. As a
result of our reliance on objective metrics in our performance management system, we have what we refer to as a metric-driven
performance culture among our employees. We believe that our focus on investing in human capital and use of a metric-driven, performance
based business model positions us to provide value-added solutions to our clients, which we believe leads to strong relationships
with our clients and recognition in our industry.
As
we grow, we continue to expand our national presence and service offerings to increase revenue, improve operational efficiencies
and drive brand loyalty for our clients. Our service is currently delivered from our call centers located in Shandong Province,
Jiangxi Province, Hebei Province, Anhui Province, the Xinjiang Uygur Autonomous Region, the Guangxi Zhuang Autonomous Region and
Chongqing City, which have a total capacity of 11,057 seats. In addition to answering and responding to inbound calls, we also
make outbound cold calls to assist the provincial subsidiaries of China Mobile and China Telecom in promoting their own mobile
value-added service MVAS products, such as weather, health, education and farming related MVAS to targeted China Mobile and China
Telecom subscribers. Our largest clients in terms of revenue for the year ended December 31, 2016 were China Mobile, China
Telecom, China Construction Bank, Alipay Internet Technology and Haier.
In
addition, we have received several industry awards and asked to participate in several important industry activities. Notable
awards and activities include:
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“Business
Work Advanced Unit of Taian City”, awarded by the People’s Government of Taian on February 2016;
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“Golden
Earphone Award - China Best Call Center (Runoff Election)” for 2016, awarded by CCM World Group;
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Golden
Earphone Award - China Best Call Center (Excellent Outsourcing Service)” for 2016, awarded by CCM World Group;
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“Golden
Voice Award - China Best Outsourcing Customer Contact Center” for 2016, awarded by 51 Call Center;
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“Scientific
Development Advanced Enterprise” for 2015, awarded by the Management Committee of Taian Gaoxin District and the Party
Working Committee of Taian Gaoxin District;
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“Opening
Up Work Advanced Enterprise” for 2015, awarded by the Management Committee of Taian Gaoxin District and the Party Working
Committee of Taian Gaoxin District;
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“Science Development Advanced Enterprise in Taian Gaoxin District” for 2015, awarded by Taian
Gaoxin District Party and Labor Management Commission;
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“Pulitzer
Award of Shandong Service Outsourcing” for 2015, awarded by Shandong Service Outsourcing
Association;
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“
Golden Voice Award
- China Best Outsourcing Customers Contact Center (Inbound Calling)” for 2015, awarded by 51 Call Center;
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“Golden
Earphone Award” for 2015, awarded by CCM World Group;
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“The
Well Known Servicing Enterprise Who has the Most Growth Potential in China” for
2014, awarded by The Expert Committee of China Service and Trade Association;
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“Important
Contact Candidates of Outsourcing Enterprises” for 2012, by Ministry of Commerce
of the People’s Republic of China;
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“Shandong
Province Service Outsourcing Growing Enterprise” for 2012, awarded by Shandong
Province Department of Commerce;
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“China’s
Best Outbound Outsourcing Contact Center of the Year” for 2011, awarded by the
Ministry of Industry and Information Technology based on the number of call center seats,
number of employees, quality of customers, and quality of service;
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“The
Promising Star of China’s Best Outsourcing Contact Center of the Year” for
2011, awarded to Taiying’s subsidiary, Chongqing Centre BPO Industry Co., Ltd.,
by the Ministry of Industry and Information Technology based on the number of call center
seats, number of employees, quality of customers, and quality of service;
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“China’s
Best Inbound Outsourcing Contact Center of the Year” for 2009, awarded by the Ministry
of Industry and Information Technology based on the number of call center seats, number
of employees, quality of customers, and quality of service;
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“100
Strongest Outsourcing Company” for 2009, recognition granted by MOFCOM based on
the number of call center seats, number of employees, quality of customer and quality
of service;
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being
named as one of only four team members of the Ministry of Industry and Information Technology’s
China Call Center BPO Industry Guideline Drafting Team;
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being
named the Leading Call Center BPO Enterprise by the government of Shandong Province (we believe we are only one of no more than
three companies to have been so named to date);
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being
chosen as the College Graduates Employment Training Base by the Youth League of Shandong
Province; and
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being
chosen as the College Graduates Employment Training Base by the Youth League of Shandong
Province.
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In addition, our CEO, Gary Wang, was awarded the Golden
Voice Award – China Customer Service Leader for 2016, awarded by 51 Call Center, Operational Manager of the Best Enterprise
in 2015, awarded by the Taian Gaoxin District Party Labor and Management Commission and the Outstanding Contribution Award of China
Customer Contract Center Industry 2015, awarded by the Alliance Institute of China Calling Center an BPO Industry. Further, he
is one of the ten people recognized to receive the 2013 Outstanding People Award of China Software Outsourcing and Information
Technology Service Industry, an award jointly issued by China Software Outsourcing and Information Technology Service Industry
Alliance and the Software and Integrated Circuit Promotion Center of the Ministry of Industry and Information Technology (MIIT).
Mr. Wang was also one of the fifteen people recognized to receive the 2011 and 2009 China Sourcing Person of the Year within the
China Software and Information Industry Category, and award given by MIIT. Our CFO, David Wang, was awarded the Outstanding People
Award of China IT Service Industry for 2014 and 2015, awarded by the Alliance of China IT Service Industry. All of these awards
and appointments were made by independent entities in open competitions with others in the industry. We believe they reflect widespread
recognition of our stature and success in our industry as well as the quality of our service.
Industry
and Market Background
China’s
Call Center BPO Market
Compared
with countries such as the U.S. and India that have relatively more mature markets, China’s call center outsourcing market
is still in its early stage of development. In the past few years, competition in China’s market was relatively low due
to highly differentiated positions and large number of unexploited potential outsourcing customers. At present, low price, standard
service vendors tend to be most popular in the market. Nevertheless, as more competition in the China market is introduced in
the future, we believe that the ability to provide customer-oriented solutions in the China call center BPO market will be increasingly
valued by customers.
Future
outsourcing development is highly dependent on the current BPO companies’ performance and strategies. Among the current
outsourcing companies, the key drivers of high performance are cost, service quality, intellectual property rights protection,
workforce skills, and industry expertise, along with a high degree of comfort and familiarity with the use of outsourcing as an
effective business practice. Growth in the China call center BPO market will depend on the industry’s ability to address
customer concerns in such areas as quality, confidentiality, information processing ability, human resources, and price.
In
the highly competitive global contact center outsourcing market, China enjoys several advantages. As a result of 30 years of economic
reform, China has greatly improved its infrastructure, in some areas matching those in developed countries. China has a large
domestic market and supply of well-educated workers, along with a talent pool supported by a well-developed education system.
In addition, despite rising labor costs, China’s outsourcing businesses still have, a low cost advantage on the global call
center market.
We
believe outsourcing will continue to grow as a result of greater client demand for cost savings, along with the need for high-quality
customer interactions and innovative service solutions that deliver tangible value. We also believe the desire for companies to
focus on core competencies will remain strong and continue to cause them to outsource certain non-core functions to experienced
outsourcing providers with the appropriate scale, consistent processes and technological expertise.
China’s
economic growth has resulted in a growing consumer population, and we believe that Chinese consumers will continue to develop
needs that can be more efficiently serviced and supported through BPO services. The call center BPO services of our clients are
non-core outsourcing processes, or BPO services that our clients may not view as critical to their operations and are outsourced
to us. By providing these services for our clients, we aid them in streamlining their business operations. Our clients transfer
the complete responsibility of their BPO functions to us, and we are then responsible for maintaining service quality standards.
Telecommunications
Market
According to the Ministry of Industry and Information
Technology, at the end of July 2016, the number of China’s mobile phone subscribers increased to approximately 1.3 billion.
According to China Internet Network Information Center at the end of 2016, China had approximately 695 million mobile internet
users, the percentage of those using mobile phones to go online reaching 95%. With intensified competition in the telecommunications
market, major telecommunication companies such as China Mobile are making transitions from voice-centric to data-centric operations,
from communications to mobile Internet and information consumption, and from mobile communication operations to innovative full
service operations.
Growth in China’s telecommunications sector continues
to be influenced by the country’s overall economy. China’s gross domestic product (“GDP”) increased 6.7%
over the previous year, according to the National Statistical Bureau of China.
Our
Operating Companies’ largest customers are the provincial subsidiaries of two of the three major telecommunications operators
in China, namely China Mobile and China Telecom. The restructuring of China’s telecommunications industry opened the fixed-line,
mobile and broadband segments to all existing telecommunications operators in China, and the ensuing competition in these segments
prompted each telecommunications operator to focus more on operating efficiency and its measure metrics, namely, average revenue
per employee. We believe that increasing competition among the three operators will drive demand for outsourcing their call center
functions to third party service providers.
China’s
Banking Industry
China’s banking system has grown considerably in recent years. According to the Institute of International
Finance, China’s bank assets have grown more than five-fold over the last decade, as compared with a 40-50% increase in the
US, Euro Area, and Japanese bank assets. According to Bankrate’s website, in 2016, the top four of the world’s largest
banks by asset size are Chinese banks. The total assets of the Industrial and Commercial Bank of China, the biggest bank in the
world reached $3.62 trillion.
According
to market research, China’s banking industry is likely to experience significant changes as a result of the continuous opening
up and reform of the financial services industry. First, the marketization of interest rate and the loosening of financial services
licenses will likely lead to significant changes in the business foundations of traditional commercial banks. As a consequence,
the financial service market may offer increasingly more innovative financial products with better returns. Second, Internet and
mobile computing are bringing dramatic changes to the delivery of traditional banking products such as deposits, lending, settlements
and investments. These changes are likely to affect the traditional channels, products and services developed by commercial banks.
Finally, China’s decision to grant banking licenses to private capital entities can invigorate its banking sector. These
new comers can further improve the banking industry’s overall performance as a result of increased competition. Developments
in China’s banking industry will bring pressure on financial institutions to take measures to generate sales, reduce their
costs of operations, and become more efficient. One such measure is to outsource their call center or data services to companies
like us.
Online
Retail Market
China’s online retail market is expected to benefit
from its large population of Internet users. According to
China Internet Network Information Center
, China had the world’s
largest Internet population with 731 million users as of December 31, 2016. According to
China Internet Network Information
Center
, China has the world’s largest mobile Internet user base with 695 million users as of end of 2016, and mobile
usage is expected to increase, driven by the growing adoption of mobile devices. The increased usage of mobile devices will make
access to the Internet even more convenient, drive higher online shopper engagement and enable new applications.
In 2016, the total transaction value of China’s
online shopping market exceeded $752 billion, an increase of 26.2% over the previous year, according to China Internet Watch. This
number is expected to increase as a result of continued growth in Internet users as well as an increased proportion of Internet
users making purchases online. Our recent execution of an outsourcing contract with a subsidiary of Alibaba, China’s largest
online retailer will, we believe, position us favorably in providing outsourcing services to the online retail market. Alibaba
is expected to reach gross merchandise volume of $912 billion in the calendar year 2020.
Our
Competitive Strengths
We
believe the following strengths differentiate us from our competitors in our market in China:
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We
are a provider of telecommunications call center BPO services to subsidiaries of two
significant telecommunications carriers in China.
Our principal operating company,
Taiying, is a provider of call center BPO services to the provincial subsidiaries of
two of the three telecommunications carriers in China, specifically China Mobile and
China Telecom;
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We
have developed comprehensive and scalable solutions.
Taiying has developed different
programs to maximize outbound calling professionals’ performance across all three
major sales metrics: (i) units sold - conversion rate and sales per hour, (ii) customer
retention, and (iii) customer satisfaction from a positive sales experience. Taiying
benefits from economies of scale as a result of being one of the largest telecommunications
call center BPO operation in China;
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We
possess a commitment to innovation and quality service.
Taiying, JTIC,
JXTY
,
SCBI
and Central BPO have respectively obtained an aggregate 50 registered computer software ownership rights from the China
State
Copyright
Bureau. Taiying has attained several awards in recognition of its efforts in setting up national call center standards and
in
improving the quality of call center service; and Taiying has been recognized with awards and certificates by a variety of
government entities for its efforts in call center BPO service;
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We
possess a strategic, national presence
. We have 11 call center
locations in 10 provinces in the PRC China, with the intention to service 18 provinces, 2 autonomous region, and 4 directly-administered
municipalities (Beijing, Shanghai, Tianjin, and Chongqing). We believe that our customers value this strong national presence
and our ability to do business in multiple geographic regions in the PRC depending on factors such as the life cycle of their
products, the complexity of the work being performed, the cultural and local language requirements, and the economics of the total
service solution. Our resulting ability to customize a multi-geographic strategy enhances our ability to win new clients or expand
our market share with existing clients;
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We
possess a high quality, loyal client base in attractive sectors
.
We maintain
broad and long-standing relationships with the provincial subsidiaries of the leading
telecommunications companies in the PRC: China Mobile and China Telecom. Notwithstanding
our lack of long-term agreements we believe that we have sustainable and long-term relationships
with our clients that make us an integral component of their planning, strategy, and
cost model. We believe our clients seek our services due to our ability to provide scalable
and timely solutions that leverage our proven processes and technology investments. We
believe that our approach to client service and our relationships will allow us to maintain
our existing base of business and grow new business as our clients launch new products
and enter new geographic regions in the PRC;
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We
focus upon strong industry growth opportunities
.
We have traditionally
focused on the telecommunications segments within the BPO market because of its growth
potential and attractive operating margins. In addition, we seek to capitalize on the
national trend toward outsourcing BPO services. We also believe that the current economic
slowdown has increased demand for outsourcing not only because it can reduce customer
service costs, but also because it offers an incremental channel to increase sales. At
the same time, we expect to benefit from growth in other industries such as financial
services, government bodies, IT and e-commerce; and
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We
employ highly qualified personnel.
Taiying’s workforce is highly skilled
with specialized training designed to address complex customer care engagements; our
entrepreneurial management team includes employees who have significant experience managing
call center services
.
Led by industry veteran, founder, chairman and chief executive
officer, Gary Wang, our management team is comprised of an experienced group of executives,
many of whom have approximately 15 or more years of operating experience in the call
center BPO industry.
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Our
Strategies
We
provide integrated BPO services to help our clients create maximum value for their customers over the long-term. Our goal is to
become the largest call center BPO service provider in China. We intend to achieve this goal by implementing the following strategies:
We
intend to pursue strategic acquisitions and alliances that fit within our core competencies and growth strategy
. We plan
to grow our revenues and market share both organically and through targeted acquisitions. Our plans to expand our service offerings
into new segments, such as data management, or into new industries, such as financial services and government bodies, may be accomplished
most efficiently and cost effectively through the acquisition of companies or assets, or through joint venture arrangements with
third parties. We view acquisitions as a key component of our growth strategy and expect to seek acquisitions in the future that
will expand our existing competencies or add to our portfolio of BPO capabilities;
We
intend to strengthen relationships with key customers
. Our existing clients are the subsidiaries of large companies with
diverse BPO needs and we plan to continue our strategy of expanding the scale and scope of the services we provide for these large
clients. We intend to further strengthen our relationships with key clients by not only offering an efficient and flexible cost
model that can reduce costs to the client, but also by expanding our current service offerings within our existing client base
to generate additional revenues for our clients;
We intend to develop new client relationships
.
We intend to capitalize on growth opportunities driven by a trend towards use of third party BPO service providers in China’s
call center outsourcing market. The 11,057 seat capacity of our existing facilities in Shandong, Jiangsu Province, Jiangxi
Province, Hebei Province, Anhui Province, the Xinjiang Uygur Autonomous Region, the Guangxi Zhuang Autonomous Region and Chongqing
City represents what we believe is a very small percentage of China’s BPO market, which leaves potential for us to gain
market share;
We
intend to increase our revenue and market share by expanding our service networks to other provinces
. We started with
our call center in Shandong Province, which covers the north region of China. Over the years, we have established a new call center
in Chongqing City, which covered the southwest region of China, and three new call centers in Jiangsu Province, which positioned
us to target potential clients in the Yangtze River Delta. We have also added call centers in Hebei Province, Anhui Province,
the Xinjiang Uygur Autonomous Region, and the Guangxi Zhuang Autonomous Region;
We
intend to diversify our client base and provide services to other industries, such as financial services, government bodies, IT
and e-commerce
. We currently have a single industry focus, with most of our revenues coming from the telecommunications
industry. While we continue to target the significant market opportunity still available in the telecommunications industry, diversification
of our client base to include customers in the financial services, government, IT and e-commerce industries will position us to
maximize our return on the core competencies of our operation. We believe that the financial services, government services, IT
and e-commerce industries, combined with the telecommunications industry, represent a majority of the overall outsourced market;
We
intend to continue to enhance our brand and augment our service offerings to attract a wider client base and increase revenues
.
We expect to continue to promote our brand name, increase our revenue through a combination of securing business from new clients
and increasing our service offerings and market share for existing clients. We expect that our track record, reputation, referrals
and historical working relationship with the provincial subsidiaries of two of the largest telecommunications operators in China,
will allow us to win new clients in the future as more companies outsource their BPO function. We also expect to generate new
business by working with our clients to outsource non-core programs that are currently managed internally; and
We
intend to continue to attract and retain quality employees. We plan to continue our focus on, and investment in, human capital
.
Building on our already strong base of recruiting, training and performance management systems, we plan to expand our efforts
in all of these areas to increase our recruiting capacity and maintain our ability to deliver high-quality services.
Our
Lines of Service
We
believe BPO is a key enabler of improved business performance as measured by a company’s ability to consistently outperform
peers through both business and economic cycles. We believe the benefits of BPO include renewed focus on core capabilities, faster
time to market, enhanced revenue generation opportunities, streamlined processes, reduced capital and operating risk, movement
from a fixed to variable cost structure, access to borderless sourcing capabilities, and creation of proprietary best operating
practices and technology, all of which contribute to increased customer satisfaction, profits and shareholder returns for our
clients.
We
believe that companies with high customer satisfaction levels enjoy premium pricing in their industry, which we believe results
in increased profitability and greater shareholder returns. Given the strong correlation between customer satisfaction and improved
profitability, we believe that more companies are increasingly focused on selecting outsourcing partners, such as Taiying, that
can deliver strategic revenue generation and front-to-back-office capabilities to improve the customer experience.
Our
service offerings enable our clients to increase revenue, reduce operating costs, improve customer satisfaction, and enhance overall
brand value and customer loyalty.
Inbound
Customer Care Service
. Our inbound customer support service offers answering service hotlines in China, 24 hours a day,
7 days a week. Contacts are initiated primarily by inbound calls from customers on a wide range of topics dealing with customer
enquiries regarding services and billings, directory assistance, account and service changes, password reset/appeals, product
and service inquiries, hotel reservations, airline ticket purchases, customer retention and customer complaints. Customer retention
programs are programs where the customer is calling to cancel service. In the latter case, our customer service associates are
trained to attempt to resolve the customer’s issue and convince the customer to keep their service with the particular provider.
In addition, we initiate sales calls, primarily to existing customers of our clients, for retention and loyalty programs, and
in some cases unsolicited calling for customer acquisition. Taiying operates under licensing and revenue sharing agreements with
the provincial subsidiaries of China Mobile and China Telecom for its inbound calling service.
Outbound Customer Care Service
.
We also provide outbound cold calling services such as selling China Mobile’s color ring back tones (“CRBT”),
wireless news service, daily weather service and other Mobile value added service MVAS to targeted wireless subscribers. Through
market segmentation, customer trends and analysis of customer attrition rates, we generate revenue by making targeted outbound
cold callings of potential subscribers. Unlike other MVAS providers who use China Mobile or China Telecom networks simply as a
distribution channel, we create and manage a vast range of MVAS products for China Mobile or China Telecom, as the case may be,
and market them to mobile phone users through the Company’s call centers under the China Mobile or China Telecom brand, as
the case may be. The provincial subsidiaries of China Mobile and China Telecom compensate our company for selling their products
and increasing their revenues by splitting the subscription fee according to a pre-determined formula for successfully enrolling
each subscriber. We believe this arrangement, emphasizing the sale of the products of the telecommunications operator rather than
our own distinguishes us from our competitors, and further strengthen our relationship with the provincial subsidiaries of China
Mobile and China Telecom.
For
inbound customer care service, fees are charged based on either number of calls (a fixed charge per interaction) or predetermined
seats charges (weekly charges, or monthly charges per seat). For outbound cold calling services, fees are charged based on the
success of marketing the product and service upon subscription. Telecommunications operators such as China Mobile and China Telecom
typically charge a subscription fee to the subscriber’s monthly bill, keeps predetermined percentage of this fee for itself
and remits the remainder to us. For advanced services, revenue sharing varies among products.
We currently derive a significant portion
of our revenue from telecommunications clients. We receive most of our revenue from a small number of clients; we derived 71% and
78% of our revenues in 2016 and 2015, respectively, from our five largest clients.
We primarily utilize our cash flow from
operations and short-term loans to fund working capital, and other strategic and general operating purposes. As of December 31,
2016 and 2015, we had $0 and $1,748,479 in short term loans, respectively. The amount of capital required over the next 12 months
will also depend on our levels of investment in infrastructure necessary to meet the growth demand of our business. Our working
capital and capital expenditure requirements could increase materially in the event of acquisitions or joint ventures, among other
factors. These factors could require that we raise additional capital through future debt or equity financing. There can be no
assurance that additional financing will be available, at all, or on terms favorable to us.
Customers
Many of our current customers are the provincial
subsidiaries of China Mobile and China Telecom and their regional affiliated entities. For the year ended December 31, 2016,
revenues from the provincial subsidiaries of China Mobile accounted for $24.96 million, revenues from the provincial subsidiaries
of China Telecom were $10.46 million, or approximately 34% or 14% of our total revenues, respectively.
The provincial subsidiaries of China Mobile
contributed 34%, 45% and 48% of total revenues for the years ended December 31, 2016, 2015 and 2014, respectively. The provincial
subsidiaries of China Telecom contributed 14%, 19% and 26% of total revenues for the years ended December 31, 2016, 2015 and
2015, respectively.
In addition to the provincial subsidiaries
of China Mobile and China Telecom, we also generate revenues from Haier, GM OnStar, and Volvo. We also have outsourcing contracts
with two of China’s top five largest banks, China Construction Bank and China CITIC Bank. We also recently entered into
an outsourcing contract with ChinaCitic Bank, Rookie Logistic, Alipay, and Benz.
Contractual
Arrangements
We
have signed contracts with the provincial subsidiaries of China Mobile and China Telecom for inbound calling services generally
having one-year term. Outbound customer care service contracts also generally have one-year terms. Both inbound and outbound contracts
have no automatic renewal provisions.
Five
of our customer relationships currently in place collectively accounted for about 71% of our revenues in the year of 2016. The
customers (in order of their contribution to our revenues during that period) are as follows: the provincial subsidiaries of China
Mobile and China Telecom, China Construction Bank, Alipay Internet Technology and Haier. Any loss of our relationship with those
customers could impact our revenue and profits.
Sales
and Marketing
Our
sales and marketing strategy has focused primarily on the telecommunications sector and substantially all of our historical revenues
have been derived from telecommunications customers. In addition to continuing to grow our presence in the telecom sector, we
have focused on the financial services sector and government bodies for further expansion. We rely on our own sales force to market
and sell our services in China. Our sales team is responsible for obtaining new clients and growing existing clients by identifying
additional sales opportunities. Our sales team is supported by our sales support team, which responds to requests for proposals
and requests for information, including preparing written responses to such requests. Our sales support team is also specifically
responsible for managing and coordinating visits by clients to our call centers. We view these site visits as one of the most
important parts of our sales cycle, and we design site visits to allow prospective clients to experience the elements of our business
model at work.
The
focus of our sales and marketing efforts is to educate prospective clients on what we believe differentiates us as an outsourced
provider in the BPO market. Specifically, our sales effort focuses on our approach of investing in our human capital to outperform
expectations and in delivering greater value per dollar spent. We provide a sales proposition to a prospective client based on
quantifiable value per dollar spent by the client on our services. This gives the client a means of comparing our value created
per dollar spent as compared to the same metrics for their internal centers or other outsourcers. We believe that this approach
has been crucial to winning and retaining clients and increasing our ability to withstand competitive pricing pressure.
Our sales organizations are structured into three strategic
customer accounts: The provincial subsidiaries of China Mobile and China Telecom and major enterprises. These accounts sell our
solutions and services to the respective customers and manage our long-term relationships with them. As of December 31, 2016,
we had 12 sales, marketing and sales support professionals.
Competition
We
operate in a highly competitive environment. We estimate that there are hundreds of companies providing call center BPO service
in China. We also compete with the in-house business process functions of our current and potential clients. We believe our key
advantage over in-house business process functions is that we enable companies to focus on their core services while we focus
on the specialized function of managing their customer relationships. We also compete with certain companies that provide BPO
services including: CM-Tong, Meiyin, Boyue, Asiainfo, 95Teleweb, and Poicom.
We
compete primarily on the basis of our experience, reputation, our quality and scope of services, our speed and flexibility of
implementation, our technological expertise, total value delivered, and our quantifiable value per dollar spent by the client
on our services.
The
business process outsourcing industry is extremely competitive, and outsourcers have historically competed based on pricing terms.
Accordingly, we could be subject to pricing pressure and may experience a decline in our average selling prices for our services.
We attempt to mitigate this pricing pressure by differentiating ourselves from our competition based on the value we bring to
our clients through the quality of our services and our ability to provide quantifiable results that our clients can measure against
our competitors. We seek to compete by emphasizing to our clients the value they receive per dollar spent for our services. We
do not generally compete in the segment of the customer care BPO market that focuses solely on price. We normally provide a sales
proposition to a client based on quantifiable value per dollar spent by the client on our services. We believe that our ability
to quantify value has allowed us to negotiate primarily fixed pricing with our clients that reflects the greater value created
per dollar spent, rather than the cost-based commodity pricing model most often emphasized in our industry.
We
believe that we have competitive advantages in the markets we serve due to our metric-driven BPO solutions, comprehensive and
scalable product and service offerings, customer-centric and cost effective project management capability, and established customer
relationships.
The
principal competitive factors in our markets include:
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ability
to provide services that are innovative and attractive to customers and their end-users;
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service
functionality, quality and performance;
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customer
service and support;
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establishment
of a significant customer base; and
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ability
to introduce new services to the market in a timely manner
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Research
and Development
We
are committed to researching, designing and developing call center information technology solutions and software products that
will meet the future needs of our customers. We continuously upgrade our existing software products to enhance scalability and
performance and to provide added features and functions. As of December 31, 2016, our research and development team consisted
of 57 researchers, engineers, developers and programmers. In addition, certain support employees regularly participate in our
research and development programs. Research and development expenses consist primarily of wage expense incurred to personnel to
continuously upgrade the Company’s existing software products. For the year ended December 31, 2016, 2015, and 2014, research
and development expenses of $3,264,073, $1,962,659, and $679,755 were included in selling, general and administrative expenses.
Intellectual
Property Rights
The
PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also a signatory
to all of the world’s major intellectual property conventions, including the:
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Convention
establishing the World Intellectual Property Organization (WIPO Convention) (June 4,
1980);
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Paris
Convention for the Protection of Industrial Property (March 19, 1985);
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Patent
Cooperation Treaty (January 1, 1994); and
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Agreement
on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
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WIPO Copyright Treaty (WCT) and WIPO
Performances and Phonograms Treaty (WPPT) (June 2007).
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The
PRC Trademark Law, adopted in 1982 and revised in 2013, with its implementation rules adopted in 2014, protects registered trademarks.
The Trademark Office of the State Administration of Industry and Commerce (“SAIC”), handles trademark registrations
and grants trademark registrations for a term of ten years.
Our
intellectual property rights are important to our business. We rely on a combination of trade secrets, confidentiality procedures
and contractual provisions to protect our intellectual property. We do not presently hold any patents or registered trademarks.
We have been granted registered computer software
ownership rights to fifty pieces of intellectual property rights by the China State Copyright Bureau, which allows us to implement
our own computer systems without having to purchase them from an outside vendor, lowering our startup costs for additional call
centers. Among them are: five software programs related to call center integration and optimization; three software programs related
to customer relationship management; one software program related to online testing; and one software program related to insurance
industry customer service inquiry system. The China State Intellectual Property Office has granted us patents to two pieces of
intellectual property rights, both patents are related to call center integration and optimization. The Trademark Office of SAIC
has granted us a registered trademark for the abbreviation
of our company name, CCRC. We have been granted one domain name right by Internet Corporation for Assigned Names and Numbers (“ICANN”)
,
which is our website address ccrc.com. We enter into confidentiality agreements with most of our employees and consultants, and
control access to and distribution of our documentation and other licensed information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our technology without authorization, or to develop similar technology independently.
Since the Chinese legal system in general, and the intellectual property regime in particular, is relatively weak, it is often
difficult to enforce intellectual property rights in China. Policing unauthorized use of our technology is difficult and the steps
we take may not prevent misappropriation or infringement of our proprietary technology. In addition, litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope
of the proprietary rights of others, which could result in substantial costs and diversion of our resources and could have a material
adverse effect on our business, results of operations and financial condition.
We
require our employees to enter into non-disclosure agreements to limit access to and distribution of our proprietary and confidential
information. These agreements generally provide that any confidential or proprietary information developed by us or on our behalf
must be kept confidential. These agreements also provide that any confidential or proprietary information disclosed to third parties
in the course of our business must be kept confidential by such third parties.
As of December 31, 2016, we have obtained
fifty registered computer software ownership rights from the China State Copyright Bureau
,
two patents from the China State Intellectual Property Office, one registered trademark from the Trademark Office of SAIC and
one domain name right from ICANN.
In
the event of trademark infringement, the SAIC has the authority to fine the infringer and to confiscate or destroy the infringing
products. In addition to actions taken by SAIC, Taiying would be entitled to sue an infringer for compensation.
REGULATION
Regulation
of the Telecommunications Industry
The
telecommunications industry is highly regulated in China. PRC laws and regulations restrict foreign investment in China’s
telecommunications service industry. The contractual arrangements between our wholly-owned subsidiary, WFOE, and Taiying, allow
us to exercise significant rights over the business operations of Taiying and to realize the economic benefits of the business.
We believe that our operations are in compliance in all material aspects with current, applicable PRC regulations. However, many
PRC laws and regulations are subject to extensive interpretive power of governmental agencies and commissions, and there is substantial
uncertainty regarding the future interpretation and application of these laws or regulations.
The
Chinese telecommunications industry, in which our largest customers operate, is subject to extensive government regulation and
control. Currently, all the major telecommunications and Internet service providers in China are primarily state owned or state
controlled and their business decisions and strategies are affected by the government’s budgeting and spending plans. In
addition, they are required to comply with regulations and rules promulgated from time to time by the Ministry of Industry and
Information Technology and other ministries and government departments.
In September, 2000, China published the Regulations of the People’s Republic of China on Telecommunications,
or the “Telecommunications Regulations.”, as amended in February, 2016. The Telecommunications Regulations were the
first comprehensive set of regulations governing the conduct of telecommunications businesses in China. In particular, the Telecommunications
Regulations set out in clear terms the framework for operational licensing, network interconnection, the setting of telecommunications
charges and standards of telecommunications services in China. Also in September 2000, China’s State Council approved the
Administrative Measures on Internet Information Services, as amended in January, 2011, which provide for control and censoring
of information on the Internet.
In December, 2001, the Ministry of Information
Industry (“MII”), which was reorganized as the Ministry of Industry and Information Technology in June, 2008, promulgated
the Administrative Measures for Telecommunications Business Operating Licenses, as amended (the “2009 Regulations”).
The 2009 Regulations provide for two types of telecommunications operating licenses for carriers in the PRC, namely licenses for
basic services and licenses for value-added services. In February, 2003, the MII issued a classification of basic and value-added
telecommunications services, as amended in March, 2016 (the “2015 Classification”). The 2015 Classification maintains
the general distinction between basic telecommunications services, or BTS, and value-added telecommunications services, or VATS,
and attempts to define the scope of each service. In particular, the 2015 Classification delineated the differences between “Type
1” and “Type 2” value-added services. Type 1 includes internet data center (IDC), content delivery network (CDN),
domestic Internet VPN services (IP-VPN) and internet access services (ISP). Type 2 covers storage and retransmission (email, voice
mail, facsimile), online date and transaction processing, call centers, domestic multi-party communications services, information
services, encoding and protocol conversion and domain name services (DNS).
Under a separate set of regulations introduced
in December, 2001, qualified foreign investors are permitted to invest in certain sectors of China’s telecommunications
industry through Sino-foreign joint ventures, including Type 2 VATS providers, although there have been few reported investments
of this nature to date. These regulations, known as the Provisions on the Administration of Foreign-Invested Telecommunications
Enterprises, as amended (the “2016 Provisions”), were the result of China’s accession to the World Trade Organization.
Under these provisions, certain qualifying foreign investors are permitted to own up to 49% of basic telecommunications businesses
in China, and up to 50% of value-added telecommunications services businesses and wireless paging businesses (one of the basic
telecommunications businesses).
Despite the introduction of the 2016 Provisions,
PRC regulations still restrict most direct foreign ownership of VATS businesses in the PRC. We and our PRC operating subsidiaries
are considered foreign persons or foreign-invested enterprises under PRC laws, and are therefore subject to foreign ownership
restrictions in connection with our limited VATS Type 2 business activities. In order to comply with these restrictions, WFOE,
our wholly-owned subsidiary, has entered into a series of control agreements with Taiying and its sole shareholder, which allow
us to exercise significant rights over the business operations of Taiying and to realize the economic benefits of the business.
We do not have any equity interest in Taiying, but instead have the right to enjoy economic benefits similar to equity ownership
through our control agreements with Taiying and its sole shareholder. For more information on the regulatory and other risks associated
with our contractual arrangements related to Taiying, please see the discussion in “Risk Factors—Risks Relating to
Our Corporate Structure.” We believe that our operations are in compliance in all material aspects with current, applicable
PRC regulations. However, many PRC laws and regulations are subject to extensive interpretive power of governmental agencies and
commissions, and there is substantial uncertainty regarding the future interpretation and application of these laws or regulations.
Regulation
of Foreign Currency Exchange and Dividend Distribution
Foreign
Currency Exchange.
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration
Regulations (1996), as amended on August 5, 2008, the Administration Rules of the Settlement, Sale and Payment of Foreign
Exchange (1996) and the Interim Measures on Administration on Foreign Debts (2003). Under these regulations, Renminbi are freely
convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign
exchange transactions, but not for most capital account items, such as direct investment, loans, repatriation of investment and
investment in securities outside China, unless the prior approval of SAFE or its local counterparts is obtained. In addition,
any loans to an operating subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed the difference
between its respective approved total investment amount and its respective approved registered capital amount. Furthermore, any
foreign loan must be registered with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of
the total investment and registered capital must be approved by the PRC Ministry of Commerce or its local counterpart. We may
not be able to obtain these government approvals or registrations on a timely basis, if at all, which could result in a delay
in the process of making these loans.
The
dividends paid by the subsidiary to its shareholder are deemed shareholder income and are taxable in China. Pursuant to the Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may retain foreign
exchange incomes, subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE.
Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration
with, SAFE and other relevant PRC governmental authorities.
Dividend
Distribution.
The principal regulations governing the distribution of dividends by foreign holding companies include the
Company Law of the PRC (1993), as amended in 2013, the Foreign Investment Enterprise Law (1986), as amended in 2016, and the Administrative
Rules under the Foreign Investment Enterprise Law (2001), as amended in 2014.
Under
these regulations, wholly foreign-owned investment enterprises in China may pay dividends only out of their retained profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned investment enterprises
in China are required to allocate at least 10% of their respective retained profits each year, if any, to fund certain reserve
funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable
as cash dividends, and a wholly foreign-owned enterprise is not permitted to distribute any profits until losses from prior fiscal
years have been offset.
Circular
37.
On July 4, 2014, SAFE issued Circular 37, which became effective as of July 4, 2014. According to Circular
37, PRC residents shall apply to SAFE and its branches for going through the procedures for foreign exchange registration of overseas
investments before contributing the domestic assets or interests to a SPV. An amendment to registration or filing with the local
SAFE branch by such PRC resident is also required if the registered overseas SPV’s basic information such as domestic individual
resident shareholder, name, operating period, or major events such as domestic individual resident capital increase, capital reduction,
share transfer or exchange, merger or division has changed. Although the change of overseas funds raised by overseas SPV, overseas
investment exercised by overseas SPV and non-cross-border capital flow are not included in Circular 37, we may be required to
make foreign exchange registration if required by SAFE and its branches.
Moreover,
Circular 37 applies retroactively. As a result, PRC residents who have contributed domestic assets or interests to a SPV, but
failed to complete foreign exchange registration of overseas investments as required prior to implementation of Circular 37, are
required to send a letter to SAFE and its branches for explanation. Under the relevant rules, failure to comply with the registration
procedures set forth in Circular 37 may result in receiving a warning from SAFE and its branches, and may result in a fine
of up to RMB 300,000 for an organization or up to RMB 50,000 for an individual. In the event of failing to register, if capital
outflow occurred, a fine up to 30% of the illegal amount may be assessed.
PRC
residents who control our company are required to register with SAFE in connection with their investments in us. If we use our
equity interest to purchase the assets or equity interest of a PRC company owned by PRC residents in the future, such PRC residents
will be subject to the registration procedures described in Circular 37.
New
M&A Regulations and Overseas Listings
On
August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration
Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, CSRC and SAFE, jointly
issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which
became effective on September 8, 2006 and was amended on June 22, 2009. This New M&A Rule, among other things, includes
provisions that purport to require that an offshore special purpose vehicle formed for purposes of overseas listing of equity
interests in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of CSRC prior
to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.
On
September 21, 2006, CSRC published on its official website procedures regarding its approval of overseas listings by special
purpose vehicles. The CSRC approval procedures require the filing of a number of documents with the CSRC and it would take several
months to complete the approval process. The application of this new PRC regulation remains unclear with no consensus currently
existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval requirement.
Our
PRC counsel, has advised us that, based on their understanding of the current PRC laws and regulations:
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we
currently control the Operating Companies by virtue of WFOE’s VIE agreements with
CCRC but not through equity interest acquisition nor asset acquisition which are stipulated
in the New M&A Rule; and
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in
spite of the above, CSRC currently has not issued any definitive rule or interpretation
concerning whether offerings like our initial public offering are subject to this new
procedure.
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Regulations
on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries
An
offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after
investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested
enterprise in China, which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law,
the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing
rules; the Administrative Provisions on Foreign Exchange in Domestic Direct Investment by Foreign Investors; and the Notice of
the State Administration on Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct
Investment.
Under the aforesaid laws and regulations, the
increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by the original approval
authority of its establishment. In addition, the increase of registered capital and total investment amount shall be registered
with Ministry of Commerce (or authorized provincial or same level government), SAIC and SAFE.
Shareholder
loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory
purpose, which is subject to a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations,
the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts
and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.
Under
these regulations, the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered
with SAFE. Furthermore, the total amount of foreign debts that can be borrowed by such PRC subsidiaries, including any shareholder
loans, shall not exceed the difference between the total investment amount and the registered capital amount of the PRC subsidiaries,
both of which are subject to the governmental approval.
Proposed
China Foreign Investment Law
The
content of the Draft FIL marks a move by MOFCOM to alter its regulation on foreign investment and streamline the current regulatory
framework. Among other proposals, the Draft FIL provides that a domestic enterprise established in the PRC that is “controlled”
by a foreign investor will be deemed to be a foreign invested enterprise, even if the domestic enterprise is directly owned by
Chinese shareholders. This means that if MOFCOM finds that a Chinese entity—which operates in a restricted or prohibited
area—is effectively “controlled” by a foreign entity through a VIE structure, then it may treat the VIE structure
as a foreign direct investment and, therefore, subject it to the additional regulations.
The
National People’s Congress (“NPC”) has not yet provided a clear legislative timeline for the Draft FIL. Therefore,
it may take some time before the Draft FIL is finally promulgated. Until then, the Draft FIL could be substantially amended as
other relevant regulators such as the National Development and Reform Commission and the SAIC may intervene in the drafting. It
remains to be seen how much of the Draft FIL will be preserved or changed and implemented before it is submitted to the National
People’s Congress (NPC), for final approval. Therefore, without knowledge of the final content of the Draft FIL before it
becomes law, there is uncertainty of the potential impact of the Draft FIL on our VIE structure.
Regulations Relating to Intellectual Property Rights
Patent.
Patents in China are principally
protected under the Patent Law of China. The duration of a patent right is either 10 years (utility model or design) or 20 years
(invention) from the date of application, depending on the type of patent right.
Copyright.
Copyright in China,
including copyrighted software, is principally protected under the Copyright Law of China and related rules and regulations. Under
the Copyright Law, for a company, the term of protection for copyright is 50 years from the first publication of its work.
Trademark.
Registered trademarks
are protected under the Trademark Law of China and related rules and regulations. Trademarks are registered with the Trademark
Office of the State Administration for Industry and Commerce. Where registration is sought for a trademark that is identical or
similar to another trademark that has already been registered or given preliminary examination and approval for use in the same
or similar category of commodities or services, the application for registration of such trademark could be rejected. Trademark
registrations are effective for a renewable ten-year period, unless otherwise revoked.
Domain names.
Domain
names are protected under the Administrative Measures on the Internet Domain Names promulgated by the MIIT. The MIIT is the major
regulatory body responsible for the administration of the Chinese Internet domain names, under supervision of which the CNNIC is
responsible for the daily administration of .cn domain names and Chinese domain names. MIIT adopts the “first to file”
principle with respect to the registration of domain names.
Employee Stock Option Plans
In February 2012, SAFE promulgated the
Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan
of Overseas Publicly-Listed Company, replacing earlier rules promulgated in March 2007, to regulate the foreign exchange administration
of Chinese citizens and non-Chinese citizens who reside in China for a continuous period of not less than one year, with a few
exceptions, who participate in stock incentive plans of overseas publicly-listed companies. Pursuant to these rules, these individuals
who participate in any stock incentive plan of an overseas publicly-listed company, are required to register with SAFE through
a domestic qualified agent, which could be the Chinese subsidiaries of such overseas listed company, and complete certain other
procedures. We and our executive officers and other employees who are Chinese citizens or non-Chinese citizens who reside in China
for a continuous period of not less than one year and have been granted options would be subject to these regulations upon the
completion of this offering. Failure to complete such SAFE registrations could subject us and these employees to fines and other
legal sanctions. The State Administration of Taxation has issued certain circulars concerning employee share options or restricted
shares. Under these circulars, our employees working in China who exercise share options or are granted restricted shares would
be subject Chinese individual income tax.
Regulations Relating to Labor
Pursuant
to the China Labor Law, which was adopted in 1995 and amended in 2009, and the China Labor Contract Law, which was adopted in
2008 and amended in 2012, a written labor contract is required when an employment relationship is established between an employer
and an employee. Other labor-related regulations and rules of China stipulate the maximum number of working hours per day and
per week as well as the minimum wages. An employer is required to set up occupational safety and sanitation systems, implement
the national occupational safety and sanitation rules and standards, educate employees on occupational safety and sanitation,
prevent accidents at work and reduce occupational hazards.
An employer is obligated to sign an indefinite term labor contract with an employee if the
employer continues to employ the employee after two consecutive fixed-term labor contracts or the employee has worked for the
employer for ten years, with certain exceptions. The employer also has to pay compensation to the employee if the employer terminates
an indefinite term labor contract, with certain exceptions. Except where the employer proposes to renew a labor contract by maintaining
or raising the conditions of the labor contract and the employee is not agreeable to the renewal, an employer is required to compensate
the employee when a definite term labor contract expires. Furthermore, under the Regulations on Paid Annual Leave for Employees
issued by the State Council in December 2007 and effective as of January 2008, an employee who has served an employer for more
than one year and less than ten years is entitled to a 5-day paid vacation, those whose service period ranges from 10 to 20 years
are entitled to a 10-day paid vacation, and those who have served for more than 20 years are entitled to a 15-day paid vacation.
An employee who does not use such vacation time at the request of the employer must be compensated at three times their normal
salaries for each waived vacation day.
Pursuant to the Regulations on Occupational
Injury Insurance which was adopted in 2004 and amended in 2010, and the Interim Measures concerning the Maternity Insurance for
Enterprise Employees, which was adopted in 1995, Chinese companies must pay occupational injury insurance premiums and maternity
insurance premiums for their employees. Pursuant to the Interim Regulations on the Collection and Payment of Social Insurance Premiums,
which was adopted in 1999, and the Interim Measures concerning the Administration of the Registration of Social Insurance, which
was adopted in 1999, basic pension insurance, medical insurance and unemployment insurance are collectively referred to as social
insurance. Both Chinese companies and their employees are required to contribute to the social insurance plans. The aforesaid measures
are reiterated in the Social Insurance Law of China, which was adopted in July 2011, which stipulates the system of social insurance
of China, including basic pension insurance, medical insurance, unemployment insurance, occupational injury insurance and maternity
insurance. Pursuant to the Regulations on the Administration of Housing Fund, which was adopted in 1999 and amended in 2002, Chinese
companies must register with applicable housing fund management centers and help each of their employees to establish a special
housing fund account in an entrusted bank. Both Chinese companies and their employees are required to contribute to the housing
funds.
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Organizational Structure.
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We are a holding company incorporated in the
British Virgin Islands that owns all of the outstanding capital stock of CBPO, our wholly owned Hong Kong subsidiary. CBPO, in
turn, owns all of the outstanding capital stock of WFOE, our operating subsidiary based in Taian City, Shandong Province, China.
WFOE has entered into control agreements with the sole shareholder of Taiying, which agreements allow WFOE to control Taiying.
Through our ownership of CBPO, CBPO’s ownership of WFOE and WFOE’s agreements with Taiying, we control Taiying. Taiying,
in turn, is the sole shareholder of Central BPO, JTTC, HTCC, SCBI, JCBI, ATIT, STTNB, STTCB, JTIS, NTEB, JXTT, XTTC, BTTC and
ZSEC. CCRC was formed by Taiying as part of a reorganization to facilitate it becoming a public company. The shareholders of Beijing
Taiying presently own 83% of the shares of CCRC.
Corporate
History – Taiying, WFOE, CBPO and CCRC
Taiying was incorporated on December 18,
2007 as a domestic Chinese limited company. We formed CBPO, WFOE and CCRC in 2014, in anticipation of registering the common shares
of CCRC in our initial public offering. In connection with the formation of CCRC, CBPO and WFOE, we caused WFOE to become the wholly-owned
foreign entity of CBPO as of August 2014 and to enter into certain control agreements with Taiying and its shareholder, pursuant
to which we, by virtue of our ownership of CBPO and CBPO’s ownership of WFOE, control Taiying.
Corporate History – Central BPO, JTTC HTCC, SCBI, JCBI,
ATIT, STTNB, STTCB, JTIS, NTEB, JXTT, XTCC, BTTC and ZSEC
Taiying
incorporated the following subsidiaries on the dates indicated below:
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Central BPO – January 28, 2010;
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JTTC – February 25, 2010;
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HTCC – April 20, 2010;
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SCBI – August 9, 2012;
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JCBI – December 12, 2013;
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ATIT – December 26, 2013;
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STTNB – May 28, 2013;
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STTCB – February 22, 2013;
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JTIS – July 1, 2014;
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NTEB – December 25, 2014;
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JXTT – January 8, 2015;
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XTTC – March 20, 2015; and
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●
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BTTC – June 30, 2015
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●
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ZSEC - June 16, 2016
|
Purpose and Significance of Taiying and its Subsidiaries, Central
BPO, JTTC, HTCC, SCBI, JCBI, ATIT, STTNB, STTCB, JTIS, NTEB, JXTT, XTTC, ZSEC and BTTC
Taiying
and its subsidiaries operate call centers throughout China. Below is a list of the call centers Taiying and each subsidiary operates,
along with the revenue allocated to each call center for 2016.
|
●
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Central BPO operates a call center located in Chongqing
and accounted for approximately 29.93% of revenue in 2016.
|
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●
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JTTC operates a call center located in Taizhou city, Jiangsu province, and accounted for approximately 6.30% of revenue in 2016.
|
|
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●
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SCBI operates a call center located in Yantai city, Shandong province, and accounted for approximately 5.94% of revenue in 2016.
|
|
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●
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JCBI operates a call center located in Kunshan city, Jiangsu province, and accounted for approximately 1.50% of revenue in 2016.
|
|
|
|
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●
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ATIT operates a call center located in Hefei city, Anhui province, and accounted for approximately 1.80% of revenue in 2016.
|
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●
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STTNB operates a call center located in Nanning city, Guangxi province, and accounted for approximately 3.96% of revenue in 2016.
|
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●
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STTCB does not operate a call center as the services were outsourced from Central BPO.
|
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●
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HTCC operates a call center located in Sanhe city, Hebei province, and is accounted for approximately 3.82% of revenue in 2016.
|
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●
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JTIS operates a call center located in Huaian city, Jiangsu province, and is accounted for approximately 7.63% of revenue in 2016.
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|
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|
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●
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NTEB does not operate any call center as it provides technological support to other call centers. Accordingly, NTEB does not generate any external revenues.
|
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●
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JXTT operates a call center located in Nanchang city, Jiangxi province, and is accounted for approximately 5.08% of revenue in 2016.
|
|
|
|
|
●
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XTTC operates a call center located in Changji City, Xinjiang Uygur Autonomous Region, and is accounted for approximately 10.55% of revenue in 2016.
|
|
|
|
|
●
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Taiying operates a call center located in Taian City, Shandong province, which accounted for approximately 23.50% of revenue in 2016.
|
|
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●
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BTTC does not operate any call center. It does not generate any external revenues.
|
|
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●
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ZSEC does not operate any call center, and did not generate any revenue currently. Taiying began to send employees to work at a customer’s facilities, in order to develop the BPO service area around Zaozhuang City, Shandong Province.
|
Control
Agreements
We
conduct our business in China through our subsidiary, WFOE. WFOE, in turn, conducts its business through Taiying, in which we hold
no equity interest, but which we control through a series of control agreements with Taiying and its shareholder. Foreign ownership
of certain business is subject to restriction under applicable PRC laws, rules and regulations. Certain aspects of our call center
business are subject to these restrictions on foreign investment. In order to comply with these laws and regulations, we have
entered into control agreements with Taiying through which we operate the restricted businesses. Under U.S. GAAP, Taiying is considered
a VIE. U.S. GAAP requires us to consolidate the operating companies in our financial statements because our control agreements
related to Taiying provide us with the risks and rewards associated with equity ownership, even though we do not own any of the
outstanding equity interests in the Operating Companies.
On
September 3, 2014, Taiying and its sole shareholder, Beijing Taiying, entered into an Entrusted Management Agreement, Exclusive
Option Agreement, Shareholder’s Voting Proxy Agreement and Pledge of Equity Interest Agreement (collectively, the “Control
Agreements”) with WFOE in return for ownership interests in CCRC. Through the organization of CCRC as a holding company,
Beijing Taiying’s shareholders now own 83% of the common shares of CCRC. The remaining 17% of CCRC’s common shares
belong to other investors. CCRC indirectly controls Taiying through its 100% equity interests of WFOE. Through the Control Agreements,
we can control the Operating Companies’ daily operations and financial affairs, appoint their senior executives and approve
all matters requiring shareholder approval. As a result of the Control Agreements, which enable us to control the Operating Companies
and cause WFOE to absorb 100% of the expected losses and gains of the Operating Companies, we are considered the primary beneficiary
of the Operating Companies. Accordingly, we consolidate the Operating Companies’ operating results, assets and liabilities
in our financial statements.
Our
current corporate structure is as follows:
Contractual
Arrangements with Taiying and its Shareholder
. Our relationships with Taiying and its sole shareholder are governed by
a series of contractual arrangements. Other than pursuant to the contractual arrangements between WFOE and Taiying, Taiying need
not transfer any other funds generated from its operations to WFOE. Effective as of September 3, 2014, WFOE entered into
the Control Agreements with Taiying and its sole shareholder, Beijing Taiying, which provide as follows:
Entrusted
Management Agreement
.
Taiying, its sole shareholder and WFOE have entered into an Entrusted Management Agreement, which
provides that WFOE will be fully and exclusively responsible for the management of Taiying. As consideration for such services,
Taiying has agreed to pay the entrusted management fee during the term of this agreement. The entrusted management fee will be
equal to Taiying’s estimated earnings. Also, WFOE will assume all operational risks related to the entrusted management
of Taiying and bear all losses of Taiying. The term of this agreement will be from the effective date thereof to the earliest
of the following: (1) the winding up of Taiying; (2) the termination date of the Entrusted Management Agreement, as
agreed by the parties thereto; or (3) the date on which WFOE completes an acquisition of Taiying.
Exclusive
Option Agreement
. Taiying and Taiying’s sole shareholder have entered into an Exclusive Option Agreement with WFOE,
which provides that WFOE will be entitled to acquire such shares from the current shareholder upon certain terms and conditions.
In addition, WFOE is entitled to an irrevocable exclusive purchase option to purchase all or part of the assets and business of
Taiying, if such a purchase is or becomes allowable under PRC laws and regulations and WFOE so elects. The Exclusive Option Agreement
also prohibits Taiying and its shareholder from transferring any portion of the equity interests, business or assets of Taiying
to anyone other than WFOE. WFOE has not yet taken any corporate action to exercise this right of purchase, and there is no guarantee
that it will do so or will be permitted to do so by applicable law at such times as it may wish to do so.
Shareholder’s
Voting Proxy Agreement
. The shareholder of Taiying has executed a Shareholder’s Voting Proxy Agreement to irrevocably
appoint the persons designated by WFOE with the exclusive right to exercise, on their behalf, all of its voting rights in accordance
with applicable law and Taiying’s Articles of Association, including but not limited to the rights to sell or transfer all
or any of its equity interests in Taiying and to appoint and elect the directors and Chairman as the authorized legal representative
of Taiying. This agreement will only be terminated prior to the completion of acquisition of all of the equity interests in, or
all assets or business of Taiying.
Pledge
of Equity Interest Agreement.
WFOE and the shareholder of Taiying have entered into a Pledge of Equity Agreement, pursuant
to which the shareholder pledged all of its shares (100%) of Taiying, to WFOE. If Taiying or its shareholder breaches its
respective contractual obligations in the “Entrusted Management Agreement”, “Exclusive Option Agreement”
and “Shareholders’ Voting Proxy Agreement”, WFOE as pledgee, will be entitled to certain right to foreclose
on the pledged equity interests. Taiying’s shareholder cannot dispose of the pledged equity interests or take any actions
that would prejudice WFOE’s interest. This pledge has been recorded with applicable authorities in China to perfect WFOE’s
security interest.
Although
the structure the company has adopted is consistent with longstanding industry practice, and is commonly adopted by comparable
companies in China, the PRC government may not agree that these arrangements comply with PRC licensing, registration or other
regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. There are
uncertainties regarding the interpretation and application of PRC laws and regulations including those that govern the company’s
contractual arrangements, which could limit the company’s ability to enforce these contractual arrangements. If the company
or any of its variable interest entities are found to be in violation of any existing or future PRC laws, rules or regulations,
or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad
discretion to take action in dealing with such violations or failures, including levying fines, revoking business and other licenses
of the company’s variable interest entities, requiring the company to discontinue or restrict its operations, restricting
its right to collect revenue, requiring the company to restructure its operations or taking other regulatory or enforcement actions
against the company. In addition, it is unclear what impact the PRC government actions would have on the company and on its ability
to consolidate the financial results of its variable interest entities in the consolidated financial statements, if the PRC government
authorities were to find the company’s legal structure and contractual arrangements to be in violation of PRC laws, rules
and regulations. If the imposition of any of these government actions causes the company to lose its right to direct the activities
of Taiying and through Taiying’s equity interest in its subsidiaries or the right to receive their economic benefits, the
company would no longer be able to consolidate the financial results of Taiying and its subsidiaries.
|
D.
|
Property, Plants and Equipment.
|
Our headquarters is located at 1366 Zhongtianmen Dajie,
Xinghuo Science and Technology Park, High-tech Zone, Taian City, Shandong Province, People’s Republic of China. Taiying have
incorporated 14 subsidiary companies, which are separate legal entities strategically-located throughout China, affording our
customers local expertise and management. Our facilities are used for sales and marketing, research and development and administrative
functions. All of the facilities are leased. We believe our facilities are adequate for our current needs. A summary description
of our call center locations follows:
Office
|
|
Address
|
|
Rental Term
|
|
Space
|
Principal Executive Office
|
|
1366 ZhongtianmenDajie
Xinghuo Science and Technology Park High-tech Zone, Taian City,
Shandong Province
People’s Republic of China 271000
|
|
October 2007-
October 2017
|
|
132,510 sq. ft.
|
|
|
|
|
|
|
|
Chongqing Center
|
|
19 East Huilong Avenue
Yongchuan, Chongqing
People’s Republic of China 402160
|
|
June 2015 – May 2018
|
|
161,400 sq. ft.
|
|
|
|
|
|
|
|
Shandong Yantai Center
|
|
8 Jinhua Road
Muping, Yantai, Shandong,
People’s Republic of China 264100
|
|
Month to Month
|
|
129,120 sq. ft.
|
|
|
|
|
|
|
|
Jiangsu Huaqiao Center
|
|
Floor 2 Building 6, 1 Jin
Jie Road, Huaqiao
International Information Center,
Huaqiao Development
District, Kunshan City,
Jiangsu Province,
People’s Republic of China
215332
|
|
April 2015 - March 2020
|
|
10,260 sq. ft.
|
|
|
|
|
|
|
|
Jiangsu Taizhou Center
|
|
98 Phoenix West Road
Taizhou, Jiangsu Province,
People’s Republic of China 225300
|
|
December 2009-
December 2024
|
|
129,120 sq. ft.
|
|
|
|
|
|
|
|
HebeiYanjiao Center
|
|
Bai Shi Jin Gu Industry Base,
YanjiaoD evelopent District
Sanhe City, Hebei Province People’s Republic of China 065201
|
|
January 2014-
December 2019
|
|
31,100 sq. ft.
|
Office
|
|
Address
|
|
Rental Term
|
|
Space
|
|
|
|
|
|
|
|
Anhui Hefei Center
|
|
1201 Huguang Road
New Industrial Park Shushan District, Hefei City, Anhui Province,
People’s Republic of China 230000
|
|
February
1, 2016 – January 31, 2017h
|
|
14,913 sq. ft.
|
|
|
|
|
|
|
|
Xinjiang Center
|
|
1003 Xihong West Road
Saybagh District, Urumqi City, Xinjiang Uygur Autonomous Region,
People’s Republic of China 830000
|
|
November 2014 – December 2017
|
|
21,800 sq. ft.
|
|
|
|
|
|
|
|
Guangxi Nanning Center
|
|
7-1 Xingguang Ave
Jiangnan District,
Nanning City, Guangxi Zhuang Autonomous Region,
People’s Republic of China 530000
|
|
Month to Month
|
|
29,117 sq. ft.
|
|
|
|
|
|
|
|
Jiangsu Huaian Center
|
|
Rooms 311-313, 315, 508-516
266 Chengde South Road
Huaian Economic and Technology Development District, Jiangsu Province,
People’s Republic of China 223005
|
|
Rooms 508-516:
March 2015 to August 2016 (extension currently be negotiated);
Rooms 311-313, 315: March 2016 to March 2017
|
|
10,652 sq. ft.
|
|
|
|
|
|
|
|
Jiangxi Taiying Center
|
|
1807 Gaoxin Avenue
Qingshan Lake District
Nanchang City, Jiangxi Province
People’s Republic of China 330096
|
|
January 2015-
December 2020
|
|
52,568 sq. ft.
|
Item
4A. Unresolved Staff Comments
Not applicable.
Item
5. Operating and Financial Review and Prospects
You
should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
audited consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ
materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth
under “Risk Factors” and elsewhere in this annual report.
Overview
We
are a BPO service provider focusing on the complex, voice-based segment of customer care services, including customer relationship
management, technical support, sales, customer retention, marketing surveys and research for some of China’s major enterprises.
We help China companies enhance their strategic capabilities, improve quality and lower costs by designing, implementing and managing
their critical back-office processes. Our goal is to create the largest call center service network in China by providing a fully-integrated
solution that spans people, process, proprietary technology and infrastructure for governments and private-sector clients in the
automotive, financial services, government, logistics, media and entertainment, retail, technology, travel, and telecommunication
industries.
Our service is currently delivered from our
delivery centers located in Shandong Province, Jiangsu Province, Hebei Province, Anhui Province, the Xinjiang Uygur Autonomous
Region, the Guangxi Zhuang Autonomous Region, and Chongqing City, with a capacity approximately of 11,057 seats. We believe Taiying
and its subsidiaries’ strategic locations and our investment in technology and human resources position us well in our efforts
to reach our goals.
Currently our largest customers are the provincial
subsidiaries of China Mobile and China Telecom. In addition to answering inbound calls, or calls initiated by customers purchasing
products and services from our clients, we also make outbound cold calls to help these subsidiaries of China Mobile and China Telecom
promote their products, such as weather, health, education and farming related VAS products to targeted China Mobile and China
Telecom’s subscribers.
We
generate almost all of our revenues from a total of 10
subsidiaries
of
China Mobile and China Telecom, China Construction Bank, Alipay Internet Technology, Ping An Insurance, Haier, and
HiSense. We signed outsourcing contracts with two of China’s top ten largest banks based upon assets held, China
Construction Bank and China CITIC Bank. We also signed outsourcing contracts with a subsidiary of China’s online
retailer Alibaba, China’s tourism network, Qunar, DIDI a mobile taxi-calling company, Jiedaibao and SF
Express.
We received grants from various government
agencies after meeting certain conditions if applicable, such as locating call centers in their jurisdictions or helping local
employment needs. Government grants are recognized when received and all the conditions specified in the grant have been met.
For the year ended December 31, 2016, the government grants recognized as income were $801,125, accounting for 10% of our net
income. Among the grants, $186,663 was for our presence in the region, awarded by the government for its initiatives of promoting
local economy, $281,553 was for helping the local employment needs by providing jobs. There are no restrictions on how grants
may be used and there are not any other obligations that exist after grants are received. We also received $270,962 for improvement
of our leased offices, as the performance obligation is not fulfilled, the amount was included in deferred revenue. We anticipate
that we will continue to receive government grants in the coming year, and government grants will continue to have impact on our
future profitability. In the absence of future government grants, our operations and profitability will be negatively impacted.
We
operate our business through contractual arrangements between WFOE, our wholly-owned subsidiary, and Taiying. Through contractual
arrangements, we are able to control the business of Taiying.
Principal
Factors Affecting Our Results of Operations
Revenues
We
generate revenue from the BPO programs we administer for our clients. For the year ended December 31, 2016, we derived approximately
48% of our revenues from Taiying’s call center service to China Mobile, China Telecom and their provincial subsidiaries.
We
provide our services to clients under contracts that typically consist of a master services agreement containing the general terms
and conditions of our client relationship, and a statement of work describing in detail the terms and conditions of each program
we administer for a client. We have signed contracts with China Mobile and China Telecom for calling services which are typically
for a one year term. However, our client relationships tend to be longer-term given the scale and complexity of the services we
provide coupled with the risk and costs to our clients associated with bringing business processes in-house or outsourcing them
to another provider.
For inbound customer care service, we charge
fees based on either the number of calls (charges per interaction) or predetermined seats charges (weekly charges, or monthly charges
per seat). We negotiate these terms on a client-by-client basis. In most contracts, our clients pay a pre-determined rate if we
meet specified performance criteria. Such criteria are based on objective performance metrics that our client agrees would add
quantifiable value to their operations. In addition, most of our contracts include provisions that provide for downward revision
of our prices under certain circumstances, such as if the average speed required to answer a call is longer than agreed to with
the client. All of our fees and downward revision provisions are negotiated at the time that we sign a statement of work with a
client, and our revenue from our contracts is thus fixed and determinable at the end of each month. For the year ended December
31, 2016, 78% of our revenue was generated from inbound calling and 14% of our revenue was generated from outbound calling. The
remaining 8% of revenues was related to other services provided to our customers such as data processing.
China’s
major enterprises have begun to focus on BPO providers who can offer both inbound and outbound customer care service as a means
to increase their sales and profitability. In the past, companies performed call center services internally, however, companies
have found that by outsourcing these services they can lower their operational costs, along with obtaining high-quality customer
interactions and innovative service solutions. We do not anticipate any major changes in our sales percentage between inbound
and outbound calling and strive to keep a balance between these two services, because clients seek BPO providers who can provide
both. However, if there is a major shift in profitability between inbound and outbound calls services, it is likely that we will
focus our services to the area with the higher profit margin.
For
outbound cold calling services, we charge fees based on the success of marketing services upon subscription. The fees we charge
vary among all of our services.
We currently derive a significant portion of
our revenue from our telecommunications clients. Provincial subsidiaries of China Mobile and China Telecom represented 48%, 64%
and 74% of our sales for the years ended December 31, 2016, 2015 and 2014, respectively.
Factors
Affecting Revenues
The
following factors affect the revenues we derive from our operations. For other factors affecting our revenues, see “Risk
Factors—Risks Related to Our Business.”
Customer
demand for outsourced call center customer care services
. Customer demand for outsourced call BPO services is closely linked
to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Declines in
customer demand due to adverse general economic conditions, lower customer confidence and changes in customer preferences for
our clients’ products can lower the revenues and profitability of our operations. As a result, changes in customer demand
and general business cycles can subject our revenues to volatility. Management is constantly trying to find additional services
that we can provide to our customers to help offset any decrease in demand for our services.
Relationships
with major customers
. Any negative changes in our relationship with China Mobile or China Telecom and negative changes in
customer demand and usage preference for our services can bring negative consequence to the revenue and profitability of our business.
The loss, cancellation, deferral or renegotiation of any large agreements with China Mobile or China Telecom could have a material
adverse effect on our financial condition and results of operations. In addition, if China Mobile or China Telecom decides to
increase their percentage of revenue sharing, or do not comply with the terms and conditions of our agreements with them, our
revenues and profitability could also be materially adversely affected. To help offset this risk we attempt to expand our client
lists, and develop more customers in other industries, such as, banking and e-commerce.
Consumer
privacy
. The growth of our business may be adversely affected if the public becomes concerned that confidential user information
transmitted over the Internet and wireless networks is not adequately protected. A damaging consumer backlash against unsolicited
mobile marketing could occur if overzealous marketers fail to respect consumers’ right to privacy and are perceived as inundating
them with unwanted and irrelevant mobile marketing calls or messages. Our services may decline and our business may be adversely
affected if significant breaches of network security or user privacy occur. We maintain and evaluate our networks for vulnerability
in an attempt to safeguard consumer privacy.
Experienced
customer care professionals
. We rely on large numbers of customer service associates, and our success depends to a significant
extent on our ability to attract, hire, train and retain qualified customer service associates. If we fail to attract and retain
enough sufficiently trained customer service associates and other personnel to support our operations and our business, results
of operations and financial condition will be seriously harmed. We have developed relationships with local colleges to put us
in the position to recruit quality employees.
Competition.
Competition in the BPO market is intense and growing. While the call center industry in China features a large number of companies,
most of those companies are smaller call center operators with fewer than 100 seats each. We believe that the industry will experience
increasing consolidation since consolidated operations result in economies of scale, brand name recognition, and more convenience
and efficiency in servicing China’s major enterprises. It is also possible that competition, in the form of new competitors
or alliances, joint ventures or consolidation among existing competitors, may decrease our market share. Increased competition
could result in lower personnel utilization rates, billing rate reductions, fewer customer engagements, reduced gross margins
and loss of market share, any one of which could materially and adversely affect our profits and overall financial condition.
To offset this risk, we seek to leverage our economies of scale, reputation in the marketplace and expand our geographic locations
in order to serve our clients better and obtain new clients.
Expansion
. We believe that businesses
in China are increasingly looking for vendors that provide call center BPO services from multiple geographic locations. This allows
clients to manage fewer vendors while minimizing risk to operations from natural disasters. We believe that we should continue
to expand our business to other regions of China to increase our market share. In 2016, Taiying has incorporated one new subsidiary
company throughout China to further expand our business. If we fail to make acquisitions or expand to other geographic regions,
our revenue growth could slow down.
Costs
and Expenses
We
primarily incur the following costs and expenses:
Costs
of revenues
. Cost of revenues consists primarily of the salaries, payroll taxes and employee benefit costs of our customer
service associates and other operations personnel. Cost of revenues also includes direct communications costs, rent expense, information
technology costs, and facilities support costs related to the operation of our call centers.
Selling,
general and administrative expenses
. Selling, general and administrative expenses consist primarily of compensation expense
for our corporate staff and personnel supporting our corporate staff, communication costs, gasoline, welfare expenses, education
expenses, professional fees (including consulting, audit and legal fees), travel and business hospitality expenses.
Depreciation
.
We currently purchase substantially all of our equipment. We record property and equipment at cost and calculate depreciation
using the straight-line method over the estimated useful lives of our assets, which generally range from three to five years.
We depreciate leasehold improvements on a straight-line basis over the shorter of the lease term or the estimated useful life
of the asset. If the actual useful life of any asset is less than its estimated depreciable life, we would record additional depreciation
expense or a loss on disposal to the extent the net book value of the asset is not recovered upon sale. Our depreciation is primarily
driven by large investments in capital equipment required for our continued expansion, including the build-out of seats, which
we define as workstations where customer service associates generate revenue. These expenditures include tenant improvements to
new facilities, furniture, information technology infrastructure, computers and software licenses and are usually in the range
of $2,000 to $8,000 per seat depending on specific client requirements. These costs are generally depreciated over five years.
Factors
Affecting Expenses
Prevailing
salary levels
. Our cost of services is impacted the most by prevailing salary levels. Although we have not been subject to
significant wage inflation in China, any increase in the market rate for wages could significantly harm our operating results
and our operating margin.
Forecasted
demand for our services
. We often incur more costs in the early stages of implementing our client’s forecasted demand
for our services. Similarly, we may also be required to increase recruiting and training costs to prepare our customer service
associates for a specific type of service. If we undertake additional recruiting and training programs and our client terminates
a program early or does not meet its forecasted demand, our operating margin could decline.
Managing
our customer service associates efficiently
. Our cost of services is also impacted by our ability to manage and employ our
customer service associates efficiently. Our workforce management group monitors staffing requirements in an effort to ensure
efficient use of these employees. Although we generally have been able to reallocate our customer service associates as client
demand has fluctuated, an unanticipated termination or significant reduction of a program by a major client may cause us to experience
a higher-than-expected number of unassigned customer service associates.
Transition
to public company
. Subsequent to the completion of our initial public offering, our administrative costs are increasing materially,
as we need to comply with detailed reporting requirements. The increased expenses also include legal fees, insurance premiums,
auditing fees, investor relations, stockholder meetings, printing and filing fees, share-based compensation expense, as well as
employee-related expenses for regulatory compliance and other costs. In addition, the selling and administrative expenses are
increasing as we add personnel and incur additional fees and costs related to the growth of our business and our operation as
a publicly traded company in the United States.
Number of customers
. To the extent Taiying
increases the number of its clients, we expect to experience a corresponding increase in selling expenses and travel expenses.
At present, Taiying is able to service substantially all of its customers with its 11 call center locations. As we expand our
Chongqing, Xinjiang and Shandong facilities, we expect Taiying to add more customers and incur more selling expenses.
Number of call centers we operate
.
We operate 11 call centers throughout China, that enable us to service clients throughout Shandong province (Taian City,
Yantai City, Jinan City), Jiangsu province (Taizhou City, Huaqiao City, Huaian City), Anhui province (Hefei City), Hebei
province (Yanjiao City), the Xinjiang Uygur Autonomous Region (Changju City), the Guangxi Zhuang Autonomous Region (Nanning
City), Jiangxi province (Nanchang City), Chongqing (Yongchuan City), Beijing centrally-administered City, and Henan province
(Zhengzhou City). As Taiying operates more call centers, our administrative expenses tend to increase in dollars but decrease
as a percentage of revenues.
Manage
and utilize our seats efficiently
. The effect of our depreciation on our operating margin is impacted by our ability to manage
and utilize our seats efficiently. We seek to expand our seat capacity only after receiving contractual commitments from our clients.
However, we have in the past increased our seat capacity based on forecasted demand projections from our clients, which are not
contractual commitments. This has resulted in a surplus of seats, which has increased our depreciation and, to a limited extent,
reduced our operating margin. As a general rule, the efficiency of our use of seats has had less of an impact on our operating
margin than the efficiency of our deployment of our customer service associates.
Depreciation
.
Our depreciation is primarily driven by large investments in capital equipment required for our continued expansion,
including the build-out of seats, which we define as workstations where customer service associates generate revenue.
These
expenditures include tenant improvements to new facilities, furniture, information technology infrastructure, computers and
software licenses and are usually in the range of $2,000 to $8,000 per seat depending on specific client requirements.
These costs are generally depreciated over five years and are substantially the same in the United States and in China.
Results
of Operations
|
|
For The Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues, net
|
|
$
|
72,731,706
|
|
|
$
|
59,350,721
|
|
|
$
|
42,661,732
|
|
Revenues – related party
|
|
|
-
|
|
|
|
-
|
|
|
|
11,407
|
|
Cost of revenues
|
|
|
53,098,552
|
|
|
|
46,891,617
|
|
|
|
35,188,331
|
|
Gross profit
|
|
|
19,633,154
|
|
|
|
12,459,104
|
|
|
|
7,484,808
|
|
Gross margin
|
|
|
27
|
%
|
|
|
21
|
%
|
|
|
18
|
%
|
Selling, general and administrative expenses
|
|
|
11,082,106
|
|
|
|
7,259,279
|
|
|
|
5,779,600
|
|
Operating income
|
|
$
|
8,551,048
|
|
|
$
|
5,199,825
|
|
|
$
|
1,705,208
|
|
Revenues
.
Our revenues from third parties were $72,731,706 and $59,350,721 for the years ended December 31, 2016 and 2015, respectively,
an increase of $13,380,985, or 23% as a result of growth in our BPO business. Our revenues from third parties were $59,350,721
and $42,661,732 for the years ended December 31, 2015 and 2014, respectively, an increase of $16,688,989, or 39% as a result
of growth in our BPO business. All of our revenue was generated from third party companies for the years ended December 31, 2016
and 2015. Our revenue growth in the years of 2016, 2015 and 2014 resulted primarily from acquiring new customers and increased
sales volumes to our existing clients. Our revenues from related parties decreased to $0 for the year ended December 31, 2015,
from $11,407 for the year ended December 31, 2014. The decrease resulted entirely from the decrease in related party revenue from
Shandong Luk Information Technology Co., Ltd., for the years ended December 31, 2015 and 2014. No revenue was generated from related
party for the year ended December 31, 2016.
Gross margin
. Our gross margin increased
from 18% for the year ended December 31, 2014, to 21% for the year ended December 31, 2015, and continued increasing
to 27% for the year ended December 31, 2016. The continuous growth was primarily due to the increase of our operating efficiency,
our growing reputation in the industry and the non-renewal of certain client contracts where we experienced losses in 2014.
Cost of revenues.
Cost of revenues consists
primarily of salaries, payroll taxes and employee benefits costs of our customer service associates and other operations personnel.
Cost of revenues also includes direct communications costs, rent expense, information technology costs, facilities support. Our
cost of revenues increased by $6,206,935, or 13% for the year ended December 31, 2016 compared to the year ended December 31, 2015.
Our cost of revenues increased by $11,703,286, or 33% for the year ended December 31, 2015 compared to the year ended December
31, 2014. This absolute dollar increase in cost of revenues for the year ended December 31, 2016 over the year ended December
31, 2015 and for the year ended December 31, 2015 over the year ended December 31, 2014 directly corresponded to the increase in
revenue during the same year. Our cost of revenues as a percentage of revenue was 73%, 79% and 82% for the years ended December 31,
2016, 2015 and 2014, respectively. This decrease was primarily due to the increase of our operating efficiency and growing reputation
in business.
Selling, general and administrative expenses
.
Selling, general and administrative expenses consist primarily of sales and administrative employee-related expenses, professional
fees, travel costs, research and development costs, and other corporate expenses. Selling, general and administrative expenses
were $11,082,106 for the year of 2016, an increase of $3,822,827, or 53% from December 31, 2015 to December 31, 2016. Selling,
general and administrative expenses were $7,259,279 for the year ended December 31, 2015, and $5,779,600 for the year of 2014,
an increase of $1,479,679, or 26%. The increase in selling, general and administrative expenses over years is a result of higher
payroll and bonus expenses paid to the administrative and research personnel and the management team. We anticipate that our administrative
expenses, particularly those related to support personnel costs, professional fees, as well as Sarbanes-Oxley compliance, will
continue to increase as we are a new publicly traded company in the United States.
Income from operations
. Our income from
operations were $8,551,048 for the year ended December 31, 2016, $5,199,825 for the year ended December 31, 2015, and
$1,705,208 for the year ended December 31, 2014. Our operating income as a percentage of total revenues was 12% for the year ended
December 31 2015, 9% for the year ended December 31, 2015, and 4% for the year ended December 31, 2014. The increase in our
income from operations resulted from the expansion and growth of our business for new and existing customers.
Government Grants
.
Government grants were $801,125 and $1,027,581 for the years ended December 31, 2016 and 2015, respectively, a decrease of
$226,456 or 22%. Government grants were $1,027,581 and $1,439,186 for the years ended December 31, 2015 and 2014, respectively,
a decrease of $411,605 or 29%. Most of government grants were a one-time event. Government grants as a percentage of net income
is 10%, 22% and 81% for the years ended December 31, 2016, 2015 and 2014, respectively. For the year ended December
31, 2016, the Company also received grants of $270,962 from governmental agencies for improving leased offices, the amount is
included in deferred revenue as the performance obligation was not fulfilled as of December 31, 2016.
Income Taxes
. We incurred $1,448,923,
$1,275,633 and $635,859 in income taxes for the years ended December 31, 2016, 2015 and 2014, respectively. The $173,290 increase
from year ended December 31, 2015 to year ended December 31, 2016 and the $639,774 increase from year ended December 31, 2014 to
December 31, 2015 resulted from our increased revenues and increased gross margin. For the years ended December 31, 2016,
2015 and 2014, Taiying was entitled to a preferential enterprise income tax (EIT) rate of 15%. The standard enterprise income tax
rate in China is 25%.
Net Income
. Our net income was $8,277,251
and $4,774,243 for the years ended December 31, 2016 and 2015, representing a significant increase of $3,503,008, or 73%.
The increase in net income was a result of our increased revenue and higher gross margin, offset by increased selling and administrative
expense and decreased government grants for the year ended December 31, 2016, compared to the year ended December 31, 2015.
Our net income was $4,774,243 and $1,782,101
for the years ended December 31, 2015 and 2014, respectively, representing an increase of $2,992,142, or 168%. The increase in
net income was a result of our increased revenue and higher gross margin, offset by increased selling and administrative expense
and decreased government grants for the year ended December 31, 2015, compared to the year ended December 31, 2014.
|
B.
|
Liquidity and Capital Resources
.
|
Liquidity
Liquidity is the ability of a company to generate
funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At December 31,
2016, our working capital was positive $22,734,959, compared to positive working capital of $16,139,360 at December 31, 2015.
Our cash and cash equivalents balance at December 31,
2016 totaled $15,947,268, compared to $13,623,849 at December 31, 2015. During the year ended December 31, 2016, cash
provided by operating activities amounted to $5,666,284, cash used in investment activities amounted to $1,020,870, cash used in
financing activities amounted to $1,510,962, and the negative effect of prevailing exchange rates on our cash position was $811,033.
During the year ended December 31, 2015, cash provided by operating activities of $5,956,771, cash used in investment activities
amounted to $1,950,145, and cash provided by financing activities was $4,818,501. In addition, the negative effect of prevailing
exchange rates on our cash position was $298,288. During the year ended December 31, 2014, cash provided by operating activities
was $495,727. Cash used in investment activities amounted to $1,306,673, and cash provided by financing activities was $182,350.
In addition, the positive effect of prevailing exchange rates on our cash position was $11,043.
The increase of $2,323,419 in cash and cash
equivalents from December 31, 2015 to December 31, 2016 was due to proceeds from initial public offering in 2015 and our increased
net income for the year ended December 31, 2016.
The significant increase of $8,526,839 in cash
and cash equivalents from December 31, 2014 to December 31, 2015 was due to the proceeds of $8,497,024 we received from the issuance
of our common shares in our IPO. We successfully completed our initial public offering on December 18, 2015 and issued 2,400,000
common shares.
Other than the continued strength of China’s
economy, the needs of telecommunications operators to outsource their call center functions, and the growing demand for Taiying’s
call-center service among other industries (all of which we believe may increase our liquidity, if they continue), we are not aware
of any trends or any demands, commitments, events or uncertainties that will result in or that are reasonably likely to result
in our liquidity increasing or decreasing in any material way.
For
2017, we expect our main growth will be organic, from Taiying’s 11
call
center locations. The demand for Taiying’s call center services appears to be strengthening, from which we expect to generate
a positive cash flow. We are seeking to acquire potential target companies and expect to complete any acquisitions at the end of
2017 or early 2018, which may be a more efficient way to expand our business. In the near future, additional amounts need to be
used for facility improvements and expansion based on our current estimates of our facilities requirements that are necessary to
support the anticipated growth of our business. In addition, we expect additional cash and cash equivalent will be occupied as
working capital with the rapid growth of our revenue. We believe that we will be able to finance our acquisition plan, our working
capital needs and planned facilities improvements and expansion for at least the next 12 months from cash generated from operations,
borrowings under our revolving line of credit and the proceeds from our initial public offering.
To the extent demand for Taiying’s
call center BPO services increases, we need to consider establishing or acquiring additional facilities in different cities
to meet such increased demand. In 2015 and 2016, we set up Jiangxi Taiying Technology Co., Ltd., Beijing Taiying Technology
Co., Ltd., Xinjiang Taiying Technology Co., Ltd., and Zhaozhuang Shenggu E-commerce Co., Ltd. With the completion of our
initial public offering in December 2015 and the sustained rapid growth in the last three years, we want to accelerate the
expansion of our business by acquiring value-added target companies in the near future.
Our long-term future capital
requirements will depend on many factors, including our level of revenue, the timing and extent of our spending to support
the maintenance and growth of our operations, the expansion of our sales and the continued market acceptance of our services.
As of December 31, 2016, we had no short-term bank loans outstanding, compared to $1,540,666 short-term bank loans
outstanding as of December 31, 2015. We also expect to continue to have significant capital requirements associated with
the maintenance and growth of our operations, including the lease and build-out of additional facilities primarily to support
an increase in the number of our customer service associates and the purchase of computer equipment and
software, telecommunications equipment and furniture, fixtures and office equipment to support our operations. We expect to
continue to incur additional costs associated with being a publicly traded company in the United States, primarily due to
increased expenses that we incur to comply with the requirements of the Sarbanes-Oxley Act of 2002, as well as costs
related to accounting and tax services, directors and officers insurance, legal expenses and investor and stockholder-related
expenses. These additional long-term expenses may require us to seek other sources of financing, such as additional
borrowings or public or private equity or debt capital. The availability of these other sources of financing will depend upon
our financial condition and results of operations as well as prevailing market conditions, and may not be available on terms
reasonably acceptable to us or at all.
We are using proceeds from our initial public
offering to fund our business. Accordingly, the following regulations have to be followed, regarding capital injections to foreign-invested
enterprises.
PRC regulations relating to investments in
offshore companies by PRC residents
. SAFE (Short for State Administration of Foreign Exchange ) promulgated the Circular on
Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Financing and Roundtrip Investment Through Offshore
Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014. SAFE Circular 37 requires PRC residents to register and update
certain investments in companies incorporated outside of China with their local SAFE branch. SAFE also subsequently issued various
guidance and rules regarding the implementation of SAFE Circular 37, which imposed obligations on PRC subsidiaries of offshore
companies to coordinate with and supervise any PRC-resident beneficial owners of offshore entities in relation to the SAFE registration
process.
We
may not be aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial
owners and cannot assure you that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation
rules. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner
pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of our company who
are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules,
may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register may also limit our
ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends
to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.
PRC
regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency
conversion
. We are an offshore holding company conducting our operations in China through our WFOE and consolidated Taiying.
As an offshore holding company, we may make loan to WFOE and Taiying subject to the approval from government authorities and limitation
of amount, we also may make additional capital contributions to our WFOE.
Any
loan to our WFOE, which is treated as foreign-invested enterprise under PRC law, is subject to PRC regulations and foreign exchange
loan registrations. In January 2003, SDRC (Short for State Development and Reform Commission), SAFE and Ministry of Finance jointly
promulgated the Circular on The Interim Provisions on the Management of Foreign Debts, or the Circular 28, regulating the total
amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by
the Ministry of Commerce or its local counterpart and the amount of registered capital of such foreign-invested company. This
means loans by us to our WFOE to finance its activities cannot exceed statutory limits and must be registered with SAFE. For example,
the current amounts of approved total investment and registered capital of our WFOE is $10 million and $5 million, respectively,
which means WFOE cannot obtain loans in excess of $5 million from our entities outside of China currently.
We
decided to finance WFOE by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce
or its local counterpart. In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement
of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular
No. 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting
how the converted RMB may be used. SAFE Circular No. 142 provides that the RMB capital converted from foreign currency registered
capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government
authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow
and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB
capital may not be altered without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans
if the proceeds of such have not been used. Violation of SAFE Circular No. 142 could result in severe monetary or other penalties.
Furthermore, SAFE promulgated a circular in November 2010, SAFE Circular No. 59, which tightens the regulations over settlement
of net proceeds from overseas offering like this offering and requires that the settlement of net proceeds must be consistent
with the description in the prospectus for the offering or otherwise approved by our board. These two circulars may significantly
limit our ability to transfer the net proceeds from this offering to Taiying. Further, we may not be able to convert the net proceeds
into RMB to invest in or acquire any other PRC Companies in China, which may adversely affect our liquidity and our ability to
fund and expand our business in China.
Currently,
the approved investment amount of WFOE is $10 million, its registered capital as of the last period presented is $5 million. Taiying
is a PRC domestic company, which has registered capital RMB 10,000,000. Violations of these SAFE regulations may result in severe
monetary or other penalties, including confiscation of earnings derived from such violation activities, a fine of up to 30% of
the RMB funds converted from the foreign invested funds or in the case of a severe violation, a fine ranging from 30% to 100%
of the RMB funds converted from the foreign-invested funds.
Capital
Resources
The
following table provides certain selected balance sheets comparisons as of December 31, 2016 and December 31, 2015:
|
|
December 31,
|
|
|
December 31,
|
|
|
Increase
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
15,947,268
|
|
|
$
|
13,623,849
|
|
|
$
|
2,323,419
|
|
|
|
17
|
%
|
Accounts receivable, net
|
|
|
13,595,396
|
|
|
|
8,852,024
|
|
|
|
4,743,372
|
|
|
|
54
|
%
|
Accounts receivable - related party
|
|
|
-
|
|
|
|
353,513
|
|
|
|
(353,513
|
)
|
|
|
-100
|
%
|
Notes receivable, current
|
|
|
547,259
|
|
|
|
125,687
|
|
|
|
421,572
|
|
|
|
335
|
%
|
Prepayments
|
|
|
504,780
|
|
|
|
708,549
|
|
|
|
(203,769
|
)
|
|
|
-29
|
%
|
Due from related parties
|
|
|
248,866
|
|
|
|
675,623
|
|
|
|
(426,757
|
)
|
|
|
-63
|
%
|
Deferred tax asset, current
|
|
|
69,864
|
|
|
|
-
|
|
|
|
69,864
|
|
|
|
100
|
%
|
Other current assets
|
|
|
1,041,923
|
|
|
|
1,045,932
|
|
|
|
(4,009
|
)
|
|
|
-0
|
%
|
Total current assets
|
|
|
31,955,356
|
|
|
|
25,385,177
|
|
|
|
6,570,179
|
|
|
|
26
|
%
|
Restricted cash
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
N/A
|
|
Notes receivable, non-current
|
|
|
907,297
|
|
|
|
970,620
|
|
|
|
(63,323
|
)
|
|
|
-7
|
%
|
Property and equipment, net
|
|
|
4,360,976
|
|
|
|
4,129,561
|
|
|
|
231,415
|
|
|
|
6
|
%
|
Deferred tax assets, non-current
|
|
|
-
|
|
|
|
23,974
|
|
|
|
(23,974
|
)
|
|
|
-100
|
%
|
Total non-current assets
|
|
|
5,768,273
|
|
|
|
5,624,155
|
|
|
|
144,118
|
|
|
|
3
|
%
|
Total assets
|
|
$
|
37,723,629
|
|
|
$
|
31,009,332
|
|
|
$
|
6,714,297
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
664,838
|
|
|
$
|
310,216
|
|
|
$
|
354,622
|
|
|
|
114
|
%
|
Accounts payable - related party
|
|
|
129,489
|
|
|
|
-
|
|
|
|
129,489
|
|
|
|
100
|
%
|
Accrued liabilities and other payables
|
|
|
3,603,471
|
|
|
|
3,333,960
|
|
|
|
269,511
|
|
|
|
8
|
%
|
Deferred revenue
|
|
|
607,160
|
|
|
|
-
|
|
|
|
607,160
|
|
|
|
100
|
%
|
Wages payable
|
|
|
2,885,735
|
|
|
|
2,803,294
|
|
|
|
82,441
|
|
|
|
3
|
%
|
Income taxes payable
|
|
|
883,654
|
|
|
|
1,014,595
|
|
|
|
(130,941
|
)
|
|
|
-13
|
%
|
Short term loans
|
|
|
-
|
|
|
|
1,748,479
|
|
|
|
(1,748,479
|
)
|
|
|
-100
|
%
|
Due to related parties
|
|
|
446,050
|
|
|
|
-
|
|
|
|
446,050
|
|
|
|
100
|
%
|
Deferred tax liabilities, current
|
|
|
-
|
|
|
|
35,273
|
|
|
|
(35,273
|
)
|
|
|
-100
|
%
|
Total current liabilities
|
|
|
9,220,397
|
|
|
|
9,245,817
|
|
|
|
(25,420
|
)
|
|
|
0
|
%
|
Total liabilities
|
|
|
9,220,397
|
|
|
|
9,245,817
|
|
|
|
(25,420
|
)
|
|
|
0
|
%
|
We
and Taiying maintain cash and cash equivalents in China. At December 31, 2016 and 2015, bank deposits were as follows:
Country
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
China
|
|
$
|
13,467,904
|
|
|
$
|
5,556,626
|
|
China (offshore bank account)
|
|
|
2,399,775
|
|
|
|
8,001,708
|
|
Total
|
|
$
|
15,867,679
|
|
|
$
|
13,558,334
|
|
The majority of our cash balances at December 31,
2016 are in the form of RMB stored in bank account of China. Cash held in banks (both mainland and offshore bank accounts) in
the PRC is not insured. The value of cash on deposit in mainland China of $13,467,904 as of December 31, 2016 has been converted
based on the exchange rate as of December 31, 2016. In 1996, the Chinese government introduced regulations, which relaxed
restrictions on the conversion of the RMB; however restrictions still remain, including but not limited to restrictions on foreign
invested entities. Foreign invested entities may only buy, sell or remit foreign currencies after providing valid commercial documents
at only those banks authorized to conduct foreign exchanges. Furthermore, the conversion of RMB for capital account items, including
direct investments and loans, is subject to PRC government approval. Chinese entities are required to establish and maintain separate
foreign exchange accounts for capital account items. We cannot be certain Chinese regulatory authorities will not impose more
stringent restrictions on the convertibility of the RMB, especially with respect to foreign exchange transactions. Accordingly,
cash on deposit in banks in the PRC is not readily deployable by us for use outside of China. We also have $79,589 and $65,514
of petty cash stocked in the Company as of December 31, 2016 and 2015 for daily expenses.
Cash
and cash equivalents
As
of December 31, 2016, cash and cash equivalents were $15,947,268, which increased by $2,323,419 compared to $13,623,849 as of
December 31, 2015. The following table sets forth certain items in our consolidated statements of cash flows for 2014, 2015 and
2016.
|
|
For The Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net cash provided by operating activities
|
|
$
|
5,666,284
|
|
|
$
|
5,956,771
|
|
|
$
|
495,727
|
|
Net cash used in investing activities
|
|
|
(1,020,870
|
)
|
|
|
(1,950,145
|
)
|
|
|
(1,306,673
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(1,510,962
|
)
|
|
|
4,818,501
|
|
|
|
182,350
|
|
Exchange rate effect on cash
|
|
|
(811,033
|
)
|
|
|
(298,288
|
)
|
|
|
11,043
|
|
Net cash inflow (outflow)
|
|
$
|
2,323,419
|
|
|
$
|
8,526,839
|
|
|
$
|
(617,553
|
)
|
Accounts
Receivable
Account
receivables as of December 31, 2016 was $13,595,396, an increase of $4,743,372 compared to a balance of $8,852,024 as of
December 31, 2015. This increase resulted primarily from increases in the volume of services we provide.
Accounts
Receivable – related party
The Company was the subcontractor of Shandong
Luk Information Technology Co., Ltd. (“Shandong Luk”) to provide BPO services, a related party controlled by the brother
of Gary Wang, The Company did not generate related party revenues from Shandong Luk for the year ended December 31, 2016 and 2015.
The Company generated revenue in the amount of $11,407 for the year ended December 31, 2014. The related party accounts receivable
with Shandong Luk amounted to $0 and $353,513 as of December 31, 2016 and 2015, respectively.
Amounts
due from related parties
As of December 31, 2016, balances due from
related parties were $248,866, a decrease of $426,757 compared to $675,623 at December 31, 2015. The amount owed to the Company
by related party companies represents non-secured short-term loans obtained from the Company, which bear no interest and are due
on demand.
Due
from related parties consist of the following:
Name of Related Party
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Shandong Luk Information Technology Co., Ltd.
|
|
|
-
|
|
|
|
448,339
|
|
Beijing Taiying Anrui Holding Co., Ltd.
|
|
|
50,811
|
|
|
|
15,406
|
|
Chongqing Shenggu Human Resources Co., Ltd.
|
|
|
198,055
|
|
|
|
211,878
|
|
|
|
$
|
248,866
|
|
|
$
|
675,623
|
|
Current
assets
Current assets as of December 31, 2016
totaled $31,955,356, an increase of $6,570,179, or 26% from our December 31, 2015 balance. This increase primarily resulted
from a $2,323,419 increase in cash and cash equivalents, a $4,743,372 increase in accounts receivable, a $421,572 increase in notes
receivable, current, a $69,864 increase in deferred tax assets, current and offset by a $353,513 decrease in accounts receivable
– related party, a $4,009 decrease in other current assets, a $203,769 decrease in prepayment, and a $426,757 decrease in
due from related parties.
Property and equipment, net
Property and equipment, net as of December 31,
2016 were $4,360,976, a slight increase of $231,415 compared to December 31, 2015. This increase primarily resulted from an
increase of $288,572 in electronic equipment to support the growth of our operations, and an increase of $103,594 in construction
in progress, offset by the current depreciation.
Accrued liabilities and other payables
Accrued liabilities and other payables principally
include network rental expense in the telecommunication industry, unpaid travel expense, bonus to employees, and professional
service expense. The balance as of December 31, 2016 was $3,603,471, an increase of $269,511 compared to $3,333,960 as of
December 31, 2015.
Wages payable
Wages payable as of December 31, 2016
was $2,885,735, an increase of $82,441 compared to $2,803,294 as of December 31, 2015. This increase resulted from the increased
employees’ compensation with our expansion of operations for the year ended December 31, 2016.
Cash
Provided By Operating Activities
Net cash provided by operating activities for
the year ended December 31, 2016 totaled $5,666,284. The activities were mainly comprised of an increase in accounts
receivable of $5,561,722, an increase in prepayments of $767,516 and offset by our net income of $8,277,251, depreciation and
amortization of $1,542,352, allowance for doubtful accounts of $805,870, an increase in wage payable of $277,335, and an increase
in accrued liabilities and other payables of $454,572, and an increase in deferred revenue of $634,644.
Net cash provided by operating activities for
the year ended December 31, 2015 totaled $5,956,771. The activities were mainly comprised of an increase in accounts
receivable of $2,499,956, an increase in prepayments of $447,311, an increase in due from related parties of $114,670, a decrease
in due to related parties of $2,394, deferred income tax asset/liability of $172,000, and offset by our net income of $4,774,243,
depreciation of $1,340,961, a decrease in other current assets of $191,536, an increase in accounts payable of $113,033, an increase
in wages payable of $908,720, an increase in income tax payable of $586,931, and an increase in accrued liabilities and other
payables of $1,277,678.
Net cash provided by operating activities for
the year ended December 31, 2014 totaled $495,727. The activities were mainly comprised of an increase in accounts receivable
of $3,251,749, an increase in prepayment of $489,918, an increase in other current assets of $234,429, and offset by our net income
of $1,782,101, depreciation of $1,342,258, deferred income tax asset/liability of $109,657, allowance for doubtful accounts of
$145,076, a decrease in due from related parties of $468,555, an increase in due to related parties of $3,493, an increase in
account payable of $18,998, an increase in wages payable of $267,931, an increase in income taxes payable of $106,833 and an increase
in accrued liabilities and other payables of $250,276.
The slight decrease in cash flows from our operating
activities for the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily resulted from our increased
cash outflow in accounts receivable and prepayments, offset by increased net income.
The significant increase in cash flows from
our operating activities for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily resulted from
our increased net income, decreased cash outflow in accounts receivable, prepayments, more cash inflow in accounts payable, wages
payable, income taxes payable, accrued liabilities and other payable, offset by more cash outflow in deferred income tax asset/liability
and due from related parties.
Cash Used In Investing Activities
Net cash used in investing activities for
the year ended December 31, 2016 totaled $1,020,870. The activities were primarily comprised of $478,775 used to purchase
property and equipment, $18,210 advanced to related parties, and $563,896 loans made to a third party company, offset by $40,011
repayment from related parties.
Net cash used in investing activities for
the year ended December 31, 2015 totaled $1,950,145. The activities were primarily comprised of $1,614,696 used to purchase
property and equipment, $930,536 advanced to related parties, $500,000 transferred to restricted cash, and offset by collections
from related parties of $1,095,087.
Net cash used in investing activities for
the year ended December 31, 2014 totaled $1,306,673. The activities were primarily comprised of $965,118 spent to purchase
property and equipment, $1,986,421 advanced to related parties, $132,742 lent to third parties, and offset by collections from
related parties of $1,633,073, and collections from third parties of $130,172.
One of our primary uses of cash in our investing
activities for each period is for our purchase of property and equipment, including information technology equipment, furniture,
fixtures and leasehold improvements for expansion of available seats. We spent $1,135,921 less than the year of 2015 in purchasing
property and equipment for the year ended December 31, 2016. In addition, we collected $1,055,076 less than the year of 2015
in repayment from our related parties, we did not transfer any amount to restricted cash for the year ended December 31, 2016,
and we paid $912,326 less than the year of 2015 in advance to our related parties for the year ended December 31, 2016. These are
the primary reasons that we used $929,275 less than the year of 2015 in our investing activities for the year ended December 31,
2016.
We spent $649,578 more than the year of 2014
in purchasing property and equipment for the year ended December 31, 2015. In addition, we collected $537,986 less than the
year of 2014 in repayment from our related parties, and transferred $500,000 to restricted cash for the year ended December 31,
2015. Although we paid $1,055,885 less than the year of 2014 in advance to our related parties for the year ended December 31,
2015. These are the primary reasons that we used $643,472 more than the year of 2014 in our investing activities for the year
ended December 31, 2015.
Cash Provided By (Used In) Financing Activities
For the year ended December 31, 2016, net
cash used in financing activities was $1,510,962. We repaid short-term loans of $1,510,962.
For the year ended December 31, 2015, net
cash provided by financing activities was $4,818,501. We received these funds from the issuance of our common shares in our initial
public offering in the amount of $8,497,024, proceeds from short-term loans of $3,800,367, offset by repayment for short-term loans
of $7,478,890.
For the year ended December 31, 2014, net
cash provided by financing activities was $182,350. We received these funds from issuance of common shares of $1,174,380 in a private
placement transaction, capital contributions from owners of $3,340,396, proceeds from short-term loans of $7,386,830, proceeds
from related parties of $32,543, offset by the repayment for short-term loans of $8,001,883 and repayment to related parties of
$3,749,916.
The change in cash flow for our financing activities
in the amount of $6,329,463 less for the year ended December 31, 2016 than the year ended December 31, 2015 was primarily due to
receiving $8,497,024 less in the year of 2016 than the year of 2015 from the proceeds of the issuance of common shares, and receiving
$3,800,367 less in the year ended 2016 than in the year ended 2015 from proceeds of short-term loans offset by $5,967,928 less
repayment of short-term loans in the year of 2016 than the year of 2015.
The
change in cash flow for our financing activities in the amount of $4,636,151 more for the year ended December 31, 2015 than the
year ended December 31, 2014 was primarily due to receiving $7,322,644 more in the year of 2015 than the year of 2014 from the
proceeds of the issuance of common shares, and receiving $3,586,463 less in the year of 2015 than in the year of 2014 from proceeds
of short-term loans.
Critical Accounting Policies
The discussion and analysis of our financial
condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these audited consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We
evaluate our estimates on an ongoing basis, including those related to revenue recognition and income taxes. We base our estimates
on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results
of which form the basis for making the judgments we make about the carrying values of our assets and liabilities that are not readily
apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.
The critical accounting policies summarized
in this section are discussed in further detail in the notes to the audited consolidated financial statements appearing elsewhere
in this prospectus. Management believes that the application of these policies on a consistent basis enables us to provide useful
and reliable financial information about our operating results and financial condition.
Variable Interest Entities
Pursuant to ASC 810 and related subtopics
related to the consolidation of variable interest entities, we are required to include in our consolidated financial statements
the financial statements of VIEs. The accounting standards require a VIE to be consolidated by a company if that company is subject
to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns. VIEs are
those entities in which we, through contractual arrangements, bear the risk of, and enjoy the rewards normally associated with
ownership of the entity, and therefore we are the primary beneficiary of the entity. Taiying is considered a VIE, and we are the
primary beneficiary. We, through our wholly-owned subsidiary, WFOE, entered into the Control Agreements with Taiying pursuant to
which WFOE shall receive all of Taiying’s net income and bear all losses of Taiying. In accordance with these agreements,
Taiying shall pay consulting fees equal to 100% of its estimated earnings before tax to WFOE.
The accounts of Taiying and its subsidiaries
are consolidated in the accompanying financial statements. As VIEs, Taiying and its subsidiaries’ sales are included in our
total sales, its income from operations is consolidated with ours, and our net income includes all of Taiying and its subsidiaries’
net income, and their assets and liabilities are included in our consolidated balance sheets. The VIEs do not have any non-controlling
interest and, accordingly, we did not subtract any net income in calculating the net income attributable to us. Because of the
Control Agreements, we have pecuniary interest in Taiying that require consolidation of Taiying and its subsidiaries’ financial
statements with our financial statements.
As required by ASC 810-10, we perform
a qualitative assessment to determine whether we are the primary beneficiary of Taiying which is identified as a VIE of us. A quality
assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity’s activities
including terms of the contracts entered into by the entity, ownership interests issued by the entity and the parties involved
in the design of the entity. The significant terms of the agreements between us and Taiying are discussed above in the “Our
Corporate Structure—Contractual Arrangements with Taiying and Taiying’s Shareholder” section. Our assessment
on the involvement with Taiying reveals that we have the absolute power to direct the most significant activities that impact the
economic performance of Taiying. WFOE, our wholly own subsidiary, is obligated to absorb all operating risks of loss from Taiying
and entitles WFOE to receive all of Taiying’s expected residual returns. In addition, Taiying’s shareholders have pledged
their equity interest in Taiying to WFOE, irrevocably granted WFOE an exclusive option to purchase, to the extent permitted under
PRC Law, all or part of the equity interests in Taiying and agreed to entrust all the rights to exercise their voting power to
the person(s) appointed by WFOE. Under the accounting guidance, we are deemed to be the primary beneficiary of Taiying and the
results of Taiying and its subsidiaries are consolidated in our consolidated financial statements for financial reporting purposes.
Revenue Recognition
The Company recognizes revenue when evidence
of an arrangement exists, the delivery of service has occurred, the fee is fixed or determinable and collection is reasonably assured.
The Company provides i) inbound call service, which includes directory assistance, mobile phone service plan, billing questions,
hotline consultation, complaints, customer feedbacks, customer relationship management, etc., and ii) outbound call service, which
includes products selling, marketing surveys, new products informing, plans expiration and bills overdue notification, etc. The
BPO inbound and outbound service fees are based on either a per minute, per hour, per transaction or per call basis. For inbound
call service, the revenues are recognized in the same period when the service is provided and the actual costs occurred. For outbound
call service, certain business successful rate was obtained. The fee is determined on a per-call basis where the Company receives
a basic standard fee for each call plus an extra fee for successfully selling a product or completing a survey, etc. Certain client
programs provide for adjustments to monthly billings based upon whether the Company achieves, exceeds or fails certain performance
criteria. Adjustments to monthly billings consist of contractual bonuses/penalties, holdbacks and other performance based contingencies.
Revenue recognition is limited to the amount that is not contingent upon delivery of future services or meeting other specified
performance conditions.
Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical
experience and on various other assumptions and information that are believed to be reasonable under the circumstances. Estimates
and assumptions of future events and their effects cannot be perceived with certainty and, accordingly, these estimates may change
as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes.
Significant estimates and assumptions by management include, among others, useful lives and impairment of long-lived assets, allowance
for doubtful accounts, income taxes including the valuation allowance for deferred tax assets. While we believe that the estimates
and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from those estimates.
Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the financial statements in
the period they are determined to be necessary.
Fair
Value of Financial Instruments
For
certain of our financial instruments, including cash and cash equivalents, accounts receivable, prepayments due from related parties,
other current assets, accounts payable due to related parties, and accrued liabilities and other payables, the carrying amounts
approximate their fair values due to the short maturities.
Foreign
Currency Translation
The
accompanying consolidated financial statements are presented in United States dollar (“$”), which is our reporting
currency. The functional currency of China Customer Relations Centers, Inc. and CBPO is the United States dollar. The functional
currency of our subsidiary and VIEs located in the PRC is the Renminbi (“RMB”). For the subsidiaries whose functional
currencies are RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and
liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange
rates. The resulting translation adjustments are included in determining other comprehensive income. Transaction gains and losses
are reflected in the consolidated statements of income.
Recent
Accounting Pronouncements
In
May 2016, the FASB issued ASU 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients
”. The amendments, among other things: (1) clarify the objective of the collectability criterion
for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other
similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception;
(4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before
the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining
the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify
that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized
under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance
in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of
adoption. The effective date of these amendments is at the same date that Topic 606 is effective. The Company is currently in
the process of evaluating the impact of the adoption on its consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”
. These amendments provide cash flow statement classification guidance for: 1. Debt Prepayment or
Debt Extinguishment Costs; 2. Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates
That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; 3. Contingent Consideration Payments Made
after a Business Combination; 4. Proceeds from the Settlement of Insurance Claims; 5. Proceeds from the Settlement of Corporate-Owned
Life Insurance Policies, including Bank-Owned Life Insurance Policies; 6. Distributions Received from Equity Method Investees;
7.Beneficial Interests in Securitization Transactions; and 8. Separately Identifiable Cash Flows and Application of the Predominance
Principle. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. Early application is permitted, including adoption in an interim period.
The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”
.
These amendments require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than
inventory when the transfer occurs. The amendments eliminate the exception for an intra-entity transfer of an asset other than
inventory. The amendments do not include new disclosure requirements; however, existing disclosure requirements might be applicable
when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. The amendments
in this ASU are effective for public business entities for fiscal year beginning after December 15, 2017, and interim period within
those fiscal years. Early application is permitted, including adoption in an interim period. The Company is currently in the process
of evaluating the impact of the adoption on its consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-17,
“Consolidation (Topic 810): Interests Held through Related Parties That Are
under Common Control”
. These amendments change the evaluation of whether a reporting entity is the primary beneficiary
of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity
treats indirect interests in the entity held through related parties that are under common control with the reporting entity.
If a reporting entity satisfies the first characteristic of a primary beneficiary (such that it is the single decision maker of
a variable interest entity), the amendments require that reporting entity, in determining whether it satisfies the second characteristic
of a primary beneficiary, to include all of its direct variable interests in a variable interest entity and, on a proportionate
basis, its indirect variable interests in a variable interest entity held through related parties, including related parties that
are under common control with the reporting entity. The amendments in this ASU are effective for public business entities for
fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. If an entity adopts the pending content that links to this paragraph in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently
in the process of evaluating the impact of the adoption on its consolidated financial statements
In
December 2016, the FASB issued ASU 2016-20,
“Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers”
. The amendments in ASU 2016-20 affect narrow aspects of the guidance issued in ASU 2014-09 including
Loan Guarantee Fees, Contract Costs, Provisions for Losses on Construction-Type and Production-Type Contracts, Disclosure of Remaining
Performance Obligations, Disclosure of Prior Period Performance Obligations, Contract Modifications, Contract Asset vs. Receivable,
Refund Liabilities, Advertising Costs, Fixed Odds Wagering Contracts in the Casino Industry, and Costs Capitalized for Advisors
to Private Funds and Public Funds. The effective date of these amendments are at the same date that Topic 606 is effective. Topic
606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting
periods therein (i.e., January 1, 2018, for a calendar year entity). The Company is currently in the process of evaluating the
impact of the adoption on its consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-03,
“Accounting Changes and Error Corrections (Topic 250) and Investments - Equity
Method and Joint Ventures (Topic 323)”.
This pronouncement amends the SEC’s reporting requirements for public
filers in regard to new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to
provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if
they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a description of the effect
on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have not yet been
implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements.
The Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections
in FASB ASU 2017-03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with
these consolidated financial statements.
|
C.
|
Research
and Development, Patent and Licenses, etc.
|
Please
refer to Item 4 Subparagraph B, “Information on the Company—Business Overview—Research and Development”
and “—Intellectual Property Rights.”
Based on our experience and observations
of the business in which we operate, we believe the following trends are likely to affect our industry and, as a result, our company,
if they continue in the future.
|
●
|
We believe China’s major enterprises have begun to focus on BPO providers who can offer fully integrated revenue generation solutions to target new markets and improve revenue and profitability. We believe companies in various industries, including credit card, insurance and logistics enterprises, have been increasingly contacting BPO service providers for their services as a means to increase sales and profitability. In the past, companies of these types typically performed call center services internally. CCRC believes such companies are increasingly outsourcing these functions.
|
|
●
|
Having experienced success with outsourcing a portion of their business processes to capable third-party providers, Chinese companies are increasingly inclined to outsource a larger percentage of this work. We have observed this trend among our major customers, the provincial subsidiaries of China Mobile and China Telecom, who have increased outsourcing as a means of meeting internal goals of limiting growth in their own employment. We believe companies will continue to consolidate their business processes with third-party providers, such as Taiying, who are financially stable and able to invest in their business while also demonstrating the ability to cost-effectively meet their evolving needs.
|
|
●
|
There is increasing adoption of outsourcing across broader groups of industries. Early adopters of the BPO trend, such as the media and communications industries, are being joined by companies in other industries, including government, automobile, retail, logistics, media, financial services, IT and e-commerce. These companies are beginning to adopt outsourcing to improve their business processes and competitiveness. For example, we see increasing interest in our services from companies in the financial services industries, as evidenced by our recent clients, two of the largest five commercial banks in China. We believe the increasing adoption of outsourcing across broader groups of industries and the number of other industries that will adopt or increase their level of outsourcing will continue to grow, further enabling us to increase and diversify our revenue and client base.
|
|
●
|
As companies broaden their product offerings and seek to enter new geographic locations, we believe they will be looking for outsourcing providers that can provide speed-to-market while reducing their capital and operating risk. To achieve these benefits, companies are seeking BPO providers with an extensive operating history, an established geographic footprint, the financial strength to invest in innovations to deliver more strategic capabilities and the ability to scale and meet customer demands quickly. We believe we can quickly implement large, complex business processes around China in a short period of time while assuring a high-quality experience for their customers.
|
|
●
|
Our existing clients are large companies with diverse BPO needs, and we plan to continue our strategy of expanding the scale and scope of the services we provide for these large clients. As a full-service provider of voice services such as care, sales, and other back-office functions, we can provide numerous capabilities to our existing client base. We have experienced continued growth from our existing clients, with more services being demanded by our existing clients. We believe our organic growth in Taiying’s sales of service to existing clients is likely to continue for the near future.
|
|
●
|
While we have our Shandong contact center to cover the services demanded from the northern part of China and
the Bohai Bay Economic Rim, we believe that our Chongqing, Hebei, Anhui, Guangxi, Xinjiang, Jiangxi
,
Jiangsu, Henan Province and Beijing City contact centers has allowed us to expand our geographic reach to other parts of China,
particularly the southwest region and the Yangtze River Delta, covering a total of 18 provinces, 2 autonomous regions, and 4 directly-administered
municipalities (Beijing, Shanghai, Tianjin, and Chongqing) in China, which have a total population of 1.13 billion. Given our strategic
locations and our significant investment in standardized technology and processes, we believe that we can meet our clients’
speed-to-market demand of launching new products or entering new geographic locations.
|
|
●
|
While we continue to target the significant market opportunity still available in the telecommunications industry, we are focusing on reaching new clients in the financial service and internet commerce industry, which have a large share of the overall outsourced market. We have been actively marketing our services to a wider range of industries, including government, consumer products and logistics entities.
|
|
●
|
We believe that competition in the customer care call center BPO market is going to become more intense, and consolidation is going to prevail in the near future. It is possible that competition in the form of new competitors or alliances, joint ventures or consolidation among existing competitors may decrease our market share.
|
|
E.
|
Off-Balance Sheet Arrangements.
|
Under SEC regulations, we are required
to disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, such as changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that are material to investors. An off-balance sheet arrangement means a transaction, agreement or contractual
arrangement to which any entity that is not consolidated with us is a party, under which we have:
|
●
|
any obligation under certain guarantee contracts,
|
|
●
|
any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets,
|
|
●
|
any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to our stock and classified in shareholder equity in our statement of financial position, and
|
|
●
|
any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.
|
We do not have any off-balance sheet
arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into
operating lease commitments, and other contractual obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United States.
|
F.
|
Tabular Disclosure of Contractual Obligations.
|
We have certain potential commitments
that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other
factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts
of payments.
The following table summarizes our contractual
obligations as of December 31, 2016, and the effect these obligations are expected to have on our liquidity and cash flows in future
periods:
Contractual obligations
|
|
Total
|
|
|
1 year
|
|
|
2-3 years
|
|
|
4-5 years
|
|
|
5 years and
thereafter
|
|
Operating leases
|
|
$
|
3,055,193
|
|
|
$
|
1,125,865
|
|
|
$
|
957,552
|
|
|
$
|
506,393
|
|
|
$
|
465,383
|
|
Total
|
|
$
|
3,055,193
|
|
|
$
|
1,125,865
|
|
|
$
|
957,552
|
|
|
$
|
506,393
|
|
|
$
|
465,383
|
|
See “Forward-Looking Statements.”
Item
6. Directors, Senior Management and Employees
|
A.
|
Directors
and Senior Management.
|
MANAGEMENT
The
following table sets forth our executive officers and directors, their ages and the positions held by them:
Name
|
|
Age
|
|
Position
|
|
Appointed
|
Gary Wang
(1) (2)
|
|
48
|
|
Chief Executive Officer, Chairman of the Board and Director
|
|
2014
|
David Wang
(1) (2)
|
|
44
|
|
Chief Financial Officer, Director
|
|
2014
|
Guoan Xu
(1) (2)
|
|
39
|
|
Vice President, Director
|
|
2014
|
Tianjun Zhang
(1) (4) (5) (6) (7)
|
|
43
|
|
Director
|
|
2015
|
Weixin Wang
(1) (3) (6) (7)
|
|
45
|
|
Director
|
|
2014
|
Jie Xu
(1) (4) (5)
|
|
43
|
|
Director
|
|
2014
|
Owens Meng
(1) (3) (5) (6) (7)
|
|
38
|
|
Director
|
|
2014
|
(1)
|
The individual’s business address is c/o Taiying,
1366 Zhongtianmen Dajie, Xinghuo Science and Technology Park, High-tech Zone, Taian City, Shandong Province, People’s Republic
of China 271000.
|
(2)
|
Class III director whose term expires at the 2019 annual meeting of shareholders.
|
(3)
|
Class II director whose term expires at the 2018 annual meeting of shareholders.
|
(4)
|
Class I director whose term expires at the 2017 annual meeting of shareholders.
|
(5)
|
Member of audit committee.
|
(6)
|
Member of compensation committee.
|
(7)
|
Member of nominating committee.
|
Gary
Wang.
Mr. Wang has served as the Chief Executive Officer and Chairman of CCRC since September 2014. Mr. Wang co-founded
Taiying in 2007 and has served as Taiying’s Chief Executive Officer since December 2007. From 2004 through 2007, Mr. Wang
was the Chief Executive Officer of Shandong Luk Information Technology Co. Ltd, a call center company based in Shandong Province.
Mr. Wang received his MBA from the Hong Kong Polytechnic University, and a bachelor’s degree in finance from Shandong
University of Finance. Mr. Wang was nominated as a director because he has 15 years of experience serving in executive positions
at companies exclusively operating in the call center industry and has extensive knowledge, experience and relationships in China’s
BPO industry.
David
Wang.
Mr. Wang has served as the Chief Financial Officer and Vice Chairman of CCRC since September 2014. Mr. Wang
co-founded Taiying in 2007 and has served as Taiying’s Executive Vice President and Chief Financial Officer since April
2008. From January 2006 through March 2008, Mr. Wang served as Executive Vice President of Fountain Investments Limited,
an investment advisory firm based in Shandong Province. From 2003 through 2005, Mr. Wang was Assistant to the President of
Tianqin Securities Limited, a full-service investment banking and brokerage firm based in Shandong Province. Mr. Wang holds
a bachelor’s degree in computer science from Shandong University, and is currently studying for the FMBA program at China
Europe International Business School (CEIBS). Mr. Wang was nominated as a director because of his extensive operating and
financial knowledge of the company as a long-term executive, which gives him detailed understanding of the complexities of our
operations.
Guoan
Xu.
Mr. Xu has served as Vice President and Director of CCRC since September 2014. Mr. Xu has served as director
and vice president of Taiying since 2014. Between 2008 and 2013, Mr. Xu served as a consultant and independent director of
Taiying. Mr. Xu holds an associate bachelor’s degree in politics and public relations from Shandong University. Mr. Xu
was nominated as a director because of his extensive operating and public relation experience.
Tianjun
Zhang.
Mr. Zhang has served as an independent director of CCRC since October 2015. Since February 2014, Mr. Zhang
has been the vice president of Jinan Zhongwei Century Technology Co., Ltd. Between February 2011 and February 2014, Mr. Zhang
was a director of Sinopec Ningxia Branch. Between November 2009 and February 2011, Mr. Zhang was a vice president of Star
Media Tanzania Co., Ltd. Between December 2001 and November 2009, Mr. Zhang was the general manager of Shandong branch of CITIC
Application Service Provider Co., Ltd. Mr. Zhang received both his MBA and bachelor degree in computer science from Shandong
University. Mr. Zhang was nominated as a director because of his experience in management.
Weixin
Wang.
Mr. Wang has served as an independent director of CCRC since September 2014. Since 2013, Mr. Wang has been
the vice chairman of Jiangsu Sailian Information Industry Research Institute. Between 2006 and 2013, Mr. Wang was the director
of Software and Integrated Circuit Promotion Center within the Strategy Consulting Department of Ministry and Information Technology.
Between 2004 and 2006, Mr. Wang was an associate researcher of China Institute of Science. Mr. Wang holds a doctorate
degree in engineering from the China Academy of Agricultural Mechanization Sciences (CAAMS). Mr. Wang was nominated as a
director because of his research and development experience in information and technology.
Jie
Xu.
Mr. Xu has served as an independent director of CCRC since September 2014. Since June 2015, Mr. Xu has been
the Chief investment officer of Shandong Juneng Investment Co., Ltd, an affiliated company of Shandong State-Owned Assets Investment
Holdings, Co., Ltd. Between September 2012 and May 2015, Mr. Xu was the general manager of the asset management department
of Luzheng Futures Stock Co., Ltd. Between 2008 and 2012, Mr. Xu was the senior manager of Qilu Securities (Beijing) Asset
Management Company, a division of Qilu Securities Co., Ltd., as full-service brokerage and investment banking firm. Between 2006
and 2007, Mr. Xu was an investment relation manager for Shandong Tianye Hengji Stock Company Limited. Between 2002 and 2006,
Mr. Xu was assistant vice president of the securities investment department of General Investment Management co., Ltd. Mr. Xu
holds a bachelor degree in finance from Shandong Economic University. Mr. Xu was nominated as a director because of his experience
in capital markets and finance.
Owens
Meng.
Mr. Meng has served as an independent director of CCRC since September 2014. Since 2013, Mr. Meng has been
the managing director of Beijing Songlin Xinya Financial Consultants, Ltd. Between 2007 and 2013, Mr. Meng served as chief
representative of Sherb Consulting LLC Beijing Representative Office, and managing director of Sherb & Co, LLP, a mid-sized
accounting firm which has audited more than 25 China-based, US publicly traded companies. Between 2003 and 2006, Mr. Meng
worked as an audit manager for Grant Thornton Beijing. Mr. Meng is a member of China Institute of Certified Public Accountants
(CICPA), and a Certified Internal Auditor (CIA) of the Institute of Internal Auditors. Mr. Meng holds a bachelor degree in
accounting and economics from Beijing Technology and Business University. Mr. Meng was nominated as a director because of
his experience in auditing, US GAAP and with United States compliance issues.
There
are no family relations among any of our officers or directors. There are no other arrangements or understandings pursuant to
which our directors are selected or nominated.
Executive
Compensation
Our
compensation committee approves our salary and benefit policies. Before our initial public offering, our board of directors determined
the compensation to be paid to our executive officers based on our financial and operating performance and prospects, and contributions
made by the officers to our success. Each of the named officers are measured by a series of performance criteria by the board
of directors, or the compensation committee on a yearly basis. Such criteria are set forth based on certain objective parameters
such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance
and overall corporate performance.
In 2016, we paid an aggregate of approximately
$971,240 U.S. dollars in cash as salaries bonuses and fees to our senior executives and officers named in this annual report.
Other than salaries, fees and share incentives, we do not otherwise provide pension, retirement or similar benefits to our officers
and directors.
Director
Compensation
All directors hold office until the next annual
meeting of shareholders at which their respective class of directors is re-elected and until their successors have been duly elected
and qualified. There are no family relationships among our directors or executive officers. Officers are elected by and serve at
the discretion of the Board of Directors. Employee directors do not receive any compensation for their services. Independent directors
are entitled to receive $20,000 per year for serving as directors and may receive stock, option or other equity-based incentives
to our directors for their service. The following table presents information regarding the compensation of our independent directors
for fiscal 2016. Compensation for our Chief Executive Officer, Gary Wang, Chief Financial Officer, David Wang and Guoan Xu are
Vice President is reflected above in the Summary Compensation Table rather than below.
Summary
Director Compensation Table FY 2016
Name
|
|
Director fees
earned or
paid in cash
|
|
|
Other
Compensation
|
|
|
Total
($)
|
|
Weixin Wang
|
|
$
|
20,000
|
|
|
$
|
0
|
|
|
$
|
20,000
|
|
Jie Xu
|
|
|
20,000
|
|
|
|
0
|
|
|
|
20,000
|
|
Tianjun Zhang
|
|
|
20,000
|
|
|
|
0
|
|
|
|
20,000
|
|
Owens Meng
|
|
|
20,000
|
|
|
|
0
|
|
|
|
20,000
|
|
See
information provided in response to Item 6.A. above as to the current directors.
Composition
of Board
Our
board of directors currently consists of seven directors. There are no family relationships between any of our executive officers
and directors.
The directors are divided into three classes,
as nearly equal in number as the then total number of directors permits. Class I directors shall face re-election at our annual
general meeting of shareholders in 2017 and every three years thereafter. Class II directors shall face re-election at our annual
general meeting of shareholders in 2018 and every three years thereafter. Class III directors shall face re-election at our annual
general meeting of shareholders in 2019 and every three years thereafter.
If
the number of directors changes, any increase or decrease will be apportioned among the classes so as to maintain the number of
directors in each class as nearly as possible. Any additional director of a class elected to fill a vacancy resulting from an
increase in such class will hold office for a term that coincides with the remaining term of that class. Decreases in the number
of directors will not shorten the term of any incumbent director. These board provisions could make it more difficult for third
parties to gain control of our company by making it difficult to replace members of the Board of Directors.
A
director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the
interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any
vote on that matter. A general notice or disclosure to the directors or otherwise contained in the minutes of a meeting or a written
resolution of the directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure
and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director
may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with our company, or in
which he is so interested and may vote on such motion.
There
are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed
by us in a general meeting.
The
Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence
provided by NASDAQ Stock Market Rule 4200(a)(15). Messrs. Weixin Wang, Jie Xu, Tianjun Zhang and Owens Meng are our independent
directors.
There
are no other arrangements or understandings pursuant to which our directors are selected or nominated.
Our
Board of Directors plays a significant role in our risk oversight. The Board of Directors makes all relevant company decisions.
As such, it is important for us to have both our Chief Executive Officer and Chief Financial Officer serve on the Board as they
play key roles in the risk oversight or the company. As a smaller reporting company with a small board of directors, we believe
it is appropriate to have the involvement and input of all of our directors in risk oversight matters.
Board
Committees
Currently,
three committees have been established under the board: the audit committee, the compensation committee and the nominating committee.
The audit committee is responsible for overseeing the accounting and financial reporting processes of our company and audits of
the financial statements of our company, including the appointment, compensation and oversight of the work of our independent
auditors. The compensation committee of the board of directors reviews and makes recommendations to the board regarding our compensation
policies for our officers and all forms of compensation, and also administers our incentive compensation plans and equity-based
plans (but our board retains the authority to interpret those plans). The nominating committee of the board of directors is responsible
for the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations
or elections of directors and other governance issues. The nominating committee considers diversity of opinion and experience
when nominating directors.
Tianjun
Zhang and Owens Meng serve on all three committees. Weixin Wang serves on the nominating and compensation committees. Jie Xu serves
on the audit committee. At this time, Weixin Wang chairs the nominating committee; Owens Meng chairs the audit committee; and
Tianjun Zhang chairs the compensation committee. Owens Meng qualifies as an “audit committee financial expert” as
that term is defined by the applicable SEC regulations and Nasdaq Capital Market corporate governance requirements.
Duties
of Directors
Under
British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our
directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of
association. We have the right to seek damages if a duty owed by our directors is breached.
The
functions and powers of our board of directors include, among others:
|
●
|
appointing
officers and determining the term of office of the officers;
|
|
●
|
authorizing
the payment of donations to religious, charitable, public or other bodies, clubs, funds
or associations as deemed advisable;
|
|
●
|
exercising
the borrowing powers of the company and mortgaging the property of the company;
|
|
●
|
executing
checks, promissory notes and other negotiable instruments on behalf of the company; and
|
|
●
|
maintaining
or registering a register of mortgages, charges or other encumbrances of the company.
|
Interested
Transactions
A
director may vote, attend a board meeting or sign a document on our behalf with respect to any contract or transaction in which
he or she is interested. A director must promptly disclose the interest to all other directors after becoming aware of the fact
that he or she is interested in a transaction we have entered into or are to enter into. A general notice or disclosure to the
board or otherwise contained in the minutes of a meeting or a written resolution of the board or any committee of the board that
a director is a shareholder, director, officer or trustee of any specified firm or company and is to be regarded as interested
in any transaction with such firm or company will be sufficient disclosure, and, after such general notice, it will not be necessary
to give special notice relating to any particular transaction.
Remuneration
and Borrowing
The
directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to
be repaid or prepaid for all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending
meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection
with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving
the compensation structure for the directors.
Our board of directors may exercise all
the powers of the Company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue
debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation
of the Company or of any third party.
Qualification
A
director is not required to hold shares as a qualification to office.
Limitation
on Liability and Other Indemnification Matters
Under
British Virgin Islands law, each of our directors and officers, in performing his or her functions, is required to act honestly
and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person
would exercise in comparable circumstances. British Virgin Islands law does not limit the extent to which a company’s memorandum
and articles of association may provide for indemnification of officers and directors, except to the extent any such provision
may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime.
Under our memorandum and articles of association,
we may indemnify our directors, officers and liquidators against all expenses, including legal fees, and against all judgments,
fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal, administrative or investigative
proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or
liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best
interest of the Company and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct
was unlawful. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or
rescission. These provisions will not limit the liability of directors under United States federal securities laws.
We
may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including
legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal,
administrative or investigative proceedings. We may only indemnify a director if he or she acted honestly and in good faith with
the view to our best interests and, in the case of criminal proceedings, the director had no reasonable cause to believe that
his or her conduct was unlawful. The decision of our board of directors as to whether the director acted honestly and in good
faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her conduct
was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved.
The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself,
create a presumption that a director did not act honestly and in good faith and with a view to our best interests or that the
director had reasonable cause to believe that his or her conduct was unlawful. If a director to be indemnified has been successful
in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal
fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection
with the proceedings.
We
may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the
directors or officers and incurred by the directors or officers in that capacity, whether or not we have or would have had the
power to indemnify the directors or officers against the liability as provided in our memorandum and articles of association.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted for our directors or officers under the foregoing
provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable as a matter of United States law.
Our
Employees
As
of December 31, 2016, we had approximately 5,963 full-time employees and approximately
1,820 part-time employees and interns. Our senior management and many of our employees have had prior experience in
the call center industry.
We
devote significant resources to recruiting and training our call center associates. We target and select high-caliber employees
through a rigorous screening and testing process. After we hire an employee, we make significant investments in foundation training,
client-specific training and ongoing instruction and coaching. We emphasize small teams, which facilitates significant time for
evaluation and coaching of our customer service associates by our team leaders and quality personnel.
Our
culture is metric-driven and performance-based. We employ a scorecard system for substantially all of our employees that define
specific goals to provide clarity of purpose and to enable objective weekly, monthly and quarterly performance evaluations. We
believe that this system, which is linked with a compensation structure that is heavily weighted with performance-based incentives,
helps our managers identify and coach low performers, reward high performers and ultimately achieve high levels of quality for
our clients.
Most
of our senior management and technical employees are well-educated Chinese professionals with substantial experience in call center
management and call center system integration and application software development. We believe that attracting and retaining highly
experienced call center associates and sales and marketing personnel is a key to our success. In addition, we believe that we
maintain a good working relationship with our employees and we have not experienced any significant labor disputes or any difficulty
in recruiting staff for our operations. Our employees are not represented through any collective bargaining agreements or by labor
unions.
Employment
Agreements
Under Chinese laws, there are some situations
where we can terminate employment agreements without paying economic compensation, such as the employer maintains or raises the
employment conditions but the employee refuses to accept the new employment agreement, when the employment agreement is scheduled
to expire, the employee is retired in accordance with laws or the employee is dead, declared dead or has disappeared. For termination
of employment in absence of legal cause, we are obligated to pay the employee two-month’s salary for each year we have employed
the employee. We are, however, permitted to terminate an employee for cause without paying economic compensation, such as when
the employee has committed a crime, being proved unqualified for recruitment during the probation period, seriously violating the
rules and regulations of the employer, or the employee’s actions or inactions have resulted in a material adverse effect
to us.
Our employment agreements with our executive
officers generally provide for a term of three (3) years, provided that either party may terminate the agreement on sixty
(60) days’ notice and a salary to be paid monthly. The agreements also provide that the executive officers are to work an
average of forty (40) hours per week and are entitled to all legal holidays as well as other paid leave in accordance with
PRC laws and regulations and our internal work policies. Under such agreements, our executive officers can be terminated for cause
without further compensation. The employment agreements also provide that we will pay for all mandatory social security programs
for our executive officers in accordance with PRC regulations. During the agreement and for one (1) year afterward, our executive
officers are required to keep trade secrets confidential.
The
contracts that we have entered into with executive officers include the following:
Gary
Wang
We entered into an employment agreement with
Mr. Wang, effective March 1, 2017, providing for Mr. Wang to serve as the Company’s Chief Executive Officer. Under
the terms of Mr. Wang’s employment agreement, Mr. Wang is, among other matters, to take overall responsibility
for the operational management and financial management of the Company in compliance with all applicable laws and devote a minimum
of forty hours per week to our business and affairs and in return will be entitled to the following:
|
●
|
Annual
compensation of RMB 1,800,000 (approximately $277,000); and
|
|
●
|
Reimbursement
of reasonable expenses.
|
Mr. Wang will be eligible to receive an annual
bonus with a target payout up to 150% of his base salary, subject to achieving Company and individual performance goals established
by the Company’s Compensation Committee. Mr. Wang’s employment agreement is for an initial term of thirty-six
months, renewable for an additional twenty-four months unless either party terminates it in writing at least sixty days before
the expiration of the initial term.
Additionally,
Mr. Wang’s employment agreement provides for confidentiality and nondisclosure provisions, whereby Mr. Wang is required
to keep trade secrets confidential during the course of his employment and for a period of thirty-six months following the termination
of his employment. His employment contract also contains a non-compete clause for a duration of twenty-four months following his
employment.
David
Wang
We entered into an employment agreement with
Mr. Wang, effective March 1, 2017, providing for Mr. Wang to serve as our Chief Financial Officer. Under the terms of Mr. Wang’s
employment agreement, Mr. Wang is, among other matters, to oversee all financial and operational controls and metrics within
the organization in accordance with industry rules and devote a minimum of forty hours per week to our business and affairs and
in return will be entitled to the following:
|
●
|
Annual
compensation of RMB 1,200,000 (approximately $185,000); and
|
|
●
|
Reimbursement
of reasonable expenses.
|
Mr. Wang will be eligible to receive an annual
bonus with a target payout up to 150% of his base salary, subject to achieving Company and individual performance goals established
by the Company’s Compensation Committee. Mr. Wang’s employment agreement is for an initial term of thirty-six
months, renewable for an additional twenty-four months unless either party terminates it in writing at least sixty days before
the expiration of the initial term.
Additionally,
Mr. Wang’s employment agreement provides for confidentiality and nondisclosure provisions, whereby Mr. Wang is required
to keep trade secrets confidential during the course of his employment and for a period of thirty-six months following the termination
of his employment. His employment contract also contains a non-compete clause for a duration of twenty-four months following his
employment.
Guoan
Xu
We entered into an employment agreement with
Mr. Xu, through Taiying, effective March 1, 2017, providing for Mr. Xu to serve as our Vice President. Under the terms of
Mr. Xu’s employment agreement, Mr. Xu is, among other matters, to take respective responsibility for the operation
and management of us in accordance with industry rules and devote a minimum of forty hours per week to our business and affairs
and in return will be entitled to the following:
|
●
|
Annual
compensation of RMB 1,080,000 (approximately $166,000); and
|
|
●
|
Reimbursement
of reasonable expenses.
|
Mr. Xu will be eligible to receive an annual
bonus with a target payout up to 150% of his base salary, subject to achieving Company and individual performance goals established
by the Company’s Compensation Committee. Mr. Xu’s employment agreement is for an initial term of thirty-six months,
renewable for an additional twenty-four months unless either party terminates it in writing at least sixty days before the expiration
of the initial term.
Additionally,
Mr. Xu’s employment agreement provides for confidentiality and nondisclosure provisions, whereby Mr. Xu is required
to keep trade secrets confidential during the course of his employment and for a period of thirty-six months following the termination
of his employment. His employment contract also contains a non-compete clause for a duration of twenty-four months following his
employment.
The
following tables set forth certain information with respect to the beneficial ownership of our common shares as of April 28, 2017,
for:
|
●
|
each
of our directors and named executive officers; and
|
|
●
|
all
of our directors and executive officers as a group.
|
We
have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe,
based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment
power or the power to receive the economic benefit with respect to all common shares that they beneficially own, subject to applicable
community property laws.
Applicable percentage ownership is based on
18,329,600 common shares outstanding at April 28, 2017. Unless otherwise indicated, the address of each beneficial owner listed
in the table below is c/o China Customer Relations Centers, Inc., 1366 Zhongtianmen Dajie, Xinghuo Science and Technology
Park, High-tech Zone, Taian City, Shandong Province, People’s Republic of China 271000.
|
|
Beneficial Ownership
(1)
|
|
Name of Beneficial Owner
|
|
Common Shares
|
|
|
Percentage
|
|
Gary Wang
(2) (5)
|
|
|
3,958,763
|
|
|
|
21.7
|
%
|
David Wang
(3) (5)
|
|
|
1,069,936
|
|
|
|
5.8
|
%
|
Guoan Xu
(4) (5)
|
|
|
122,400
|
|
|
|
*
|
|
Weixin Wang
(5)
|
|
|
0
|
|
|
|
0
|
|
Jie Xu
(5)
|
|
|
0
|
|
|
|
0
|
|
Tianjun Zhang
(5)
|
|
|
0
|
|
|
|
0
|
|
Owens Meng
(5)
|
|
|
0
|
|
|
|
0
|
|
All directors and executive officers as a group
|
|
|
5,151,099
|
|
|
|
28.1
|
%
|
*
|
Less
than 1%.
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common
shares or the power to receive the economic benefit of the common shares.
|
(2)
|
Chairman
and Chief Executive Officer
|
(3)
|
Chief
Financial Officer
|
(4)
|
Vice
President
|
(5)
|
Director
|
Share
Option Pool
We intend to establish a pool for share options for our employees. This pool will contain options to purchase
our common shares equal to ten percent (10%) of the number of common shares. Currently, this pool will contain options to
purchase up to 1,832,960 of our common shares subject to outstanding share options.
Item
7. Major Shareholders and Related Party Transactions
The following tables set forth certain
information with respect to the beneficial ownership of our common shares as of April 28, 2017, for:
|
●
|
each
stockholder known by us to be the beneficial owner of more than 5% of our outstanding
common shares.
|
We
have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe,
based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment
power or the power to receive the economic benefit with respect to all common shares that they beneficially own, subject to applicable
community property laws.
Applicable percentage ownership is based on
18,329,600 common shares outstanding at April 28, 2017. Unless otherwise indicated, the address of each beneficial owner listed
in the table below is c/o China Customer Relations Centers, Inc., 1366 Zhongtianmen Dajie, Xinghuo Science and Technology
Park, High-tech Zone, Taian City, Shandong Province, People’s Republic of China 271000.
|
|
Beneficial Ownership
(1)
|
|
Name of Beneficial Owner
|
|
Common Shares
|
|
|
Percentage
|
|
Qingmao Zhang
|
|
|
1,224,000
|
|
|
|
6.7
|
%
|
Qiaolin Wang
|
|
|
979,200
|
|
|
|
5.3
|
%
|
Jishan Sun
(3)
|
|
|
764,240
|
|
|
|
4.2
|
%
|
Telecare Global Services Limited
(2)(3)
|
|
|
764,240
|
|
|
|
4.2
|
%
|
Guangzhou Cornerstone Asset Management Co., Ltd.
|
|
|
1,032,000
|
|
|
|
5.6
|
%
|
5% or greater beneficial owners as a group
|
|
|
4,763,680
|
|
|
|
26.0
|
%
|
(1)
|
Beneficial ownership is determined in accordance with
the rules of the SEC and includes voting or investment power with respect to the common shares or the power to receive the economic
benefit of the common shares.
|
(2)
|
Represents
764,240 shares directly held by Telecare Global Services Limited, a British Virgin Islands limited liability company controlled
by Mr. Jishan Sun. Mr. Sun holds voting and investment power over the shares held.
|
(3)
|
Mr.
Jishan Sun and Telecare Global Services Limited each hold less than 5% of the common shares, but due to Mr. Sun’s control
of Telecare, the common shares of each are considered in the aggregate making them principal shareholders. Mr. Sun holds
voting and investment power over the shares held.
|
|
B.
|
Related Party Transactions.
|
The
related parties consist of the following:
Name of Related Party
|
|
Nature of Relationship
|
David Wang
|
|
Shareholder, Director and Chief Financial Officer
|
|
|
Guoan Xu
|
|
Shareholder, Director and Vice President
|
|
|
Limin Gao
|
|
Manager of Taiying
|
|
|
Gary Wang
|
|
Principal Shareholder, Director, Chief Executive Officer and Chairman of the Board
|
|
|
Yongjie Yang
|
|
Wife of Gary Wang
|
|
|
Qingmao Zhang
|
|
Principal Shareholder
|
|
|
Chunmei Sun
|
|
Wife of David Wang
|
|
|
Qiaolin Wang
|
|
Shareholder
|
|
|
|
Beijing TaiyingAnrui Holding Co., Ltd
|
|
Sole Shareholder
|
|
|
|
Shandong Luk Information Technology Co., Ltd.
|
|
Controlled by the brother of Gary Wang
|
|
|
Chongqing Ruixuan Technology Co., Ltd.
|
|
Controlled by Beijing Taiying
|
|
|
Chongqing Shenggu Human Resources Co., Ltd.
|
|
Controlled by Beijing Taiying
|
|
|
Chongqing Shenggu Investment Co., Ltd.
|
|
Controlled by Beijing Taiying
|
|
|
Chongqing Shenggu Construction Co., Ltd.
|
|
Controlled by Beijing Taiying
|
|
|
Shandong Shenggu Investment Co., Ltd.
|
|
Controlled by Beijing Taiying
|
|
|
Northern Shenggu Call Center Training School
|
|
Controlled by Beijing Taiying
|
|
|
YantaiShenggu Human Resources Management Co., Ltd.
|
|
Controlled by Beijing Taiying
|
|
|
Chongqing Yongchuan Shenggu Training School
|
|
Controlled by Beijing Taiying
|
|
|
|
Zaozhuang Shenggu Chuangke Enterprise Management Co., Ltd.
|
|
Controlled by Gary Wang
|
|
|
|
Chongqing Taiying Shiye Development Co., Ltd.
|
|
David Wang being a 5% shareholder
|
|
|
|
Beijing Jiate Information Technology Co., Ltd.
|
|
Shareholder of HTCC.
|
Beijing Jiate Information Technology Co., Ltd.
In July 2016, HTCC, its parent company
Taiying, and Beijing Jiate Information Technology Co., Ltd. (“Jiate”) entered into an investment agreement, pursuant
to which Jiate will contribute RMB4,900,000 (approximately $706,000) into HTCC in order to obtain 49% equity interest in HTCC.
Based on the agreement, all the parties agreed to complete the registration process with local administrative department within
30 days after the agreement was signed and Jiate is entitled to HTCC’s earnings after injecting the first portion of investment
in the amount of RMB2,450,000 (approximately $356,000) prior to February 1, 2017. The registration process was completed on July
11, 2016 and HTCC received the capital contribution of $356,000 on January 31, 2017. As a result, Jiate became the related party
of the Company.
Jiate acts as an intermediary agent and
receives commission for referring customers to HTCC. The services provided by Jiate were recorded as related party transactions
in the year ended December 31, 2016. See more details in services provides by related parties.
As of December 31, 2015, the balance of
receivable from Jiate was $125,687 which was recorded as notes receivable, current. The balance was fully settled during the year
ended December 31, 2016 by a repayment of $40,011 and payment of expense made by Jiate on behalf of the Company in the amount of
82,794.
Notes receivable from related party
Chongqing Taiying Shiye Co., Ltd. (“Shiye”),
a company in which David Wang owns 5% of the equity interest, borrowed $1,130,765 from the Company for a construction project in
the year ended December 31, 2013. The receivable bears no interest and is due on demand. During the year ended December 31, 2014,
Shiye repaid $113,901 to the Company.
As of December 31, 2016 and 2015, the
receivable from Shiye was recorded as notes receivable – related party, non-current in the amount of $907,297 and $970,620,
respectively.
Revenues from related party
The Company was the subcontractor of Shandong
Luk Information Technology Co., Ltd. (“Shandong Luk”) to provide BPO services, a related party controlled by the brother
of Gary Wang. The Company did not generate any related party revenues from Shandong Luk for the years ended December 31, 2016 and
2015. And the Company generated revenues in the amount of $11,407 for the year ended December 31, 2014. The accounts receivable
with Shandong Luk amounted to $353,513 as of December 31, 2015. During the year ended December 31, 2016, the Company decided
to record an allowance for all the receivable balance from Shandong Luk, included in accounts receivable – related party,
as the Company does not expect to collect from Shandong Luk within a reasonable period of time.
Services provided by related parties
The Company subcontracted projects to
a related party, Shandong Luk, and the related party provided services in the amount of $485,304, $892,595 and $718,756 for the
years ended December 31, 2016, 2015 and 2014, respectively, which was included in cost of revenues. Out of the services provided,
both parties agreed to use $0, $26,830, and $426,434 to settle part of the balances that Shandong Luk owed to the Company as of
December 31, 2016, 2015, and 2014, respectively.
Jiate charged the Company $188,319
for the customers it referred to the Company during the year ended December 31, 2016, which was included in selling, general
and administrative expenses. As of December 31, 2016 and 2015, the related party accounts payable balance was $129,489 and
$0, respectively.
Due
from related parties
Due
from related parties consist of the following:
Name of Related Party
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Qiaolin Wang
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,948
|
|
Limin Gao
|
|
|
-
|
|
|
|
-
|
|
|
|
437
|
|
Chunmei Sun
|
|
|
-
|
|
|
|
-
|
|
|
|
76,485
|
|
Shandong Luk Information Technology Co., Ltd.
|
|
|
-
|
|
|
|
448,339
|
|
|
|
354,095
|
|
Beijing Taiying Anrui Holding Co.,Ltd
|
|
|
50,811
|
|
|
|
15,406
|
|
|
|
-
|
|
Chongqing Ruixuan Technology Co., Ltd.
|
|
|
-
|
|
|
|
-
|
|
|
|
29,717
|
|
Chongqing Shenggu Human Resources Co., Ltd.
|
|
|
198,055
|
|
|
|
211,878
|
|
|
|
223,761
|
|
Chongqing Shenggu Investment Co., Ltd.
|
|
|
-
|
|
|
|
-
|
|
|
|
651
|
|
Chongqing Shenggu Construction Co., Ltd.
|
|
|
-
|
|
|
|
-
|
|
|
|
2,644
|
|
Shandong Shenggu Investment Co., Ltd.
|
|
|
-
|
|
|
|
-
|
|
|
|
2,441
|
|
Northern Shenggu Call Center Training School
|
|
|
-
|
|
|
|
-
|
|
|
|
65
|
|
Chongqing Yongchuan Shenggu Training School
|
|
|
-
|
|
|
|
-
|
|
|
|
70,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
248,866
|
|
|
$
|
675,623
|
|
|
$
|
763,977
|
|
The
amount owed to the Company by related party companies represents non-secured short-term loans obtained from the Company, which
bears no interest and was due on demand.
During the year ended December 31, 2016, the
Company decided to record an allowance for all the receivable balance from Shandong Luk, included in due from related parties,
as the Company does not expect to collect from Shandong Luk within a reasonable period of time.
The
remaining amounts owed to the Company by individuals represent advances to the Company management members for business travel
or business development purpose and cash advances to the related parties which were non-secured and interest-free.
The Company provided a loan of $18,210 to Beijing Taiying during the year ended December 31, 2016.
The Company received the repayment for loan of $40,011, $1,095,087, and 1,633,073 from related party companies
for the year ended December 31, 2016, 2015, and 2014, respectively.
Due
to related parties
In 2014, the Company repaid a loan obtained
from Chunmei Sun for $392,118. The loan bears an annual interest rate of 15%. For the year ended December 31, 2014, the interest
expense recorded for the related party loan amounted to $108,264.
During the year ended December 31, 2016, a related
party paid expenses on behalf of the Company in the amount of $1,746. As of December 31, 2016 and 2015, the balance owed to this
related party was $1,670.
For the years ended December 31, 2015 and 2014,
the Company borrowed $19,841 and $294,500 from, and repaid $0 and $95,987 to Jiate, respectively. For the year ended December 31,
2016, Jiate purchased property and equipment for the Company in the amount of $238,353, and paid expenses on behalf of the Company
in the amount of $23,094.
As of December 31, 2015, the balance owed to
Jiate was $207,813, which was included in short term loans. As of December 31, 2016, the balance owed to Jiate was $444,380, which
was included in due to related parties as Jiate became the related party of the Company.
Due
to related parties consist of the following:
Name of Related Party
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Beijing Jiate Information Technology Co., Ltd.
|
|
|
444,380
|
|
|
|
-
|
|
Guoan Xu
|
|
|
1,670
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
446,050
|
|
|
$
|
-
|
|
Contractual
Arrangements with Taiying and its Sole Shareholder
We
operate our business in China through a series of contractual arrangements with Taiying and its sole shareholder, which is controlled
by Gary Wang, our Chief Executive Officer and Chairman, and other related parties. For a description of these contractual arrangements
see “Organizational Structure—Control Agreements.”
|
C.
|
Interests of experts and counsel.
|
Not
applicable for annual reports on Form 20-F.
Item
8. Financial Information
|
A.
|
Consolidated Statements and Other Financial Information.
|
See
information provided in response to Item 18 below.
Legal
and Administrative Proceedings
We
are currently not a party to any material legal or administrative proceedings and are not aware of any pending or threatened material
legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings
arising in the ordinary course of our business.
Dividend
Policy
The
holders of shares of our common shares are entitled to dividends out of funds legally available when and as declared by our board
of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable
future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations
depends upon the receipt of dividends or other payments from our operating subsidiary and other holdings and investments. In addition,
the Operating Companies may, from time to time, be subject to restrictions on their ability to make distributions to us, including
as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or
other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of
our common shares are entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.
We
have not experienced any significant changes since the date of our audited consolidated financial statements included in this
annual report.
Item
9. The Offer and Listing
|
A.
|
Offer
and listing details
.
|
Our
common shares have been listed on the NASDAQ Capital Market since December 21, 2015 under the symbol “CCRC.” The table
below shows, for the periods indicated, the high and low market prices for our shares.
|
|
Price per share of
common shares:
|
|
|
|
High
|
|
|
Low
|
|
Annual highs and lows
|
|
|
|
|
|
|
Fiscal year 2016
|
|
$
|
22.00
|
|
|
$
|
5.54
|
|
|
|
|
|
|
|
|
|
|
Quarterly highs and lows
|
|
|
|
|
|
|
|
|
First quarter 2016
|
|
$
|
10.80
|
|
|
$
|
5.65
|
|
Second quarter 2016
|
|
$
|
12.68
|
|
|
$
|
5.54
|
|
Third quarter 2016
|
|
$
|
16.38
|
|
|
$
|
9.66
|
|
Fourth quarter 2016
|
|
$
|
22.00
|
|
|
$
|
10.98
|
|
First quarter 2017
|
|
$
|
19.32
|
|
|
$
|
11.83
|
|
Second quarter 2017 (through April 27, 2017)
|
|
$
|
15.67
|
|
|
$
|
12.90
|
|
|
|
|
|
|
|
|
|
|
Monthly highs and lows
|
|
|
|
|
|
|
|
|
November 2016
|
|
$
|
17.05
|
|
|
$
|
13.36
|
|
December 2016
|
|
$
|
22.00
|
|
|
$
|
13.46
|
|
January 2017
|
|
$
|
19.32
|
|
|
$
|
17.05
|
|
February 2017
|
|
$
|
18.97
|
|
|
$
|
11.83
|
|
March 2017
|
|
$
|
14.26
|
|
|
$
|
12.11
|
|
April 2017 (through April 27, 2017)
|
|
$
|
15.67
|
|
|
$
|
12.90
|
|
Not
applicable for annual reports on Form 20-F.
Our
common shares are listed on the NASDAQ Capital Market under the symbol “CCRC.”
Not
applicable for annual reports on Form 20-F.
Not
applicable for annual reports on Form 20-F.
Not
applicable for annual reports on Form 20-F.
Item
10. Additional Information
Not applicable for annual reports on Form 20-F.
|
B.
|
Memorandum and Articles of Association.
|
We
incorporate by reference the description of our Memorandum and Articles of Association, as currently in effect in the British
Virgin Islands, set forth in our registration statement on Form F-1, declared effective on December 9, 2015 (File No. 333-199306).
Other
than described elsewhere in this annual report, we did not have any other material contracts.
Foreign
Currency Exchange
The principal regulations governing foreign
currency exchange in China are the Foreign Exchange Administration Regulations (1996), as amended on August 5, 2008, the
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996) and the Interim Measures on Administration
on Foreign Debts (2003). Under these regulations, Renminbi are freely convertible for current account items, including the distribution
of dividends, interest payments, trade and service-related foreign exchange transactions, but not for most capital account items,
such as direct investment, loans, repatriation of investment and investment in securities outside China, unless the prior approval
of competent authorities (if required) and registration with SAFE or its local counterparts are obtained. In addition, any loans
to an operating subsidiary in China that is a foreign invested enterprise, cannot, in the aggregate, exceed the difference between
its respective approved total investment amount and its respective approved registered capital amount. Furthermore, any foreign
loan must be registered with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of the total
investment and registered capital must be approved by the PRC Ministry of Commerce or authorized provincial or same level government. We may not be able to obtain these government approvals or registrations on a timely basis, if at all, which could result in
a delay in the process of making these loans.
The
dividends paid by the subsidiary to its shareholder are deemed shareholder income and are taxable in China. Pursuant to the Administration
Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit
foreign exchange, subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE.
Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration
with, SAFE and other relevant PRC governmental authorities.
Circular
37
On July 4, 2014, SAFE issued Circular
37, which became effective as of July 4, 2014. According to Circular 37, PRC residents shall apply to SAFE and its branches
for going through the procedures for foreign exchange registration of overseas investments before contributing the domestic or
offshore assets or interests to a SPV. An amendment to registration or filing with the local SAFE branch by such PRC resident
is also required if the registered overseas SPV’s basic information such as domestic individual resident shareholder, name,
operating period, or major events such as domestic individual resident capital increase, capital reduction, share transfer or
exchange, merger or division has changed. Although the change of overseas funds raised by overseas SPV, overseas investment exercised
by overseas SPV and non-cross-border capital flow are not included in Circular 37, we may be required to make foreign exchange
registration if required by SAFE and its branches.
Moreover,
Circular 37 applies retroactively. As a result, PRC residents who have contributed domestic assets or interests to a SPV, but
failed to complete foreign exchange registration of overseas investments as required prior to implementation of Circular 37, are
required to send a letter to SAFE and its branches for explanation. Under the relevant rules, failure to comply with the registration
procedures set forth in Circular 37 may result in receiving a warning from SAFE and its branches, and may result in a fine
of up to RMB 300,000 for an organization or up to RMB 50,000 for an individual. In the event of failing to register, if capital
outflow occurred, a fine up to 30% of the illegal amount may be assessed.
PRC
residents who control our company are required to register with SAFE in connection with their investments in us. If we use our
equity interest to purchase the assets or equity interest of a PRC company owned by PRC residents in the future, such PRC residents
will be subject to the registration procedures described in Circular 37.
Regulations
on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries
An
offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after
investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested
enterprise in China, which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law,
the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing
rules; the Administrative Provisions on Foreign Exchange in Domestic Direct Investment by Foreign Investors; and the Notice of
the State Administration on Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for Direct
Investment.
Under the aforesaid laws and regulations, the
increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by the original approval
authority of its establishment. In addition, the increase of registered capital and total investment amount shall be registered
with Ministry of Commerce (or authorized provincial or same level government), SAIC and SAFE.
Shareholder
loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory
purpose, which is subject to a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations,
the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts
and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.
Under
these regulations, the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered
with SAFE. Furthermore, the total amount of foreign debts that can be borrowed by such PRC subsidiaries, including any shareholder
loans, shall not exceed the difference between the total investment amount and the registered capital amount of the PRC subsidiaries,
both of which are subject to the governmental approval.
Proposed
China Foreign Investment Law
The
content of the Draft FIL marks a move by MOFCOM to alter its regulation on foreign investment and streamline the current regulatory
framework. Among other proposals, the Draft FIL provides that a domestic enterprise established in the PRC that is “controlled”
by a foreign investor will be deemed to be a foreign invested enterprise, even if the domestic enterprise is directly owned by
Chinese shareholders. This means that if MOFCOM finds that a Chinese entity—which operates in a restricted or prohibited
area—is effectively “controlled” by a foreign entity through a VIE structure, then it may treat the VIE structure
as a foreign direct investment and, therefore, subject it to the additional regulations.
The
National People’s Congress (“NPC”) has not yet provided a clear legislative timeline for the Draft FIL. Therefore,
it may take some time before the Draft FIL is finally promulgated. Until then, the Draft FIL could be substantially amended as
other relevant regulators such as the National Development and Reform Commission and the State Administration of Industry and
Commerce may intervene in the drafting. It remains to be seen how much of the Draft FIL will be preserved or changed and implemented
before it is submitted to the National People’s Congress (NPC), for final approval. Therefore, without knowledge of the
final content of the Draft FIL before it becomes law, there is uncertainty of the potential impact of the Draft FIL on our VIE
structure.
Regulation
of Dividend Distribution
The principal regulations governing the distribution
of dividends by foreign holding companies include the Company Law of the PRC (1993), as amended in 2013, the Foreign Investment
Enterprise Law (1986), as amended in 2016, and the Administrative Rules under the Foreign Investment Enterprise Law (2001), as
amended in 2014.
Under
these regulations, wholly foreign-owned investment enterprises in China may pay dividends only out of their retained profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned investment enterprises
in China are required to allocate at least 10% of their respective retained profits each year, if any, to fund certain reserve
funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable
as cash dividends, and a wholly foreign-owned enterprise is not permitted to distribute any profits until losses from prior fiscal
years have been offset.
The
following sets forth the material British Virgin Islands, Chinese and U.S. federal income tax matters related to an investment
in our common shares. It is directed to U.S. Holders (as defined below) of our common shares and is based on laws and relevant
interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This description does
not deal with all possible tax consequences relating to an investment in our common shares, such as the tax consequences under
state, local and other tax laws.
The
following brief description applies only to U.S. Holders (defined below) that hold common shares as capital assets and that have
the U.S. dollar as their functional currency. This brief description is based on the tax laws of the United States in effect as
of the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this
annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing
authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.
The
brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are
a beneficial owner of shares and you are, for U.S. federal income tax purposes,
|
●
|
an
individual who is a citizen or resident of the United States;
|
|
●
|
a
corporation (or other entity taxable as a corporation for U.S. federal income tax purposes)
organized under the laws of the United States, any state thereof or the District of Columbia;
|
|
●
|
an
estate whose income is subject to U.S. federal income taxation regardless of its source;
or
|
|
●
|
a
trust that (1) is subject to the primary supervision of a court within the United
States and the control of one or more U.S. persons for all substantial decisions or (2) has
a valid election in effect under applicable U.S. Treasury regulations to be treated as
a U.S. person.
|
WE
URGE POTENTIAL PURCHASERS OF OUR SHARES TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S.
TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR SHARES.
PRC
Enterprise Income Tax
According
to the Enterprise Income Tax Law of PRC (the “EIT Law”), which was promulgated on March 16, 2007 and became effective
on January 1, 2008, the income tax for both domestic and foreign-invested enterprises is at a uniform rate of 25%, unless
they qualify for certain exceptions. The Regulation on the Implementation of Enterprise Income Tax Law of the PRC (the “EIT
Rules”) was promulgated on December 6, 2007 and became effective on January 1, 2008.
On April 14, 2008, the Chinese Ministry
of Science and Technology, Ministry of Finance and State Administration of Taxation enacted the Administrative Measures for Certifying
High and New Technology Enterprises, which retroactively became effective on January 1, 2008 and amended on January 1,
2016. Under the EIT Law, certain qualified high-tech companies may benefit from a preferential tax rate of 15% if they own their
core intellectual properties and are classified into certain industries strongly supported by the Chinese government and set forth
by certain departments of the Chinese State Council. Taiying was granted the high and new technology enterprise (“HNTE”)
qualification valid for three years starting from June 12, 2009 and successfully renewed the qualification in 2012 and 2015,
which is valid through December 10, 2018. There can be no assurance, however, that Taiying and its subsidiaries will continue
to meet the qualifications for such a reduced tax rate. In addition, there can be no guaranty that relevant governmental authorities
will not revoke Taiying’s “high and new technology enterprise” status in the future.
Uncertainties
exist with respect to how the EIT Law applies to the tax residence status of CCRC and our offshore subsidiaries. Under the EIT
Law, an enterprise established outside of China with a “de facto management body” within China is considered a “resident
enterprise”, which means that it is treated in a manner similar to a Chinese enterprise for enterprise income tax purposes.
Although the implementation rules of the EIT Law define “de facto management body” as a managing body that exercises
substantive and overall management and control over the production and business, personnel, accounting books and assets of an
enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State
Administration of Taxation, at April 22, 2009 which provides that a foreign enterprise controlled by a PRC company or a PRC company
group will be classified as a “resident enterprise” with its “de facto management bodies” located within
China if the following criteria are satisfied:
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the
place where the senior management and core management departments that are in charge
of its daily operations perform their duties is mainly located in the PRC;
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its
financial and human resources decisions are made by or are subject to approval by persons
or bodies in the PRC;
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its
major assets, accounting books, company seals, and minutes and files of its board and
shareholders’ meetings are located or kept in the PRC; and
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more
than half of the enterprise’s directors or senior management with voting rights
frequently reside in the PRC.
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We
do not believe that we meet the conditions outlined in the preceding paragraph since CCRC does not have a PRC enterprise or enterprise
group as our primary controlling shareholder. In addition, we are not aware of any offshore holding companies with a corporate
structure similar to the Company that has been deemed a PRC “resident enterprise” by the PRC tax authorities.
If
we are deemed a PRC resident enterprise, we may be subject to the EIT at the rate of 25% on our global income, except that the
dividends we receive from our PRC subsidiaries may be exempt from the EIT to the extent such dividends are deemed dividends among
qualified resident enterprises. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiaries,
a 25% EIT on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and
profitability.
PRC
Business Tax and VAT
Pursuant to applicable PRC tax regulations,
any entity or individual conducting business in the value-added telecommunication service industry used to be generally required
to pay a business tax at the rate of 3% on the revenues generated from providing such services. However, beginning on June 1,
2014, a value-added tax has generally been imposed to replace the business tax in value-added telecommunications services. Pursuant
to the Provisional Regulations on Value-added Tax of the PRC last amended on February 6, 2016 and its Implementing Rules,
all entities or individuals in the PRC engaging in the sale of goods, the provision of processing services, repairs and replacement
services, and the importation of goods are required to pay VAT. The amount of VAT payable is calculated as “output VAT”
minus “input VAT”. According to Circular of the Ministry of Finance and the State Administration of Taxation on the
Fully Carrying out the Pilot Collection of Value-added Tax in Lieu of Business Tax (“Circular 36”) promulgated at
March 23, 2016, the rate of VAT is 6% for value-added telecommunications services.
People’s
Republic of China Taxation
Under the EIT law and EIT Rules, both of which
became effective on January 1, 2008, the income tax for both domestic and foreign-invested enterprises is at a uniform rate
of 25%, unless they qualify for certain exceptions. On April 14, 2008, the Chinese Ministry of Science and Technology, Ministry
of Finance and State Administration of Taxation enacted the Administrative Measures for Certifying High and New Technology Enterprises,
which retroactively became effective on January 1, 2008 and amended on January 1, 2016. provide that certain qualified
high-tech companies may benefit from a preferential tax rate of 15% if they own their core intellectual properties and are classified
into certain industries strongly supported by the Chinese government and set forth by certain departments of the Chinese State
Council. Taiying was granted the HNTE qualification valid for three years starting from June 12, 2009 and successfully renewed
the qualification in 2012 and 2015, which is valid through December 10, 2018. There can be no assurance, however, that Taiying
and its subsidiaries will continue to meet the qualifications for such a reduced tax rate. In addition, there can be no guaranty
that relevant governmental authorities will not revoke Taiying’s “high and new technology enterprise” status
in the future.
We
are a holding company incorporated in the British Virgin Islands and we gain substantial income by way of dividends from our PRC
subsidiaries. The EIT Law and Rules provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC
Subsidiary to its equity holders that are non-resident enterprises, will normally be subject to PRC withholding tax at a rate
of 10%, unless any such foreign investor’s jurisdiction of incorporation has tax treaty with China that provides for a different
withholding arrangement.
British
Virgin Islands Taxation
Under
the BVI Act as currently in effect, a holder of common shares who is not a resident of the British Virgin Islands is exempt from
British Virgin Islands income tax on dividends paid with respect to the common shares and all holders of common shares are not
liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such shares. The
British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the
BVI Act.
There
are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated or re-registered
under the BVI Act. In addition, shares of companies incorporated or re-registered under the BVI Act are not subject to transfer
taxes, stamp duties or similar charges.
There
is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands or between
China and the British Virgin Islands.
United
States Federal Income Taxation
The
following does not address the tax consequences to any particular investor or to persons in special tax situations such as:
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a
dealer in securities or currencies;
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a
person whose “functional currency” is not the United States dollar;
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financial
institutions;
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regulated
investment companies;
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real
estate investment trusts;
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traders
that elect to mark-to-market;
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persons
liable for alternative minimum tax;
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persons
holding our common shares as part of a straddle, hedging, conversion or integrated transaction;
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persons
that actually or constructively own 10% or more of our voting shares;
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persons
who acquired our common shares pursuant to the exercise of any employee share option
or otherwise as consideration; or
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persons
holding our common shares through partnerships or other pass-through entities.
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Prospective
purchasers are urged to consult their tax advisors about the application of the U.S. Federal tax rules to their particular circumstances
as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our common
shares.
Taxation
of Dividends and Other Distributions on our Common Shares
Subject
to the passive foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect
to the common shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income
as dividend income on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated
earnings and profits (as determined under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received
deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With
respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate
applicable to qualified dividend income, provided that (1) the common shares are readily tradable on an established
securities market in the United States, or in the event we are deemed to be a PRC “resident enterprise” under the
PRC tax law, we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes
an exchange of information program, (2) we are not a passive foreign investment company (as discussed below) for either our
taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are
met. Under U.S. Internal Revenue Service authority, common shares are considered for purpose of clause (1) above to be readily
tradable on an established securities market in the United States if they are listed on the NASDAQ Capital Market. You are urged
to consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our common shares,
including the effects of any change in law after the date of this annual report.
Dividends
will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend
income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit
limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of
tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect
to specific classes of income. For this purpose, dividends distributed by us with respect to our common shares will constitute
“passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
To
the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S.
federal income tax principles), it will be treated first as a tax-free return of your tax basis in your common shares, and to
the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to
calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution
will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital
gain under the rules described above.
Taxation
of Dispositions of Common Shares
Subject
to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange
or other taxable disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and
your tax basis (in U.S. dollars) in the common shares. The gain or loss will generally be capital gain or loss. Capital gains
are generally subject to United States federal income tax at the same rate as ordinary income, except that non-corporate U.S.
Holders who have held common shares for more than one year may be eligible for reduced rates of taxation. The deductibility of
capital losses is subject to limitations. Any such gain or loss that you recognize will generally be treated as United States
source income or loss for foreign tax credit limitation purposes.
Passive
Foreign Investment Company
Based
on our current operations and the composition of our income and assets, we are not a passive foreign investment company, or PFIC,
for U.S. federal income tax purposes for our current taxable year ending December 31, 2015. Our actual PFIC status for the
current taxable years ending December 31, 2016 will not be determinable until after the close of such taxable years and,
accordingly, there is no guarantee that we will not be a PFIC for the current taxable year. PFIC status is a factual determination
for each taxable year which cannot be made until the close of the taxable year. A non-U.S. corporation is considered a PFIC for
any taxable year if either:
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at
least 75% of its gross income is passive income; or
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at
least 50% of the value of its assets (based on an average of the quarterly values of
the assets during a taxable year) is attributable to assets that produce or are held
for the production of passive income (the “asset test”).
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We
will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other
corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
We
must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular,
because the value of our assets for purposes of the asset test will generally be determined based on the market price of
our common shares, our PFIC status will depend in large part on the market price of our common shares. Accordingly, fluctuations
in the market price of the common shares may cause us to become a PFIC. In addition, the application of the PFIC rules is subject
to uncertainty in several respects and the composition of our income and assets will be affected by how, and how quickly, we spend
the cash we raised in our initial public offering. If we are a PFIC for any year during which you hold common shares, we will
continue to be treated as a PFIC for all succeeding years during which you hold common shares. However, if we cease to be a PFIC,
you may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with respect to the
common shares.
If
we are a PFIC for any taxable year during which you hold common shares, you will be subject to special tax rules with respect
to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including
a pledge) of the common shares, unless you make a “mark-to-market” election as discussed below. Distributions you
receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the
three preceding taxable years or your holding period for the common shares will be treated as an excess distribution. Under these
special tax rules:
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the
excess distribution or gain will be allocated ratably over your holding period for the
common shares;
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the
amount allocated to the current taxable year, and any taxable year prior to the first
taxable year in which we were a PFIC, will be treated as ordinary income, and
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the
amount allocated to each other year will be subject to the highest tax rate in effect
for that year and the interest charge generally applicable to underpayments of tax will
be imposed on the resulting tax attributable to each such year.
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The
tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset
by any net operating losses for such years, and gains (but not losses) realized on the sale or other disposition of the common
shares cannot be treated as capital, even if you hold the common shares as capital assets.
A
U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to
elect out of the tax treatment discussed above. If you make a mark-to-market election for the common shares, you will include
in ordinary income each year an amount equal to the excess, if any, of the fair market value of the common shares as of the close
of your taxable year over your adjusted tax basis in such common shares. You are allowed a deduction for the excess, if any, of
the adjusted tax basis of the common shares over their fair market value as of the close of the taxable year. However, deductions
are allowable only to the extent of any net mark-to-market gains on the common shares included in your income for prior taxable
years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition
of the common shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market
loss on the common shares, as well as to any loss realized on the actual sale or disposition of the common shares, to the extent
that the amount of such loss does not exceed the net mark-to-market gains previously included for such common shares. Your tax
basis in the common shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election,
the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us, except that
the lower applicable capital gains rate for qualified dividend income discussed above under “—Taxation of Dividends
and Other Distributions on our Common Shares” generally would not apply.
The
mark-to-market election is available only for “marketable stock”, which is stock that is traded in other than
de
minimis
quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange
or other market (as defined in applicable U.S. Treasury regulations), including the NASDAQ Capital Market. If the common shares
are regularly traded on the NASDAQ Capital Market and if you are a holder of common shares, the mark-to-market election would
be available to you were we to be or become a PFIC.
Alternatively,
a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect
out of the tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC
will generally include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings
and profits for the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S.
Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We
do not currently intend to prepare or provide the information that would enable you to make a qualified electing fund election.
If you hold common shares in any year in which we are a PFIC, you will generally be required to file U.S. Internal Revenue Service
Form 8621 to report your ownership of our common shares as well as distributions received on the common shares, any gain realized
on the disposition of the common shares, any PFIC elections you would like to make in regard to the common shares, and any information
required to be reported pursuant to such an election.
You
are urged to consult your tax advisors regarding the application of the PFIC rules to your investment in our common shares and
the elections discussed above.
Information
Reporting and Backup Withholding
Dividend
payments with respect to our common shares and proceeds from the sale, exchange or redemption of our common shares may be subject
to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup
withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other
required certification on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders
who are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form
W-9. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup
withholding rules.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income
tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold
taxes for individual shareholders.
Under
the Hiring Incentives to Restore Employment Act of 2010, certain United States Holders are required to report information relating
to common shares, subject to certain exceptions (including an exception for shares held in accounts maintained by certain financial
institutions), by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with
their tax return for each year in which they hold shares. U.S. Holders are urged to consult their own tax advisors regarding the
application of the U.S. information reporting and backup withholding rules.
A
Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification
of its foreign status to the payor, under penalties of perjury, on the applicable IRS Form W-8BEN.
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Dividends
and Paying Agents.
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Not applicable for annual reports on Form
20-F.
Not applicable for annual reports on Form
20-F.
We are subject to the information requirements
of the Exchange Act. In accordance with these requirements, the company files reports and other information with the SEC. You may
read and copy any materials filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains
a web site at
http://www.sec.gov
that contains reports and other information regarding registrants that file electronically
with the SEC. In accordance with NASDAQ Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our
website at www.ccrc.com. In addition, we will provide hard copies of our annual report free of charge to shareholders upon request.
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Subsidiary Information.
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Not
Applicable.
Item
11. Quantitative and Qualitative Disclosures About Market Risk
Interest
Rate Risk
Our main interest rate exposure relates to bank
borrowings. We manage our interest rate exposure with a focus on reducing our overall cost of debt and exposure to changes in interest
rates. In the year 2016, we had $0.773 million weight average outstanding bank loans, with weighted average effective interest
rate of 7%. In 2015, we had $1.66 million weighted average outstanding bank loans, with weighted average effective interest rate
of 30%.
As of December 31, 2016, if interest rates increased/decreased
by 1%, with all other variables having remained constant, and assuming the amount of bank borrowings outstanding at the end of
the year was outstanding for the entire year, profit attributable to equity owners of our company would have been RMB 51,173 ($7,703)
lower/higher, respectively, mainly as a result of higher/lower interest income from our cash and cash equivalents and loan receivables.
As of December 31, 2015, if interest rates increased/decreased
by 1%, with all other variables having remained constant, and assuming the amount of bank borrowings outstanding at the end of
the year was outstanding for the entire year, profit attributable to equity owners of our company would have been RMB 0.1 million
($0.02) lower/higher, respectively, mainly as a result of higher/lower interest income from our cash and cash equivalents and loan
receivables.
Foreign
Exchange Risk
Our functional currency is the RMB, and our
financial statements are presented in U.S. dollar. The RMB depreciated against the U.S. dollar by 5.0% in 2015 and 7.0% in 2016.
The change in the value of RMB relative to the U.S. dollar may affect our financial results reported in the U.S. dollar terms
without giving effect to any underlying change in our business or results of operation.
Currently,
our assets, liabilities, revenues and costs are denominated in RMB and in U.S. dollars, Our exposure to foreign exchange risk
will primarily relate to those financial assets denominated in U.S. dollars. Any significant revaluation of RMB against U.S. dollar
may materially affect our earnings and financial position, and the value of, and any dividends payable on, our common shares in
U.S. dollars in the future.
Commodity
Risk
We
are not exposed to commodity price risk.
Item
12. Description of Securities Other Than Equity Securities
With
the exception if Items 12.D.3 and 12.D.4, this Item 12 is not applicable for annual reports on Form 20-F. As to Items 12.D.3 and
12.D.4, this Item 12 is not applicable, as the company does not have any American Depository Shares.
(4) 49% owned by Beijing Jiate Information Technology Co., Ltd.,
see Note 9 and Note 15 for detailed discussion.
The accompanying audited financial statements have been prepared
in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The consolidated financial statements include the accounts of the
Company and Taiying, which is a variable interest entity with the Company as the primary beneficiary. In accordance with U.S. GAAP
regarding “Consolidation of Variable Interest Entities (VIE)”, the Company identifies entities for which control is
achieved through means other than through voting rights, and determines when and which business enterprise, if any, should consolidate
the VIE.
The Company evaluated its participating interest in Taiying and
concluded it is the primary beneficiary of Taiying, a VIE. The Company consolidated Taiying and all significant intercompany transactions
and balances have been eliminated.
Certain prior year amounts have been reclassified to conform to
the current period presentation. These reclassifications had no impact on net earnings and financial position.
The accompanying consolidated financial statements are presented
in United States dollar (“$”), which is the reporting currency of the Company. The functional currency of China Customer
Relations Centers, Inc. and CBPO is United States dollar. The functional currency of the Company’s subsidiary and VIEs located
in the PRC is Renminbi (“RMB”). For the subsidiaries whose functional currencies are RMB, results of operations and
cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange
rate at the end of the period, and equity is translated at historical exchange rates. The resulting translation adjustments are
included in determining other comprehensive income. Transaction gains and losses are reflected in the consolidated statements
of income. For the year ended December 31, 2016, the Company had gain of $278,411 resulted from foreign currency transactions,
which was included in other income.
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company bases its estimates and judgments on historical experience and on various other assumptions
and information that are believed to be reasonable under the circumstances. Estimates and assumptions of future events and their
effects cannot be perceived with certainty and, accordingly, these estimates may change as new events occur, as more experience
is acquired, as additional information is obtained and as our operating environment changes. Significant estimates and assumptions
by management include, among others, useful lives and impairment of long-lived assets, allowance for doubtful accounts, income
taxes including the valuation allowance for deferred tax assets. While the Company believes that the estimates and assumptions
used in the preparation of the financial statements are appropriate, actual results could differ from those estimates. Estimates
and assumptions are periodically reviewed and the effects of revisions are reflected in the financial statements in the period
they are determined to be necessary.
Cash and cash equivalents include cash on hand and cash in time
deposits, certificates of deposit and all highly liquid instruments with original maturities of three months or less.
Accounts receivable consists principally of amounts due from trade
customers. Credit is extended based on an evaluation of the customer’s financial condition and collateral is not generally
required. Certain credit sales are made to industries that are subject to cyclical economic changes.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its clients to make required payments or to cover potential credit losses. Estimates are
based on historical collection experience, current trends, credit policy and relationship between accounts receivable and revenues.
In determining these estimates, the Company examines historical write-offs of its receivables and reviews each client’s
account to identify any specific customer collection issues.
Certain call center decoration projects were still under construction
as of December 31, 2016 and the costs of construction were reported as construction in progress. No provision for depreciation
is made on the assets under construction until such time as the relevant assets are completed and ready for their intended use.
For certain of the Company’s financial instruments, including
cash and cash equivalents, accounts receivable, prepayments, other current assets, accounts payable, accrued liabilities and other
payables, deferred revenue, wages payable, and income taxes payable, the carrying amounts approximate their fair values due to
the short maturities.
Government grants include cash subsidies as well as other subsidies
received from various government agencies by the subsidiaries of the Company. Such subsidies are generally provided as incentives
from the local government to encourage the expansion of local business. The government grant is recognized in the consolidated
statements of income and comprehensive income when the relevant performance criteria specified in the grant are met, for instance,
locating contact centers in their jurisdictions or helping local employment needs. Grants applicable to purchase of property and
equipment are credited to deferred revenue upon receipt and are amortized over the life of depreciable assets. For the year ended
December 31, 2016, the Company received grant of $270,962 for the purpose of making improvement on its leased offices. The Company
included this amount in deferred revenue as the performance obligation is not fulfilled as of December 31, 2016.
Research and development expenses consist primarily of wage expense
incurred to personnel to continuously upgrade the Company’s existing software products. For the years ended December 31,
2016, 2015, and 2014, research and development expenses of $3,264,073, $1,962,659, and $679,755 were included in selling, general
and administrative expenses in the consolidated statements of income and comprehensive income.
The Company accounts for income taxes under the provision of FASB
ASC 740-10, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for
the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting
amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Financial instruments that potentially subject the Company to concentrations
of credit risk are cash and accounts receivable arising from its normal business activities. The Company places its cash in what
it believes to be credit-worthy financial institutions. The Company routinely assesses the financial strength of the customer and,
based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence,
believes that its accounts receivable credit risk exposure beyond such allowance is limited.
A related party is generally defined as (i) any person that
holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone
that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can
significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party
transaction when there is a transfer of resources or obligations between related parties. The Company conducts business with its
related parties in the ordinary course of business. Related parties may be individuals or corporate entities.
Transactions involving related parties cannot be presumed to be
carried out on an arm's-length basis, as the requisite conditions of competitive, freemarket dealings may not exist. Representations
about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms
equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated. It is not, however,
practical to determine the fair value of amounts due from/to related parties due to their related party nature.
The Company uses the “management approach” in determining
reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s
chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s
reportable segments. The Company’s chief operating decision maker has been identified as the chief executive officer of the
Company who reviews financial information of separate operating segments based on U.S. GAAP. The chief operating decision maker
now reviews results analyzed by customer. This analysis is only presented at the revenue level with no allocation of direct or
indirect costs. Consequently, the Company has determined that it has only one operating segment.
The notes receivable includes due on demand interest-free notes
to third parties. For the year ended December 31, 2016, the Company advanced a loan of $563,896 to a third party company. The loan
is non-interest bearing and due on demand. For the year ended December 31, 2014, the Company received repayments of notes
for a total amount of $130,172 from a third party individual.
As of December 31, 2016 and 2015, balance of notes receivable, current was $547,259, and $125,687, respectively.
Note
8 – SHORT TERM LOANS
Short
term loans and related guarantees are comprised of the following:
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Guarantee
|
|
Balance
|
|
|
Balance
|
|
Industrial Bank Co., Ltd., Taian Branch
|
|
Taian Development District Taishan Venture Capital Co., Ltd and Gary Wang
|
|
|
-
|
|
|
|
1,540,666
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal of bank loans
|
|
|
|
$
|
-
|
|
|
$
|
1,540,666
|
|
The annual interest rates of the short-term bank loans listed above
ranged from 6.4% to 6.5%. On June 24, 2016, the Company repaid the outstanding bank loans in full.
In addition to the short-term bank loans, the Company also entered
into short term loan agreements with other third party individuals and companies for the years ended December 31, 2015 and
2014. For the year ended December 31, 2015, the Company borrowed $2,172,163 from one third party individual and two third
party companies, and repaid an amount of $2,171,291. A loan with an amount of $965,018 was secured by certain fixed assets of Taiying
and was charged with a monthly interest rate of 1.67%. The net carrying value of the fixed assets of Taiying pledged for the loan
amounted to $2,493,055. As of December 31, 2015, this secured loan has been paid off. All other three loans are unsecured and bear
an annual interest rate ranging from 0% to 10%. For the year ended December 31, 2014, the Company borrowed $1,722,622 from two
third party individuals and two third party companies, and repaid an amount of $1,722,622. For the year ended December 31, 2014,
all these loans are unsecured and bear no interest. The loans were borrowed primarily to pay off salaries and other payable related
to the business operation.
The interest expenses for the years ended December 31, 2016,
2015 and 2014 were $50,383, $278,363 and $552,894, respectively.
Note 9 – RELATED PARTY TRANSACTIONS
The related parties had transactions for the years ended December
31, 2016, 2015 and 2014 consist of the following:
Name of Related Party
|
|
Nature of Relationship
|
Guoan Xu
|
|
Shareholder, Director and Vice President
|
|
|
|
Beijing Taiying Anrui Holding Co., Ltd.
|
|
Sole Shareholder
|
|
|
|
Shandong Luk Information Technology Co., Ltd.
|
|
Controlled by the brother of Gary Wang
|
|
|
|
Chunmei Sun
|
|
Wife of Gary Wang
|
|
|
|
Chongqing Shenggu Human Resources Co., Ltd.
|
|
Controlled by Beijing Taiying
|
|
|
|
Chongqing Taiying Shiye Development Co., Ltd.
|
|
David Wang being a 5% shareholder
|
|
|
|
Beijing Jiate Information Technology Co., Ltd.
|
|
Shareholder of HTCC
|
Beijing
Jiate Information Technology Co., Ltd.
In July 2016, HTCC, its parent company Taiying, and Beijing Jiate
Information Technology Co., Ltd. (“Jiate”) entered into an investment agreement, pursuant to which Jiate will contribute
RMB4,900,000 (approximately $706,000) into HTCC in order to obtain 49% equity interest in HTCC. Based on the agreement, all the
parties agreed to complete the registration process with local administrative department within 30 days after the agreement was
signed and Jiate is entitled to HTCC’s earnings after injecting the first portion of investment in the amount of RMB2,450,000
(approximately $356,000) prior to February 1, 2017. The registration process was completed on July 11, 2016 and HTCC received the
capital contribution of $356,000 on January 31, 2017. As a result, Jiate became the related party of the Company.
Jiate acts as an intermediary agent and receives commission for
referring customers to HTCC. The services provided by Jiate were recorded as related party transactions in the year ended December
31, 2016. See more details in services provides by related parties.
As of December 31, 2015, the balance of receivable from Jiate was
$125,687 which was recorded as notes receivable, current. The balance was fully settled during the year ended December 31, 2016
by a repayment of $40,011 and payment of expense made by Jiate on behalf of the Company in the amount of 82,794.
Notes receivable from related party
Chongqing Taiying Shiye Co., Ltd. (“Shiye”), a company
in which David Wang owns 5% of the equity interest, borrowed $1,130,765 from the Company for a construction project in the year
ended December 31, 2013. The receivable bears no interest and is due on demand. During the year ended December 31, 2014, Shiye
repaid $113,901 to the Company.
As of December 31, 2016 and 2015, the receivable from Shiye was
recorded as notes receivable – related party, non-current in the amount of $907,297 and $970,620, respectively.
Revenues from related party
The Company was the subcontractor of Shandong Luk Information Technology
Co., Ltd. (“Shandong Luk”) to provide BPO services, a related party controlled by the brother of Gary Wang. The Company
did not generate any related party revenues from Shandong Luk for the years ended December 31, 2016 and 2015. And the Company generated
revenues in the amount of $11,407 for the year ended December 31, 2014. The accounts receivable with Shandong Luk amounted to $353,513
as of December 31, 2015. During the year ended December 31, 2016, the Company decided to record an allowance for all the receivable
balance from Shandong Luk, included in accounts receivable – related party, as the Company does not expect to collect from
Shandong Luk within a reasonable period of time.
Services provided by related parties
The Company subcontracted projects to a related party, Shandong
Luk, and the related party provided services in the amount of $485,304, $892,595 and $718,756 for the years ended December 31,
2016, 2015 and 2014, respectively, which was included in cost of revenues. Out of the services provided, both parties agreed to
use $0, $26,830, and $426,434 to settle part of the balances that Shandong Luk owed to the Company as of December 31, 2016, 2015,
and 2014, respectively.
Jiate charged the Company $188,319 for the customers it
referred to the Company during the year ended December 31, 2016, which was included in selling, general and administrative
expenses. As of December 31, 2016 and 2015, the related party accounts payable balance was $129,489 and $0, respectively.
Due from related parties
Due from related parties consist of the following:
Name of Related Party
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Shandong Luk Information Technology Co., Ltd.
|
|
$
|
-
|
|
|
$
|
448,339
|
|
Beijing Taiying Anrui Holding Co., Ltd.
|
|
|
50,811
|
|
|
|
15,406
|
|
Chongqing Shenggu Human Resources Co., Ltd.
|
|
|
198,055
|
|
|
|
211,878
|
|
|
|
$
|
248,866
|
|
|
$
|
675,623
|
|
The Company provided a loan of $18,210 to Beijing Taiying
during the year ended December 31, 2016.
The amount owed to the Company by related party companies represents
non-secured short-term loans obtained from the Company, which bears no interest and was due on demand.
During the year ended December 31, 2016, the Company decided to
record an allowance for all the receivable balance from Shandong Luk, included in due from related parties, as the Company does
not expect to collect from Shandong Luk within a reasonable period of time.
Due
to related parties
The balance of due to related parties was $446,050 and $0 as of
December 31, 2016 and 2015, respectively.
In 2014, the Company repaid a loan obtained from Chunmei Sun for
$392,118. The loan bears an annual interest rate of 15%. For the year ended December 31, 2014, the interest expense recorded for
the related party loan amounted to $108,264.
During the year ended December 31, 2016, a related party paid expenses
on behalf of the Company in the amount of $1,746. As of December 31, 2016, the balance owed to this related party was $1,670.
For the years ended December 31, 2015 and 2014, the Company borrowed
$19,841 and $294,500 from Jiate, and repaid $0 and $95,987 to Jiate, respectively. For the year ended December 31, 2016, the Company
purchased property and equipment through Jiate in the amount of $238,353. Jiate also paid expenses on behalf of the Company in
the amount of $23,094.
As of December 31, 2015, the balance owed to Jiate was $207,813,
which was included in short term loans. For the year ended December 31, 2016, $203,048 was reclassified from short term loans to
due to related parties as Jiate became a related party of the Company. As of December 31, 2016, the balance owed to Jiate was $444,380,
which was included in due to related parties.
Note 10 – MAJOR CUSTOMERS AND CREDIT RISK
The Company had two customers including their provincial subsidiaries
in each of the years ended December 31, 2016, 2015 and 2014 that contributed at least 10% of total revenues. The provincial
subsidiaries of both customers are in the telecommunications industry, which collectively represents 48%, 64% and 74% of the total
revenues for the years ended December 31, 2016, 2015 and 2014, respectively. The account receivable balances due from these
two customers were $4,025,927 and $3,903,981 at December 31, 2016 and 2015, respectively.
The loss of one or more of its significant customers could have
a material adverse effect on the Company’s business, operating results, or financial condition. The Company does not require
collateral from its customers. To limit the Company’s credit risk, management performs periodic credit evaluations of its
customers and maintains allowances for uncollectible accounts. Although the Company’s accounts receivable could increase
dramatically as the Company grows its sales, management does not believe significant credit risk exists as of December 31,
2016 and 2015.
Notes 11 – INCOME TAXES
British Virgin Islands (“BVI”)
Under the current laws of BVI, China Customer Relations Centers,
Inc. is not subject to tax on income or capital gain. In addition, payments of dividends by the Company to their shareholders are
not subject to withholding tax in the BVI.
Hong Kong
The Company’s subsidiary, CBPO, is incorporated in Hong Kong
and has no operating profit or tax liabilities during the period. CBPO is subject to tax at 16.5% on the assessable profits arising
in or derived from Hong Kong.
PRC
The Company’s subsidiary, VIE and VIE’s subsidiaries
registered in the PRC are subject to PRC Enterprise Income Tax (“EIT”) on the taxable income in accordance with the
relevant PRC income tax laws. On March 16, 2007, the National People’s Congress enacted a new enterprise income tax
law, which took effect on January 1, 2008. The law applies a uniform 25% enterprise income tax rate to both foreign invested
enterprises and domestic enterprises. According to the tax law, entities that qualify as high and new technology enterprises (“HNTE”)
supported by the PRC government are allowed a 15% preferential tax rate instead of the uniform tax rate of 25%.
Taiying was granted the HNTE valid for three years starting from June 12, 2009 and successfully renewed
the qualification of HNTE in the year of 2012, and subsequently in the year of 2015. The qualification of HNTE will be renewed
after evaluation by relevant government authorities every three years. Taiying is entitled to a preferential EIT rate of 15%.
Other PRC entities are subject to the 25% EIT rate of their taxable income.
The
provision for income taxes consists of the following:
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current
|
|
$
|
1,554,060
|
|
|
|
1,447,633
|
|
|
$
|
526,202
|
|
Deferred
|
|
|
(105,137
|
)
|
|
|
(172,000
|
)
|
|
|
109,657
|
|
Total
|
|
$
|
1,448,923
|
|
|
|
1,275,633
|
|
|
$
|
635,859
|
|
The
reconciliations of the PRC statutory income tax rate and the Company’s effective income tax rate are as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
PRC statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Effect of income tax exemptions and reliefs
|
|
|
(7.36
|
%)
|
|
|
(4.82
|
%)
|
|
|
(8.10
|
%)
|
Effect of expenses not deductible for tax purposes
|
|
|
0.39
|
%
|
|
|
0.83
|
%
|
|
|
2.10
|
%
|
Effect of income not taxable
|
|
|
(0.49
|
%)
|
|
|
(2.17
|
%)
|
|
|
(3.89
|
%)
|
Effect of additional deduction allowed for tax purposes
|
|
|
(2.66
|
%)
|
|
|
-
|
|
|
|
-
|
|
Effect of valuation allowance on deferred income tax assets
|
|
|
0.00
|
%
|
|
|
0.02
|
%
|
|
|
4.98
|
%
|
Effect of income tax rate difference under different tax jurisdictions
|
|
|
1.73
|
%
|
|
|
2.62
|
%
|
|
|
6.21
|
%
|
Others
|
|
|
(1.61
|
%)
|
|
|
(0.39
|
%)
|
|
|
0.00
|
%
|
Total
|
|
|
15.00
|
%
|
|
|
21.09
|
%
|
|
|
26.30
|
%
|
Accounting
for Uncertainty in Income Taxes
The
tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC
after those enterprises complete their relevant tax filings. Therefore, the Company’s PRC entities’ tax filings results
are subject to change. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s
PRC entities’ tax filings, which may lead to additional tax liabilities.
ASC
740 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach.
The management evaluated the Company’s tax positions and concluded that no provision for uncertainty in income taxes was
necessary as of December 31, 2016 and 2015.
Notes
12 – COMMITMENTS
The Company leases facilities with expiration dates between February
2016 and December 2024. Rental expense for the years ended December 31, 2016, 2015 and 2014 was $1,783,888, $1,426,695 and $788,216,
respectively. The Company has future minimum lease obligations as of December 31, 2016 as follows:
2017
|
|
|
1,125,865
|
|
2018
|
|
|
521,376
|
|
2019
|
|
|
436,176
|
|
2020
|
|
|
351,265
|
|
2021
|
|
|
155,128
|
|
Thereafter
|
|
|
465,383
|
|
Total
|
|
$
|
3,055,193
|
|
JTIS leased offices and apartments located in Huai’an Economic
and Technology Development District (the “District”). To attract more business in the newly constructed business center,
the local government provided incentive to all companies located in the District by offering free office rent for certain period
of time. The initial rent free period given to JTIS is 5 years and subject to change. For the year ended December 31, 2016, JTIS
was also provided three apartments free of charge by the local government.
Note 13 – STATUTORY RESERVES
According to the Company Law in the PRC, companies are required
to set aside 10% of their after-tax profit to general reserves each year, based on the PRC accounting standards, until the cumulative
total of such reserves reaches 50% of the registered capital. These general reserves are not distributable as cash dividends to
equity owners. The Company had appropriated $2,067,835 and $1,288,617 to statutory reserves as of December 31, 2016 and 2015,
respectively.
Note 14 – STOCKHOLDERS’ EQUITY
On March 6, 2014, China Customer Relations Centers, Inc. (“CCRC”)
was incorporated in the British Virgin Islands. On the same day, the Company issued 10,000 common shares at $0.001 per share to
its incorporator for a consideration of $10.
On June 16, 2014, a total of 634,800 shares were issued at
$1.85 per share to two individuals and three corporations with cash proceeds of $222,000 received in June, 2014 and the remaining
cash proceeds received in July 2014.
On September 3, 2014, the Company entered into certain control
agreements with Taiying and its sole shareholder, Beijing Taiying, pursuant to which we, by virtue of our ownership of CBPO and
CBPO’s ownership of WFOE, control Taiying. In exchange for these control and grants, the shareholders of Beijing Taiying
received ownership of the majority of the shares of CCRC. That is, 20 Beijing Taiying shareholders (including Gary Wang, who founded
Taiying and is the chairman of the boards of both Taiying and CCRC) transferred their right to control Taiying to WFOE. Beijing
Taiying shareholders then collectively received 15,284,800 of CCRC’s 15,929,600 presently issued and outstanding shares,
representing 96% of CCRC’s issued common shares.
On September 3, 2014, the Company’s Board of Directors
approved the 2014 Share Incentive Plan (“the Plan”). Under the Plan, awards of options and restricted stock may be
granted. These options may be incentive stock options or non-statutory stock options. Under the Plan, a total of 1,832,960 unissued
shares shall be reserved. The exercise price of an option shall not be less than 100% of the fair market value of such shares on
the date of grant.
On December 18, 2015, the Company completed its initial public offering
on the NASDAQ Capital Market under the symbol of "CCRC." The Company offered 2,400,000 common shares at $4 per share.
Net proceeds raised by the Company from the initial public offering amounted to $8,497,024 after deducting underwriting discounts
and commissions and other offering expenses. Out of the $8.5 million net proceeds, $500,000 was deposited into an escrow account
to satisfy the initial $500,000 in potential indemnification obligations arising during an escrow period of two years following
the closing date of December 18, 2015 and was presented as restricted cash.
As of the filing date, there is a total number of 18,329,600 shares
outstanding.
Note 15 – SUBSEQUENT EVENTS
In July 2016, HTCC, its parent company Taiying, and Beijing Jiate
Information Technology Co., Ltd. (“Jiate”) entered into an investment agreement, pursuant to which Jiate will contribute
RMB4,900,000 (approximately $706,000) into HTCC in order to obtain 49% equity interest in HTCC. Based on the agreement, all the
parties agreed to complete the registration process with local administrative department within 30 days after the agreement was
signed and Jiate is entitled to HTCC’s earnings after injecting the first portion of investment in the amount of RMB2,450,000
(approximately $356,000) prior to February 1, 2017. The registration process was completed on July 11, 2016 and HTCC received the
capital contribution of $356,000 on January 31, 2017. See Note 9 for more discussion.
On November 12, 2016, the Company entered into a share subscription
agreement with Beijing Ling Ban Future Technology Co. Ltd. (“Ling Ban”), pursuant to which the Company agreed to invest
RMB 18 million (approximately $2,592,000) in Ling Ban in order to obtain 6% equity interest in Ling Ban. On March 23, 2017, the
Company transferred RMB 8 million (approximately $1,162,000) to Ling Ban. No additional investment was made by the Company as of
the filing date.
On
November 12, 2016, the Company entered into an investment agreement with Beijing Ling Ban Intelligence Online Services Co., Ltd.
(“Ling Ban Online”), a wholly owned subsidiary of Ling Ban. Pursuant to the agreement the Company agreed to invest
RMB 6 million (approximately $864,000) in Ling Ban Online in order to obtain 10% of equity interest in Ling Ban Online as well
as to acquire additional 10% equity interest in Ling Ban Online from Ling Ban for a cash consideration of RMB 6 million (approximately
$864,000). On January 4, 2017, the Company transferred RMB 6 million (approximately $864,000) to Ling Ban Online. No additional
payment was made by the Company as of the filing date.
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