UNITED STATES

SECURITIES AND
EXCHANGE COMMISSION

WASHINGTON, D.C.
20549



FORM 20-F

(Mark One)



| ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION
    12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------------



OR



|x | ANNUAL REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the fiscal year
ended December 31, 2014



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION
    13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | --------------------------------------------------------------------------------------------

For the transition
period from ___________ to ___________



OR



| ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION
    13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------------



Date of event requiring this shell company report:



Commission file number:
001-35715



|KBS
    Fashion Group Limited                             
|----------------------------------------------------------
|(Exact Name of Registrant
    as Specified in Its Charter)



Not Applicable

(Translation of Registrant’s
Name Into English)



Republic of
the Marshall Islands

(Jurisdiction of
Incorporation or Organization)



|Xin
    Fengge Building                     
|--------------------------------------------
|Yupu Industrial
    Park                    
|Shishi City, Fujian
    Province 362700     
|People’s
    Republic of China              
|(Address of Principal
    Executive Offices)



|Mr.
    Keyan Yan, Chief Executive Officer                                                 
|-------------------------------------------------------------------------------------------
|Xin Fengge Building                                                                        
|Yupu Industrial
    Park                                                                   
|Shishi City, Fujian
    Province 362700                                                    
|People’s Republic
    of China                                                             
|Tel: + (86) 595
    8889 6198                                                              
|Fax:
    (86) 595 8850 5328                                                                
|(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:



|Title
    of Each Class             | Name
    of Each Exchange On Which Registered
|----------------------------------- | ---------------------------------------------
|Common Stock, $0.0001
    par value | NASDAQ Capital Market                        



Securities registered or to be registered pursuant to Section
12(g) of the Act.



Units, Common
Stock Purchase Warrants

(Title of Class)



Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.

None

(Title of Class)



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 (December 31, 2014): 25,417,329



Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ̈Nox



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 ̈Nox



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. YesxNo ̈



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). YesxNo ̈



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer.



|Large Accelerated Filer ̈ | Accelerated Filer ̈ | Non-Accelerated Filerx
|------------------------ | ------------------ | ----------------------



Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:



|U.S. GAAP ̈ |  | International Financial ReportingStandards as issued by theInternational AccountingStandards Boardx |  | Other ̈
|---------- |  | --------------------------------------------------------------------------------------------------- |  | ------



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. ̈Item 17 ̈Item
18



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). Yes ̈Nox











Annual Report
on Form 20-F

Year Ended December
31, 2014



TABLE OF CONTENTS



|                                                              | Page
|------------------------------------------------------------- | ----
|                                                              |     
|PART I                                                        |     
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 2   
|                                                              |     
|A. Directors and Senior Management                            | 2   
|B. Advisors                                                   | 2   
|C. Auditors                                                   | 2   
|                                                              |     
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE               | 2   
|                                                              |     
|A. Offer Statistics                                           | 2   
|B. Method and Expected Timetable                              | 2   
|                                                              |     
|ITEM 3KEY INFORMATION                                         | 2   
|                                                              |     
|A. Selected Financial Data                                    | 2   
|B. Capitalization and Indebtedness                            | 3   
|C. Reasons for the Offer and Use of Proceeds                  | 3   
|D. Risk Factors                                               | 4   
|                                                              |     
|ITEM 4. INFORMATION ON THE COMPANY                            | 25  
|                                                              |     
|A. History and Development of the Company                     | 25  
|B. Business Overview                                          | 26  
|C. Organizational Structure                                   | 39  
|D. Property, Plants and Equipment                             | 40  
|                                                              |     
|ITEM 4A. UNRESOLVED STAFF COMMENTS                            | 41  
|                                                              |     
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS          | 41  
|                                                              |     
|A. Operating Results                                          | 41  
|B. Liquidity and Capital Resources                            | 46  
|C. Research and Development, Patents and Licenses, Etc.       | 47  
|D. Trend Information                                          | 47  
|E. Off-Balance Sheet Arrangements                             | 47  
|F. Tabular Disclosure of Contractual Obligations              | 47  
|G. Safe Harbor                                                | 49  
|                                                              |     
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES            | 50  
|                                                              |     
|A. Directors and Senior Management                            | 50  
|B. Compensation                                               | 51  
|C. Board Practices                                            | 51  
|D. Employees                                                  | 52  
|E. Share Ownership                                            | 52  
|                                                              |     
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS     | 54  
|                                                              |     
|A. Major Shareholders                                         | 54  
|B. Related Party Transactions                                 | 54  
|C. Interests of Experts and Counsel                           | 55  











|ITEM 8. FINANCIAL INFORMATION                                                           | 55
|--------------------------------------------------------------------------------------- | --
|                                                                                        |   
|A. Consolidated Statements and Other Financial Information                              | 55
|B. Significant Changes                                                                  | 55
|                                                                                        |   
|ITEM 9. THE OFFER AND LISTING                                                           | 56
|                                                                                        |   
|A. Offer and Listing Details                                                            | 56
|B. Plan of Distribution                                                                 | 57
|C. Markets                                                                              | 57
|D. Selling Shareholders                                                                 | 57
|E. Dilution                                                                             | 57
|F. Expenses of the Issue                                                                | 57
|                                                                                        |   
|ITEM 10. ADDITIONAL INFORMATION                                                         | 57
|                                                                                        |   
|A. Share Capital                                                                        | 57
|B. Memorandum and Articles of Association                                               | 57
|C. Material Contracts                                                                   | 60
|D. Exchange Controls                                                                    | 60
|E. Taxation                                                                             | 62
|F. Dividends and Paying Agents                                                          | 66
|G. Statement by Experts                                                                 | 66
|H. Documents on Display                                                                 | 66
|I. Subsidiary Information                                                               | 67
|                                                                                        |   
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     | 67
|                                                                                        |   
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                         | 68
|                                                                                        |   
|A. Debt Securities                                                                      | 68
|B. Warrants and Rights                                                                  | 68
|C. Other Securities                                                                     | 68
|D. American Depositary Shares                                                           | 68
|                                                                                        |   
|PART II                                                                                 |   
|                                                                                        |   
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                | 69
|                                                                                        |   
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS | 69
|                                                                                        |   
|ITEM 15. CONTROLS AND PROCEDURES                                                        | 69
|                                                                                        |   
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                              | 70
|                                                                                        |   
|ITEM 16B. CODE OF ETHICS                                                                | 70
|                                                                                        |   
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                        | 70
|                                                                                        |   
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                    | 71
|                                                                                        |   
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS        | 71
|                                                                                        |   
|ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT                                  | 71
|                                                                                        |   
|ITEM 16G. CORPORATE GOVERNANCE                                                          | 71
|                                                                                        |   
|ITEM 16H. MINE SAFETY DISCLOSURE                                                        | 71
|                                                                                        |   
|PART III                                                                                |   
|                                                                                        |   
|ITEM 17. FINANCIAL STATEMENTS                                                           | 72
|                                                                                        |   
|ITEM 18. FINANCIAL STATEMENTS                                                           | 72
|                                                                                        |   
|ITEM 19. EXHIBITS                                                                       | 72











INTRODUCTORY NOTES



Use of Certain Defined Terms



Except as otherwise indicated by the context and for the purposes
of this report only, references in this report to:



| | · | “KBS,” “we,” “us,” “our”
    and the “Company” are to KBS Fashion Group Ltd., a company organized in the Republic of the Marshall Islands;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| | · | ““KBS International,” refers to KBS International
    Holding Inc., a Nevada corporation, which was dissolved in August 2014;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | “Hongri PRC,” refers to Hongri (Fujian) Sports Goods
    Co., Ltd., which is our wholly owned subsidiary organized in the PRC;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | · | “Hongri International”
    are to Hongri International Holdings Limited, which is our wholly owned subsidiary and a company organized in the BVI;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| | · | “BVI” are the British Virgin
    Islands;
| | - | -----------------------------------------



| | · | “Hong Kong” are to the
    Hong Kong Special Administrative Region of the People’s Republic of China;
| | - | -----------------------------------------------------------------------------------------------------



| | · | “PRC” and “China”
    are to the People’s Republic of China;
| | - | ------------------------------------------------------------



| | · | “SEC” are to the Securities
    and Exchange Commission;
| | - | --------------------------------------------------------



| | · | “Exchange Act” are to the
    Securities Exchange Act of 1934, as amended;
| | - | --------------------------------------------------------------------------



| | · | “Securities Act” are to
    the Securities Act of 1933, as amended;
| | - | -------------------------------------------------------------------



| | · | “Renminbi” and “RMB”
    are to the legal currency of China; and
| | - | ----------------------------------------------------------------



| | · | “U.S. dollars,” “dollars”
    and “$” are to the legal currency of the United States.
| | - | -------------------------------------------------------------------------------------



The consolidated financial statements included in this Annual
Report are our first consolidated financial statements prepared in accordance with IFRS as issued by the IASB. For periods up to
and including the year ended December  31, 2013, the Company prepared its financial statements in accordance with U.S. generally
accepted accounting principles (U.S. GAAP). Accordingly, the Company has prepared financial statements which comply with IFRS applicable
for periods ending on or after December 31, 2014, together with the comparative period data as of and for the year ended December
31, 2013, as described in the accounting policies. In preparing these financial statements, the Company’s opening statement
of financial position was prepared as of January 1, 2013, the Company’s date of transition to IFRS.



The  financial statements included in our Annual Reports
on Form 20-F previously filed with the SEC were prepared in accordance with U.S. GAAP and the most recent consolidated financial
statements prepared in accordance with U.S. GAAP are those as of and for the fiscal year ended December 31, 2013. IFRS differs
in certain respects from U.S. GAAP. An explanation of how the transition to IFRS has affected our consolidated financial statements
is provided in note 4 to the accompanying consolidated financial statements.



Forward-Looking Information



In addition to historical information,
this report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. We use words such as “believe,” “expect,” “anticipate,” “project,”
“target,” “plan,” “optimistic,” “intend,” “aim,” “will”
or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those
concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for
future operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations,
predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties, as well as assumptions, which, if they were to ever materialize or
prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking
statements. Potential risks and uncertainties include, among other things, the possibility that we may not be able to maintain
or increase our net revenues and profits due to our failure to anticipate consumer preferences and develop new menswear products,
our failure to execute our business expansion plan, changes in domestic and foreign laws, regulations and taxes, changes in economic
conditions, uncertainties related to China’s legal system and economic, political and social events in China, a general
economic downturn, a downturn in the securities markets, and other risks and uncertainties which are generally set forth under
Item 3 “Key information—D. Risk Factors” and elsewhere in this report.



Readers are urged to carefully review
and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise
interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects.
The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as
required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations
or future events.



1







PART I



|ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- | -----------------------------------------------------



A. Directors and Senior Management



Not applicable.



B. Advisors



Not applicable.



C. Auditors



Not applicable.



|ITEM 2. | OFFER
    STATISTICS AND EXPECTED TIMETABLE
|------- | -------------------------------------------



A. Offer Statistics



Not applicable.



B. Method and Expected Timetable



Not applicable.



|ITEM 3. | KEY   INFORMATION
|------- | -----------------



A. Selected Financial Data



The following table presents selected financial data regarding
our business. It should be read in conjunction with our consolidated financial statements and related notes contained elsewhere
in this annual report and the information under Item 5 “Operating and Financial Review and Prospects.”



Our consolidated financial
statements were prepared and presented in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”). Because fiscal year 2014 is the first year for
the Company to prepare and present in accordance with IFRS as issued by the IASB, we do not include the historical financial
information as of and for the years ended December 31, 2012, 2011 and 2010. The following selected financial data for the
fiscal years ended December 31, 2014 and 2013 have been derived from our audited consolidated financial statements that are
included in this report beginning on page F-1.



The financial statements contained elsewhere
fully represent our financial condition and operations; however, they are not indicative of our future performance. The selected
financial data information is only a summary and should be read in conjunction with the historical consolidated financial statements
and related notes and Operating and Financial Review and Prospects “contained elsewhere herein.



2









|                                        |  | Years ended December 31, |            
|--------------------------------------- |  | ------------------------ | -----------
|                                        |  | 2014                     |            
|Statement of Income Data                |  |                          |            
|Total revenue                           |  | $                        | 58,832,481 
|Total cost of sales                     |  |                          | (39,416,973
|Gross profit                            |  |                          | 19,415,508 
|Distribution and selling expenses       |  |                          | (7,191,606 
|Administrative expenses                 |  |                          | (4,649,229 
|Profit for the year                     |  |                          | 6,876,982  
|Total comprehensive income for the year |  |                          | 6,526,172  
|Outstanding shares                      |  |                          | 25,417,329 
|Earning per share, basic diluted        |  |                          | 0.27       
|Balance Sheet Data                      |  |                          |            
|Cash and cash equivalents               |  | $                        | 20,604,583 
|Non-current assets                      |  |                          | 52,929,386 
|Current assets                          |  |                          | 62,093,570 
|Working capital                         |  |                          | 52,704,076 
|Total assets                            |  |                          | 115,022,956
|Current liabilities                     |  |                          | 9,389,493  
|Total liabilities                       |  |                          | 9,404,880  
|Equity                                  |  |                          | 105,618,076





We publish our financial statements in
Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience
of the reader. The results and financial positions in functional currency are translated into the presentation currency of its
intended ultimate legal parent as follows:



(1) Assets and liabilities for each balance
sheet presented are translated at the closing rate at the date of that balance sheet;

(2) Income and expenses for each income
statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect
of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions);

(3) Share equity, share premium and dividends
are translated at historical exchange rates; and

(4) All resulting exchange differences
are recognized in foreign currency translation reserve, a separate component of equity

No representation is made that the Renminbi
amounts referred to in this annual report could have been or could be converted into U.S. dollars at any particular rate or at
all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion
of Renminbi into foreign exchange and through restrictions on foreign trade.



Translation from RMB to USD found place
at the following rates:



|                  |  | Period end rates     |  | Average rates      
|----------------- |  | -------------------- |  | -------------------
|December 31, 2013 |  | USD 1.00= RMB 6.0969 |  | USD 1.00=RMB 6.1896
|December 31, 2014 |  | USD 1.00= RMB 6.1190 |  | USD 1.00=RMB 6.1448



B. Capitalization and Indebtedness



Not applicable.



C. Reasons for the Offer and Use of Proceeds



Not applicable.



3







D. Risk Factors



An investment in our capital stock
involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information
included in this annual report, before making an investment decision. If any of the following risks actually occurs, our business,
financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment.



RISKS RELATED TO OUR BUSINESS



General economic conditions, including
a prolonged weakness in the economy, may affect consumer discretionary spending, which could adversely affect our business and
financial performance.



The apparel industry has historically
been subject to substantial cyclical variations. Our business and financial performance are dependent on a number of factors impacting
consumer discretionary spending, including general economic and business conditions; consumer confidence; wages and employment
levels; the housing market; consumer debt levels; availability of consumer credit; credit and interest rates; fuel and energy
costs; energy shortages; taxes; general political conditions, both domestic and abroad. Consumer product purchases, including
purchases of our products, may decline during recessionary periods. Our ability to access the capital markets may be restricted
at a time when we would like, or need, to raise capital, which could impair on our ability to open additional stores or build
additional manufacturing lines. In addition, as domestic and international economic conditions change, trends in consumer spending
on discretionary items, including our merchandise, become unpredictable and subject to reductions due to economic uncertainties.
A prolonged economic recovery or an uncertain outlook in the economy could result in additional declines in consumer discretionary
spending, which could materially affect our financial performance.



A contraction in apparel sales and
production could impair our results of operations and liquidity and jeopardize our supply base.



Apparel sales and production are cyclical
and depend, among other things, on general economic conditions and consumer spending and preferences. As the volume of apparel
production fluctuates, the demand for our products also fluctuates. A contraction in apparel sales could harm our results of operations
and liquidity. In addition, our suppliers would also be subject to many of the same consequences which could pressure their results
of operations and liquidity. Depending on an individual supplier’s financial condition and access to capital, its viability
could be challenged which could impact its ability to perform as we expect and consequently our ability to meet our own commitments.



If we are unable to anticipate consumer
preferences and develop new menswear products, we may not be able to maintain or increase our net revenues and profits.



Our success depends on our ability to
identify, originate and define apparel trends as well as to anticipate, gauge and react to changing consumer demands for menswear
in a timely manner. Our target market of consumers comprises urban males between the ages of 20 and 40 with moderate-to-high levels
of disposable income. Our business is particularly sensitive to their fashion preferences, which cannot be predicted with certainty.
Our new products may not receive consumer acceptance as consumer preferences could shift rapidly, and our future success depends
in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and
shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs, styles and
categories, we could experience lower sales, excess inventories and lower profit margins. In a distressed economic and retail
environment, many of our competitors may engage in aggressive activities, such as markdowns or other promotional sales to dispose
of excess, slow-moving inventory, further increasing the need to react appropriately to changing consumer preferences and fashion
trends. Failure to do so could adversely affect the level of acceptance of our products, our brand image and our relationship
with our distributors, and therefore have a material adverse effect on our financial condition or results of operations.



4







The apparel industry is highly competitive, and if we
fail to compete effectively, we could lose our market position.



The menswear industry is highly competitive
in China and worldwide. We compete with various domestic brands with similar business models and target markets. We also compete
with a growing number of international brands trying to expand their market share in China to take advantage of rising consumer
spending on casual menswear. Our primary international and domestic competitors include Exceed, Xiniya, Cabbeen, and NQ. Some
of our competitors are significantly larger and have greater financial resources than we do. In order to compete effectively,
we must: (1) maintain the image of our brands and our reputation for innovation and high quality; (2) be flexible and innovative
in responding to rapidly changing market demands on the basis of brand image, style, performance and quality; and (3) offer consumers
a wide variety of high quality products at competitive prices.



The purchasing decisions of consumers
are highly subjective and can be influenced by many factors, such as brand image, marketing programs and product features. Some
of our competitors enjoy competitive advantages, including greater brand recognition and greater financial resources for competitive
activities, such as sales, marketing and strategic acquisitions. The number of our direct competitors and the intensity of competition
may increase as we expand into other product lines or as other companies expand into our product lines. Our competitors may enter
into business combinations or alliances that strengthen their competitive positions or prevent us from taking advantage of such
combinations or alliances. Our competitors also may be able to respond more quickly and effectively than we can to new or changing
opportunities, standards or consumer preferences. Our results of operations and market position may be adversely impacted by our
competitors and the competitive pressures in the menswear industries.



Failure to effectively promote or develop our brand could
materially and adversely affect our sales and profits.



We sell all our products under the KBS
brand, from which we derive most of our revenues. Brand image is an important factor that affects a customer’s purchasing
decision for menswear products. Our success therefore depends on, among other things, market recognition and acceptance of the
KBS brand and the culture, lifestyle, and images associated with the brand, some of which may not be within our control. We have
limited control over our distributors that we rely upon to sell our products, which may limit our ability to ensure a consistent
brand image. See “Risks Factors Relating to Our Business –We have limited control over the ultimate retail sales by
our distributors and our image and business may be adversely affected if our distributors fail to adhere to, or fail to cause
the third party retail outlet operators to adhere to, our retail policies and standards.” We began designing, promoting,
and selling KBS branded products in China in 2006. To effectively promote KBS brand, we need build and maintain the brand image
by focusing on a variety of promotional and marketing activities to promote brand awareness, as well as to increase its presence
in the markets in which we compete. There is no assurance that we will be able to effectively promote or develop KBS brand, and
if we fail to do so, the goodwill of KBS brand may be undermined and our business as well as our financial results may be adversely
affected. In addition, negative publicity or disputes regarding KBS brand, products, company, or management could materially and
adversely affect public perception of KBS brand. Any impact on our ability to continue to sell KBS brand or any significant damage
to KBS brand’s image could materially and adversely affect our sales and profits.



Our business depends substantially
on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose
their services.



Our future success heavily depends on
the continued service of our senior executives and other key employees. In particular, we rely on the expertise, experience, and
business contacts, of Mr. Keyan Yan, our Chairman and Chief Executive Officer, Ms. Lixia Tu, our Chief Financial Officer and Mr.
Themis Kalapotharakos, our director. If one or more of our senior executives are unable or unwilling to continue to work for us
in their present positions, we may have to spend a considerable amount of time and resources searching, recruiting, and integrating
the replacements into our operations, which would substantially divert management’s attention from and severely disrupt
the Company business. This may also adversely affect our ability to execute our business strategy. Moreover, if any of our senior
executives joins a competitor or forms a competing company, we may lose customers, suppliers and key employees.



Failure to execute our business expansion plan could
adversely affect our financial condition and results of operations.



A large part of our initial growth resulted
from an increase in the number of our retail sales outlets, including corporate and franchised stores, and the increased sales
volume and profitability provided by these sales outlets. The number of our sales outlets increased from 8 in 2006 to 102 in 2014.
In the future, we intend to invest more resources to improve brand recognition, and may develop more channels to improve sales
such as opening online stores. However, we cannot guarantee that these strategies will increase sales and improve profitability
of the company.



5







Our production facility is located in
Taihu City in Anhui Province, China. Currently the facility has a production capacity of 2 million pieces of clothes per year
and the facility is on a leased term. This production facility mainly produces ODM products for famous sportswear producers. We
are in the process of acquiring land use rights for land adjacent to our current facility consisting of 110,557 square meters
to build a new facility, a portion of which already been acquired. Upon completion, the new facility is expected to have a production
capacity of 20 million pieces and accommodate 5,000 workers. The construction commenced in 2011 and is to take place in four phases:
Phase 1 consists of a 5-story dormitory which was completed in 2012. Phase 2 is to add facilities with annual production capacity
of five million pieces of clothes. We have completed the construction of property by the end of 2014. Phase 3 construction is
to add additional facilities with annual production capacity of 5 million pieces and is expected to be finished by the end of
2016. Phase 4 will include production facilities with annual production capacity of 10 million pieces, an office building, staff
quarters and living facilities, and is expected to be completed by the end of 2018. Due to the local government’s need for
additional time to conclude negotiations with local residents over appropriate resettlement terms, the timeline of the construction
of the adjacent facility has been delayed. As a result, our commitments to this facility may reduce our liquidity for an indefinite
period and until it is completed. We may also indefinitely lose opportunities to expand our sales due to this delay.



The decision to increase our production
capacity was based in part on our projections of market demand for our products and ODM orders from other brand name owners. If
actual customer demand does not meet our projections, we will likely suffer overcapacity problems and may have to leave capacity
idle or need to contract out our facilities at an unfavorable price, which may reduce our overall profitability and adversely
affect our financial condition and results of operations. Our future success depends on our ability to expand the Company’s
business to address growth in demand for our current and future products.



Our ability to expand the Company’s business is subject
to significant risks and uncertainties, including:



| | · | the
                                         unavailability of additional funding to invest more in brand recognition such as advertisement,
                                         expand our production capacity, purchase additional fixed assets and purchase raw materials
                                         on favorable terms or at all;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | our
                                         inability to manage an online shop, hire qualified personnel and establish distribution
                                         methods;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | conditions
                                         in the commercial real estate market existing at the time we seek to expand;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| | · | delays
                                         and cost overruns as a result of a number of factors, many of which may be beyond our
                                         control, such as problems with equipment vendors and ODM contract manufacturers;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | failure
                                         to maintain high quality control standards;
| | - | --------------------------------------------------------------------------------------------

| | · | shortage
                                         of raw materials;
| | - | -------------------------------------------------------------------

| | · | our
                                         inability to obtain, or delays in obtaining, required approvals by relevant government
                                         authorities;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | diversion
                                         of significant management attention and other resources; and
| | - | ---------------------------------------------------------------------------------------------------------------

| | · | failure
                                         to execute our expansion plan effectively.
| | - | -------------------------------------------------------------------------------------------



The expansion of our business may place
significant strain on our personnel, management, financial systems and operational infrastructure and may impede our ability to
meet any increased demand for our products. To accommodate the Company’s growth, we will need to implement a variety of
new and upgraded operational and financial systems, procedures, and controls, including improvements to our accounting and other
internal management systems, by dedicating additional resources to our reporting and accounting function and improvements to our
record keeping and contract tracking system. We will also need to recruit more personnel and train and manage our growing employee
base. Furthermore, we will need to maintain and expand relationships with our current and future customers, suppliers, distributors
and other third parties, and there is no guarantee that we will succeed.



If we encounter any of the risks described
above or if we are otherwise unable to establish or successfully operate online shops or additional production capacity, we may
be unable to grow our business and revenues, reduce our operating costs, maintain our competitiveness or improve our profitability
and, consequently, our business, financial condition, results of operations and prospects will be adversely affected.



6







If we are unable to fund capital
expenditures or obtain additional sources of liquidity when we need it, our business may be adversely affected. In addition, if
we obtain equity financing, the issuance of our equity securities could cause dilution for our stockholders. To the extent we
obtain the financing through the issuance of debt securities, our debt service obligations could increase and we may become subject
to restrictive operating and financial covenants.



We anticipate that we will make substantial
capital investments to expand our business within the next 3 years. For the fiscal years ended December 31, 2014 and 2013, we
paid approximately $17.5 million and $11.1 million, respectively, for capital expenditures, which include expenses related to
our second and third phase construction of production facility, purchasing production equipment, commencing e-commerce project
and upgrading of our point-of-sale and enterprise resource planning systems.



There was approximately $3.8 million of
cash released from the trust account to us immediately following the closing of our share exchange transaction with KBS International
on August 1, 2014. However, there is no assurance that we will have sufficient cash to fund our anticipated capital expenditures.
If we need but are unable to obtain adequate financing or financing on terms favorable to us, we may be unable to successfully
maintain our operations and accomplish our growth strategy. In addition, we may be unable to generate sufficient cash internally
or obtain alternative sources of capital to fund our proposed capital expenditures, take advantage of business opportunities or
respond to competitive pressures. As a result, we may seek to sell additional equity securities, debt securities, or borrow from
lending institutions. Any issuance of equity securities could cause dilution for our stockholders. Any incurrence of indebtedness
could increase our debt service obligations and cause us to be subject to restrictive operating and finance covenants. Our ability
to obtain external financing in the future is also subject to a number of uncertainties, including:



| | · | Our
                                         future financial condition, results of operations and cash flows;
| | - | --------------------------------------------------------------------------------------------------------------



| | · | general
                                         market conditions for financing activities by companies in our industry;
| | - | -------------------------------------------------------------------------------------------------------------------------



| | · | economic,
                                         political and other conditions in China and elsewhere; and
| | - | -------------------------------------------------------------------------------------------------------------



| | · | uncertain
                                         economic prospect and tightened credit markets resulting from the recent global economic
                                         slowdown and financial market crisis.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If we are unable to obtain funding in
a timely manner or on commercially acceptable terms, or at all, our growth prospects and future profitability may be materially
adversely affected. Adverse changes in the capital markets could make it difficult to obtain capital or obtain it at attractive
rates.



Due to our rapid growth in recent
years, our past results may not be indicative of our future performance and evaluating our business and prospects may be difficult.



Our business has grown and evolved rapidly
in recent years as demonstrated by our growth in net sales, reached $99.6 million for the year ended December 31, 2013, while
in 2014 our net sales decreased by 40% to $58.8 million, which was mainly due to the softening of the Chinese economic growth
and a challenging retail environment. As a result, we cannot assure that we will be able to achieve similar growth in future periods
as recent years before 2014, and our historical operating results may not provide a meaningful basis for evaluating our business,
financial performance and prospects. Moreover, our ability to achieve satisfactory production results at higher volumes is unproven.
Therefore, you should not rely on our past results or our historical rate of growth as an indication of our future performance.



We experience fluctuations in operating results.



Our annual and quarterly operating results
have fluctuated, and are expected to continue to fluctuate. Among the factors that may cause our operating results to fluctuate
are customers’ response to merchandise offerings, the timing of the rollout of new sales outlets, seasonal variations in
sales, the timing of merchandise receipts, the level of merchandise returns, changes in merchandise mix and presentation, our
cost of merchandise, unanticipated operating costs, and other factors beyond our control, such as general economic conditions
and actions of competitors.



7







We have historically experienced seasonal
fluctuations in our sales. A substantial portion of our revenues are typically earned during the second and fourth quarters and
we generally experience lowest revenues during the first and third quarters. If sales during the second and fourth quarters are
lower than expected, our operating results would be adversely affected, and it would have a disproportionately large impact on
our annual operating results. The sales of our products are also affected by local spending behavior, which are typically affected
by seasonal shopping patterns during major Chinese holidays. Extreme changes in weather patterns could also affect customers’
purchasing behavior, which may lead to fluctuations in our net sales. For example, extended periods of unusually warm temperatures
during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with such
unusual weather conditions. These extreme or unusual weather conditions could have a material adverse effect on our results of
operations.



As a result of these factors, we believe that period-to-period
comparisons of historical and future results will not necessarily be meaningful and should not be relied on as an indication of
future performance.



Our failure to collect the trade receivables or untimely
collection could affect our liquidity.



We extend credit to some of our customers
while generally requiring no collateral. Depending on the size and creditworthiness of a customer, we typically expect and receive
payment within 30-90 days of product delivery. We perform ongoing credit evaluations of our customers’ financial condition.
As of December 31, 2014, we had about $1.9 million of bad debt to write off. In addition, we had about 61% of account receivables
are within 90 days credit term and do not expect to have difficulties in collections. However, our sales going forward may rely
more heavily on credit, and if we encounter future problems collecting amounts due from our clients or if we experience delays
in the collection of amounts due from our clients, our liquidity could be negatively affected.



We rely on distributors for a substantial portion of
our sales and the loss of any of our large distributors would harm our business.



A substantial portion of our sales are
made to distributors that resell our products. For the year ended December 31, 2013 and 2014, distributors accounted for approximately
78% and 69% of our total sales, respectively, and our top five distributors accounted for approximately 54.04% and 43.93% of our
total sales, respectively. The marketing efforts of our distributors are critical for our success. If we fail to attract additional
distributors, and our existing distributors do not promote our products at the same or at a greater level than the products of
our competitors, our business, financial condition and results of operations could be adversely affected.



Furthermore, there is no assurance that
any of our distributors will satisfy the sales targets set forth in their distribution agreements and we or they may not wish
to renew the distribution agreements in future years. Moreover, our distributors are not obliged to continue to place orders with
the Company at the same level as before or at all and there is no assurance that we would be able to obtain orders from other
distributors to replace any such lost sales on terms satisfactory to us or all. If any of our largest distributors substantially
reduces its purchases from us, or otherwise fails to renew its distribution agreement with us, we may suffer a significant loss
of sales and our business, results of operations, and financial condition may be materially and adversely affected.



We have limited control over the ultimate retail sales
by our distributors and our image and business may be adversely affected if our distributors fail to adhere to, or fail to cause
the third party retail outlet operators to adhere to, our retail policies and standards.



We rely on the contractual obligations
set forth in the distribution agreements that we enter into with our distributors, as well as policies and standards we formulate
from time to time, to impose our retail policies on these distributors in respect of the franchisee retail outlets. In addition,
as we do not enter into any agreements with the third party retail outlet operators, we rely on our distributors to ensure that
these franchisee retail outlets operate in accordance with our retail policies. As such, our control over the ultimate retail
sales by our distributors and the franchisee retail outlet operators is limited. There is no assurance that our distributors or
the third party franchisee retail outlet operators will comply with, or that the distributors will enforce, our retail policies.
As a result, we may not be able to effectively manage our sales network or maintain a uniform brand image, and cannot assure you
that franchisee retail outlets would continue to offer quality services to consumers.



In addition, if any of the distributors
or third party franchisee retail outlet operators experiences difficulties in selling our products in the retail market, they
may attempt to disregard our pricing policies and liquidate their excessive inventory buildup through aggressive discounts, which
may damage the image and the value of our brand. There is no assurance that we will be able to, in a timely manner, impose penalties
on or replace any distributors who consistently fail to comply with, or fail to cause the third party franchisee retail outlet
operators appointed by them to comply with, our retail policies in their operation of franchisee retail outlets. In such event,
our business, results of operations and financial condition may be materially and adversely affected.



8







We may not be able to accurately
track the inventory levels at our distributors, retailers or department store concessions.



Our ability to track the sales by our
distributors to third-party retailers and the ultimate retail sales by the retailers, and consequently their respective inventory
levels, is limited. We implement a policy to require our distributors to provide us with their sales reports on a weekly basis
and we carry out random on-site inspections of our distributors to track their inventories. The purpose of tracking the inventory
level is mainly to gather information regarding the market acceptance of our products so that we can reflect consumers’
preferences in the design and development of our products for the next season. The tracking of inventory level also helps us to
understand the market recognition of our products in a particular region, and thus allows us to adjust our marketing strategy
if necessary. The implementation of the policy, however, requires the distributors to accurately report the relevant data to us
in a timely manner, which is largely dependent on the cooperation of the Company’s distributors. We may not always obtain
the required data in time and the data provided to us by our distributors may be inaccurate or incomplete.



We plan to implement an enterprise resource
planning system, or ERP system in 2016, which will allow us to track sales at the authorized retail outlets on a timely basis.
Such system is expected to facilitate the processing of basic replenishment orders from our distributors, the movement of products
through our authorized retail network, and the collection of information for planning and forecasting purposes. If we are unable
to roll out the ERP system as planned, we would not be able to accurately track our inventory levels on a timely basis. Inaccurate,
mistaken, incomplete or delayed data regarding inventory levels may mislead the Company to make wrong business judgments for its
production, marketing efforts and sales strategies. If that happens, our operations and financial results may be materially adversely
affected. In addition, if we cannot manage inventory levels properly, future orders of our products may be reduced, which would
materially adversely affect our future business, financial condition, results of operation and prospects.



Our operations could be materially
adversely affected if we fail to effectively manage our relationships with, or lose the services of, our ODM contract manufacturers.



The production of our brand name products
are 100% outsourced to PRC-based third party ODM contract manufacturers. In the years ended December 31, 2014 and 2013, we had
7 and 6 contract manufacturers, respectively. Purchases from our top five ODM contract manufacturers accounted for approximately
98% and 99% of our total purchases for the years ended December 31, 2014 and 2013, respectively. As we do not enter into long-term
contracts with our ODM contract manufacturers, they may decide not to accept our future ODM orders on the same or similar terms,
or at all. If an ODM contract manufacturer decides to substantially reduce its volume of supply to us or to terminate its business
relationship with us, we may not be able to find a proper replacement in a timely manner and may be forced to default on the agreements
with our distributors that sell our products. This may negatively impact our revenues and adversely affect our reputation and
relationships with our distributors that sell our products, causing a material adverse effect on our financial condition, results
of operations and prospects.



Further,
if any of our ODM contract manufacturers fails to provide the required number of products meeting our quality standards, we may
have to delay delivery of products to our distributors, become unable to supply products at all, or even recall products previously
dispatched. This could cause the Company to lose revenues or market share and damage our reputation, any of which could have a
material adverse effect on our business, financial condition, results of operations and prospects. In addition, some ODM contract
manufacturers may not fully comply with certain laws, such as labor and environmental laws. If any of our ODM contract manufacturers
is found to have violated laws and regulations in the PRC, media reports on such violations may negatively affect our reputation
and image, resulting in material adverse impact on our business, financial condition and results of operations.



While we provide the designs of our products
to the ODM contract manufacturers, as well as guidance for manufacturing the products ordered by us, we do not have direct control
over the ODM contract manufacturers. If any of them is involved in unauthorized production and sale of goods using the KBS brand,
our reputation, financial condition and results of operations may be materially adversely affected.



9







As the Company grows, our reliance on
ODM contract manufacturers may also grow as our added production capacity may not be sufficient to keep pace with the increased
production requirements driven by our growth. We may not be able to find sufficient additional ODM contract manufacturers to produce
our products on the same or similar terms as our existing ODM contract manufacturers, and we may not be able to achieve our growth
and development goals.



Any interruption in our operations
could impair our financial performance and negatively affect our brand.



Our
operations are complicated and integrated, involving the coordination of third party ODM contract manufacturers and external distribution
processes. While these operations are modified on a regular basis in an effort to improve outsourcing and distribution efficiency
and flexibility, we may experience difficulties in coordinating the various aspects of our operations processes, thereby causing
downtime and delays. In addition, we may encounter interruption in our operations processes due to a catastrophic loss or events
beyond our control, such as fires, explosions, labor disturbances or violent weather conditions. Any interruptions in our operations
or capabilities at our facilities could result in our inability to procure our products, which would reduce our net sales and
earnings for the affected period. If there is a delays in delivery times to our customers, our business and reputation could be
severely affected. Any significant delays in deliveries to our customers could lead to increased returns or cancellations and
cause the Company to lose future sales. The Company currently does not have business interruption insurance to offset these potential
losses, delays and risks so a material interruption of our business operations could severely damage our business.



We rely heavily on our management
information system for inventory management, distribution and other functions. If our system fail to perform these functions adequately
or if we experience an interruption in our operation, our business and results of operations could be materially adversely affected.



The efficient operation of our business
is dependent on our management information systems. We rely heavily on our management information systems to manage our order
entry, order fulfillment, pricing, point-of-sale and inventory replenishment processes.



We cannot assure you that our management
information system will operate properly or without interruption. Any malfunction to any part or all of our management information
system for a prolonged period may cause delays in operations or impairment of our overall business efficiency. We also cannot
ensure that the level of security currently maintained will be sufficient to protect the system from third party intrusions, viruses,
lost or stolen data, or similar situations. Additionally, as part of our growth and development strategy over the next few years,
we plan to upgrade and improve our management information system. We cannot assure you that there will be no interruptions to
our management information system during the upgrades or that the new management information system will be able to integrate
fully with the existing information system.



The failure of our management information
system to perform as we anticipate could disrupt our business and could result in decreased revenue, increased overhead costs
and excess or out-of-stock inventory levels, causing our business and results of operations to suffer materially.



Failure to protect the integrity, security and use of
our customers’ information and media could expose us to litigation and materially damage our standing with our customers.



Increasing
costs associated with information security — such as increased investment in technology, the costs of compliance with consumer
protection laws and costs resulting from consumer fraud — could cause our business and results of operations to suffer materially.
While we have taken significant steps to protect customer and confidential information, including entering into confidentiality
agreements with relevant employees and incorporate confidentiality clauses in our policies, there can be no assurance that advances
in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our
customer transaction processing capabilities and personal data. If any such compromise of our security were to occur, it could
have a material adverse effect on our reputation, operating results and financial condition. Any such compromise may materially
increase the costs we incur to protect against such information security breaches and could subject us to additional legal risk.
Procurement specialists and managers are required to sign a confidentiality agreement.



10







We have limited insurance coverage
in China and may not be able to recover insurance proceeds if we experience uninsured losses.



Operation of our facilities involves many
risks, including equipment failures, natural disasters, industrial accidents, power outages, labor disturbances and other business
interruptions. We do not carry any business interruption insurance, product recall or third-party liability insurance for our
production facilities or with respect to our products to cover claims pertaining to personal injury or property or environmental
damage arising from defects in our products, product recalls, accidents on our property or damage relating to our operations.
While business interruption insurance and other types of insurance are available to a limited extent in China, we have determined
that the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially
reasonable terms make it impractical for us to have such insurance. Therefore, our existing insurance coverage may not be sufficient
to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages
and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which
could have a material adverse effect on our business, financial condition and results of operations.



Our inability to protect our trademarks
and other intellectual property rights may prevent us from successfully marketing our products and competing effectively.



We believe our trademarks and other intellectual
property rights are important to our success and competitive position and recognize the importance of registering the trademarks
related to our KBS brand for protection against infringement. We currently hold two registered trademarks. Failure to protect
our intellectual property could harm our brand and our reputation, and adversely affect our ability to compete effectively. Further,
enforcing or defending our intellectual property rights, including our trademarks, patents, copyrights and trade secrets, could
result in the expenditure of significant financial and managerial resources. We produce, market and sell our products under registered
trademarks. We regard our intellectual property, particularly our trademarks and trade secrets to be of considerable value and
importance to our business and our success. We rely on a combination of trademark, patent, and trade secrecy laws, and contractual
provisions to protect our intellectual property rights. There can be no assurance that the steps taken by us to protect these
proprietary rights will be adequate or that third parties will not infringe or misappropriate our trademarks, trade secrets or
similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims against
us, and we may have to pursue litigation against other parties to assert our rights. Any such claim or litigation could be costly
and we may lack the resources required to defend against such claims. In addition, any event that would jeopardize our proprietary
rights or any claims of infringement by third parties could have a material adverse effect on our ability to market or sell our
brands, and profitably exploit our products.



Environmental regulations impose
substantial costs and limitations on our operations.



We use chemicals and produces significant
emissions in our manufacturing operations. As such, we are subject to various national and local environmental laws and regulations
in China concerning issues such as air emissions, wastewater discharges, and solid waste management and disposal. These laws and
regulations can restrict or limit our operations and expose us to liability and penalties for non-compliance. While we believe
that our facilities are in material compliance with all applicable environmental laws and regulations, the risks of substantial
unanticipated costs and liabilities related to compliance with these laws and regulations are an inherent part of our business.
It is possible that future conditions may develop, arise or be discovered that create new environmental compliance or remediation
liabilities and costs. While we believe that we can comply with existing environmental legislation and regulatory requirements
and that the costs of compliance have been included within budgeted cost estimates, compliance may prove to be more limiting and
costly than anticipated.



We may be unable to establish and
maintain an effective system of internal control over financial reporting, and, as a result, we may be unable to accurately report
our financial results or prevent fraud.



We are subject to reporting obligations
under the U.S. securities law. The SEC as required by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), adopted
rules requiring every public company to include a management report on such company’s internal control over financial reporting
in its annual report, which must also contain management’s assessment of the effectiveness of the company’s internal
control over financial reporting. In addition, the independent registered public accounting firm auditing the financial statements
of a company that is not a non-accelerated filer under Rule 12b-2 of the Exchange Act must also attest to the operating effectiveness
of the company’s internal controls.



11







Our management assessed the effectiveness
of the our internal control over the financial reporting as of December 31, 2014, using criteria established in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment
using those criteria, our management concluded that our internal control over financial reporting was not effective as of December
31, 2014.



Failure to achieve and maintain an effective
internal control environment could result in our inability to accurately report our financial results, prevent or detect fraud
or provide timely and reliable financial and other information pursuant to the reporting obligations we have as a public company,
which could have a material adverse effect on our business, financial condition and results of operations. Further, it could cause
our investors to lose confidence in the information we report, which could adversely affect our stock price.



RISKS RELATED TO DOING BUSINESS IN CHINA



Our business operation may be affected if we are forced
to relocate our manufacturing facilities and stores.



We leased the premises for our manufacturing
facilities and corporate stores. However, none of our lease agreements have been registered with the relevant governmental agencies.
According to our PRC legal counsel, Grandall Law Firm (Beijing), without registration, our rights to use and occupy the premises
may not be secured if any third parties such as other tenants who have registered their lease agreements challenge us under PRC
law. Moreover, while we have taken various measures to verify the ownership of property such as checking utility bills and search
government records, most of our landlords have declined to confirm whether they possess the property ownership certificates and
land use rights certificates for our properties. As a result, we have been unable to verify whether third parties may assert their
ownership rights under PRC law against most of our landlords or challenge most of our leases in the future. If our rights to use
the premises are challenged, we may be forced to relocate to other premises. We may not be able to relocate to a suitable premise
promptly or lease alternative premises on terms at least as favorable as our existing ones. In addition, relocation costs and
interruption of production may have a material adverse effect on our business operation and financial performance.



Changes in the economic and political
policies of the PRC government could have a material and adverse effect on our business and operations.



We conduct substantially all our business
operations in China. Accordingly, our results of operations, financial condition and prospects are significantly dependent on
economic and political developments in China. China’s economy differs from the economies of developed countries in many
aspects, including the level of development, growth rate and degree of government control over foreign exchange and allocation
of resources. While China’s economy has experienced significant growth in the past 30 years, the growth has been uneven
across different regions and periods and among various economic sectors in China. We cannot assure you that China’s economy
will continue to grow, or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such
slowdown will not have a negative effect on its business and results of operations.



The PRC government exercises significant
control over China’s economic growth through the allocation of resources, control over payment of foreign currency-denominated
obligations, implementation of monetary policy, and preferential treatment of particular industries or companies. Certain measures
adopted by the PRC government may restrict loans to certain industries, such as changes in the statutory deposit reserve ratio
and lending guidelines for commercial banks by the People’s Bank of China, or PBOC. These current and future government
actions could materially affect our liquidity, access to capital, and ability to operate our business.



The global financial markets experienced
significant disruptions in 2008 and the United States, Europe and other economies went into recession. Since 2012, growth of the
Chinese economy has slowed. The PRC government has implemented various measures to encourage economic growth and guide the allocation
of resources. Some of these measures may benefit the overall PRC economy but may also have a negative effect on us. Our financial
condition and results of operation could be materially and adversely affected by government control over capital investments or
changes in tax regulations that are applicable to us. In addition, any stimulus measures designed to boost the Chinese economy,
may contribute to higher inflation, which could adversely affect our results of operations and financial condition. See “Risks
Related to Doing Business in China -Future inflation in China may inhibit our ability to conduct business in China.”



12







Uncertainties with respect to the PRC legal system could
limit the legal protections available to you and us.



We conduct substantially all of our business
through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable
to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based
on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series
of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in
China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules
are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections
available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion
of resources and management attention. In addition, most of our executive officers and directors are residents of China and not
of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it
could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United
States against our Chinese operations and subsidiaries.



You may have difficulty enforcing judgments against us.



Most of our assets are located outside
of the United States and most of our current operations are conducted in the PRC. In addition, most of our directors and officers
are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is
located outside the United States. As a result, it may be difficult for you to effect service of process within the United States
upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of
the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States
and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to
whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law, Grandall Law Firm
(Beijing), has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures
Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures
Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China
does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments
with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty,
security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United
States.



The PRC government exerts substantial influence over
the manner in which we must conduct our business activities.



The PRC government has exercised and continues
to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our
ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import
and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in
China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments
of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that
would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.



Accordingly, government actions in the
future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy
or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions
in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties
or joint ventures.



13







Future inflation in China may inhibit our ability to
conduct business in China.



In recent years, the Chinese economy has
experienced periods of rapid expansion and highly fluctuating rates of inflation. According to the National Bureau of Statistics
of China, the annual average percent changes in the consumer price index in China for 2011, 2012, 2013 and 2014 were increases
of 5.4%, 2.6%, 2.6% and 1.5%, respectively. High inflation may erode disposable incomes and consumer spending. Furthermore, certain
components of our cost of sales, including direct raw material costs, direct labor costs and design costs may increase as a result
of an increase in the cost of materials and labor resulting from general inflation. However, we cannot guarantee that we can pass
on increased costs to customers through increases in retail prices. This could adversely impact our business, financial condition
and results of operations.



Restrictions on currency exchange may limit our ability
to receive and use our sales effectively.



The
majority of our sales will be settled in RMB and U.S. dollars, and any future restrictions on currency exchanges may limit our
ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments
in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested
enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China
authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment
and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB in the future.



In addition, the Notice of the General
Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement
of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, issued by the PRC
State Administration of Foreign Exchange (“SAFE”), and effective as of August 29, 2008 (“Circular 142”),
regulates the conversion by foreign-invested enterprises of foreign currency into RMB by restricting how the converted RMB may
be used. Circular 142 requires that RMB converted from the foreign currency-dominated capital of a foreign-invested enterprise
may only be used for purposes within the business scope approved by the relevant government authority and may not be used to make
equity investments in PRC, unless specifically provided otherwise. SAFE further strengthened its oversight over the flow and use
of RMB funds converted from the foreign currency-dominated capital of a foreign-invested enterprise. The use of such RMB may not
be changed without approval from SAFE, and may not be used to repay RMB loans if the proceeds of such loans have not yet been
used. Any violation of Circular 142 may result in severe penalties, including substantial fines.



Fluctuations in exchange rates could
adversely affect our business and the value of our securities.



The
value of our securities will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those
currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative
to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change
in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend
we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments
we make in the future.



Since July 2005,
the RMB has no longer been pegged to the U.S. dollar. However, the PBOC regularly intervenes in the foreign exchange market to
limit fluctuations in RMB exchange rates and achieve policy goals. Following the removal of the U.S. dollar peg, the RMB appreciated
more than 20% against the U.S. dollar over the following three years. From July 2008 to June 2010, the RMB traded within a narrow
range against the U.S. dollar. Since June 2010 the RMB has further appreciated against the U.S. dollar, from approximately RMB6.83
per U.S. dollar as of June 1, 2010 to approximately RMB6.119 per U.S. dollar as of December 31, 2014. It is difficult to predict
how RMB exchange rates may change going forward.



Very limited hedging transactions are
available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions.
While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified
by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies. As a result, fluctuations
in exchange rates may have a material adverse effect on your investment.



14







The implementation of the new PRC
employment contract law and increases in the labor costs in China may hurt our business and profitability.



China
adopted a new Labor Contract Law, effective on January 1, 2008, and issued its implementation rules, effective on September 18,
2008. The Labor Contract Law and related rules and regulations impose more stringent requirements on employers with regard to,
among others, minimum wages, severance payment and non-fixed-term employment contracts, time limits for probation periods, as
well as the duration and the times that an employee can be placed on a fixed-term employment contract. Due to the limited period
of effectiveness of the Labor Contract Law and its implementation rules and regulations, and the lack of clarity with respect
to their implementation and potential penalties and fines, it is uncertain how they will impact our current employment policies
and practices. In particular, compliance with the Labor Contract Law and its implementation rules and regulations may increase
our operating expenses. In the event that we decide to terminate some of its employees or otherwise change its employment or labor
practices, the Labor Contract Law and its implementation rules and regulations may also limit its ability to effect those changes
in a manner that we believe to be cost-effective or desirable, and could result in a material decrease in our profitability.



Restrictions under PRC law on our
PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to
grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our
business.



Substantially all of our sales are earned
by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments
to their offshore parent companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their
accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries
are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance
with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations
to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances,
or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise
fund and conduct our business.



Failure
to comply with PRC regulations relating to the investment in offshore special purpose companies by PRC residents may subject our
PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC
subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.



On July 14, 2014, the SAFE issued the
Circular Relating to Foreign Exchange Administration of Offshore Investment, Financing and Roundtrip Investment by Domestic Residents
Through Special Purpose Vehicles, or Circular 37. Circular 37 repeals and replaces the Notice Concerning Foreign Exchange Controls
on Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75. Under
Circular 37, PRC residents are required to register with the SAFE or its local branches prior to establishing, or acquiring control
of, an offshore company for the purpose of investment or financing that offshore company with equity interests in, or assets of,
a PRC enterprise or with offshore equity interest or assets legally held by such PRC resident. In addition, PRC residents are
required to amend their registrations with the SAFE and its local branches to reflect any material changes with respect to such
PRC resident’s investment in such offshore company, including changes to basic information of such PRC resident, increase
or decrease in capital, share transfer or share swap, merger or division. In the event that a PRC shareholder fails to make the
required registration or update the previously filed registration, the PRC subsidiaries of that offshore special purpose vehicle
may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation
to their offshore parent company, and the offshore parent company may also be prohibited from contributing additional capital
into its PRC subsidiaries. Furthermore, failure to comply with the various foreign exchange registration requirements described
above could result in liability under the PRC laws for evasion of applicable foreign exchange restrictions.



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 regulations. The failure of
our beneficial owners who are PRC residents to comply with these SAFE registrations may subject such beneficial owners or our
PRC subsidiaries to fines and legal sanctions. Furthermore, since Circular 37 was recently promulgated and it is unclear how this
regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented
by the relevant PRC government authorities, we cannot predict how these regulations will affect our business operations or future
strategy. Failure to register or comply with relevant requirements 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.



15







Our business and financial performance
may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Hongri PRC constitutes
a Round-trip Investment without MOFCOM approval.



On August 8, 2006, six PRC regulatory
agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors (the “Foreign
M&A Rule”), which became effective on September 8, 2006 and was amended on June 22, 2009.



According to the Foreign M&A Rule,
a “Round-trip Investment” is defined as having taken place when a PRC business that is owned by PRC individual(s)
is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). Under
the Foreign M&A Rule, any Round-trip Investment must be approved by MOFCOM, and any indirect arrangement or series of arrangements
which achieves the same end result without the approval of MOFCOM is a violation of PRC law.



Our Hong Kong subsidiary Vast Billion
Investment Limited (“Vast Billion”) acquired Hongri PRC in 2011 from Bizhen Chen and Keyan Yan. At the time of the
acquisition, Hongri International, the parent company of Vast Billion, was owned and controlled by Mr. Sun Keung Chan and Ms.
So Wa Cheung, both of whom are citizens of the Hong Kong Special Administrative Region. Mr. Yan entered into the Amended and Restated
Option Agreement with Mr. Chan and Ms. Cheung, dated March 9, 2011, pursuant to which Mr. Yan was granted an option to acquire
all of the shares of common stock that Mr. Chan and Ms. Cheung will acquire in Target in connection with the reverse acquisition,
for an aggregate exercise price of RMB 131,409 (approximately $20,000). Mr. Yan may exercise this option during the period commencing
on the date which is six (6) months after the date on which the first registration statement is filed by the Company under the
Securities Act, and ending on the fifth anniversary thereof.



Because no Chinese nationals have direct
stock ownership of either Hongri International or Vast Billion, we believe that the above transactions do not constitute a “Round-trip
Investment” and therefore it has decided not to seek the approval from MOFCOM or China Securities Regulatory Commission
(“CSRC”), pursuant to the Foreign M&A Rule. However, the PRC regulatory authorities may take the view that these
transactions and the reverse acquisition of Hongri PRC are part of an overall series of arrangements which constitute a Round-trip
Investment, because at the end of the transactions, the stockholders of Hongri PRC became majority owners and effective controlling
parties of a foreign entity that acquired ownership of Hongri PRC.



If we are found to be in violation of
the Foreign M&A Rule, the PRC regulatory authorities would have broad discretion in dealing with such violation, including
levying fines, confiscating our income, revoking our PRC subsidiaries’ business or operating licenses, requiring us to restructure
or unwind the relevant ownership structure or operations. Any of these actions could cause significant disruption to our business
operations and may materially and adversely affect our business, financial condition and results of operations. We believe that
if these regulatory actions occur, we may be able to find a way to re-establish control of Hongri PRC’s business operations
through a series of contractual arrangements rather than an outright purchase of the equity of Hongri PRC. But we cannot assure
you that such contractual arrangements will be protected by PRC law or that we can receive as complete or effective economic benefit
and overall control of Hongri PRC’s business than if we had direct ownership of Hongri PRC.



Under the Enterprise Income Tax
Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable
tax consequences to us and our non-PRC stockholders.



On March 16, 2007, the National People’s
Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on November 28, 2007, the State Council of China
passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China
with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it
can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT
Law define de facto management as “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise.



16







On April 22, 2009, the State Administration
of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated
Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application
of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an
enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties
mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial
assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half
of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an
enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends
to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated
by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises
are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.



We may be deemed to be a resident enterprise
by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case,
this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise
income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding
tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect
to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could
result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect
to gains derived by our non-PRC stockholders from transferring our shares.



Heightened scrutiny of acquisition
transactions by PRC tax authorities may have a negative impact on Chinese company’s business operations and its acquisition
strategy.



Pursuant to the Notice on Strengthening
Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, effective on
January 1, 2008, and the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC
Resident Enterprises , or SAT Announcement 7, effective on February 3, 2015, issued by the SAT, if a non-resident enterprise transfers
the equity interests of or similar rights or interests in overseas companies which directly or indirectly own PRC taxable assets
through an arrangement without a reasonable commercial purpose, but rather to avoid PRC corporate income tax, the transaction
will be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate income tax. SAT Announcement
7 specifies certain factors that should be considered in determining whether an indirect transfer has a reasonable commercial
purpose. However, as SAT Announcement 7 is newly issued, there is uncertainty as to the application of SAT Announcement 7 and
the interpretation of the term “reasonable commercial purpose.”



Under SAT Announcement 7, the entity which
has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to withhold any
PRC corporate income tax that is due. If the transferring shareholders do not pay corporate income tax that is due for a transfer
and the entity which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities may impose
a penalty on the entity that so fails to withhold, which may be relieved or exempted from the withholding obligation and any resulting
penalty under certain circumstances if it reports such transfer to the PRC tax authorities.



Although SAT Announcement 7 is generally
effective as of February 3, 2015, it also applies to cases where the PRC tax treatment of a transaction that took place prior
to its effectiveness has not yet been finally settled. As a result, SAT Announcement 7 could be determined by PRC tax authorities
to be applicable to the historical reorganization, and it is possible that these transactions could be determined by PRC tax authorities
to lack a reasonable commercial purpose. As a result, the transfer of shares by certain shareholders to other parties could be
subject to corporate income tax of up to 10% on capital gains generated from such transfers, and PRC tax authorities could impose
tax obligations on the transferring shareholders or subject us to penalty if the transferring shareholders do not pay such obligations
and withhold such tax.



17







SAT Announcement 7 and its interpretation
by relevant PRC authorities clarify that an exemption provided by SAT Circular 698 for transfers of shares in a publicly-traded
entity that is listed overseas is available if the purchase of the shares and the sale of the shares both take place in open-market
transactions. However, if a shareholder of an entity that is listed overseas purchases shares in the open market and sells them
in a private transaction, or vice-versa, PRC tax authorities might deem such a transfer to be subject to SAT Circular 698 and
SAT Announcement 7, which could subject such shareholder to additional reporting obligations or tax burdens. Accordingly, if a
holder of the Company’s common stock purchases such common stock in the open market and sells them in a private transaction,
or vice-versa, and fails to comply with SAT Circular 698 or SAT Announcement 7, the PRC tax authorities may take actions, including
requesting to provide assistance for their investigation or impose a penalty on it, which could have a negative impact on the
company’s business operations.



We started constructing a factory
building in Anhui Province without certain required approvals from relevant governmental authorities, which may expose the company
to administrative penalties and cause future use of the factory building to be prohibited.



Under
PRC law, prior to the commencement of a building construction, certain approvals and permits should be obtained from various governmental
authorities, including the approval or registration of the project, approval of environmental impact assessment, approval of fire-prevention
design, land use planning and construction planning, and a building permit. As of the date of this report, Anhui Kaixin Apparel
Co. Ltd., a PRC subsidiary of Hongri PRC, is in the process of constructing its factory building without certain of these approvals
and permits. As a result, the construction of this building may be challenged by relevant governmental authorities and subject
to potential administrative penalties. In addition, the government may reject our filing for the completion of construction and
further refuse to issue the building ownership certificate to us. As a result, our future use of the building could be prohibited
under PRC law and the value of the building could be adversely affected.



Our failure to fully comply with
PRC laws relating to social insurance and housing accumulation fund may expose it to potential administrative penalties.



The
PRC laws and regulations require all employers in China to fully contribute their own portion to the social insurance and housing
accumulation funds for their employees within a certain period of time. Failure to do so may expose the employers to make rectification
for the unpaid contributions by the relevant labor authority.



As of the date of this report, Hongri
PRC has not paid housing accumulation funds for its employees. In addition, Hongri PRC failed to make contributions to the social
insurance in full amount for its employees before 2014. PRC governmental authorities may impose penalties on Hongri PRC for failure
to comply. In addition, in the event that any current or former employee files a complaint with the PRC government, Hongri PRC
may be subject to making up the contributions to the social insurance and housing accumulation funds as well as paying administrative
fines. The total cost of these contributions and any related fines or penalties could be significant and could have a material
adverse effect on our working capital.



We may be exposed to liabilities
under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could
have a material adverse effect on our business.



We
are subject to the Foreign Corrupt Practice Act (“FCPA”), and other laws that prohibit improper payments or offers
of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute,
for the purpose of obtaining or retaining business. We have operations, have agreements with third parties, and make most of our
sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized
payments or offers of payments by the employees, consultants, sales agents, or distributors of our subsidiaries, even though they
may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees.
However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants,
sales agents, or distributors of our subsidiaries may engage in conduct for which we might be held responsible. Violations of
the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities,
which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek
to hold our subsidiaries liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.



18







If we become directly subject to
the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant
resources to investigate and resolve the matter which could harm our business operations, stock price and reputation, and could
result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.



Recently,
U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed
so-called reverse merger transactions, 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
on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in many 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 stockholder lawsuits, 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 subsidiaries, our business and our stock price after the Acquisition.
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 our subsidiaries. This situation may be costly and
time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our
subsidiaries and business operations may be severely and adversely affected and your investment in our stock could be rendered
worthless.



The disclosures in our reports and
other filings with the SEC and our other public pronouncements will not be subject to the scrutiny of any regulatory bodies in
the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located
in China where all of our operations and business are located have conducted any due diligence on our operations or reviewed or
cleared any of our disclosure.



Unlike
public reporting companies whose operations are located primarily in the United States, however, all of our operations will be
located in China. Since all of our operations and business takes place in China, it may be more difficult for the Staff of the
SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are
not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore,
our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory
authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the CSRC, a PRC regulator
that is tasked with oversight of the capital markets in China. Accordingly,you
should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has
done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other
public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.



Our auditor, like other independent
registered public accounting firms operating in China, is registered with the U.S. Public Company Accounting Oversight Board,
or the PCAOB, but has not yet been inspected, and as such, investors currently do not have the benefit of PCAOB oversight.



Auditors of companies
that are registered with the SEC and traded publicly in the United States must be registered with the PCAOB and are required by
U.S. law to undergo regular inspections by the PCAOB to assess their compliance with U.S. law and professional standards in connection
with their audits of public company financial statements filed with the SEC. Because our auditor, BDO China Shu Lun Pan Certified
Public Accountants LLP is located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without
the approval of the Chinese authorities, the audit work and practices of its auditor, like other registered audit firms operating
in China, is currently not inspected by the PCAOB. The inability of the PCAOB to conduct inspections of auditors in China also
makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as
compared to auditors outside of China that are subject to PCAOB inspections. As a result, investors may lose confidence in our
future reported financial information and procedures and the quality of our future financial statements.



19







Proceedings instituted by the SEC
against five PRC-based accounting firms could result in financial statements being determined to be not in compliance with the
requirements of the Securities Exchange Act of 1934.



In December 2012, the SEC instituted proceedings
under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based accounting firms alleging that these firms
had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’
work papers related to their audits of certain PRC-based companies that are publicly traded in the United States. Rule 102(e)(1)(iii)
grants to the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who
is found by the SEC, after notice and opportunity for a hearing, to have willfully violated, or willfully aided and abetted the
violation of, any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued,
sanctioning four of these accounting firms and suspending them from practicing before the SEC for a period of six months. The
sanction will not take effect until there is an order of effectiveness issued by the SEC. In February 2014, four of these PRC-based
accounting firms filed a petition for review of the initial decision.  In February 2015, each of these four accounting firms
agreed to a censure and to pay fine to the SEC to settle the dispute with the SEC. The settlement stays the current proceeding
for four years, during which time the firms are required to follow detailed procedures to seek to provide the SEC with access
to Chinese firms' audit documents via the CSRC. If a firm does not follow the procedures, the SEC would impose penalties such
as suspensions, or commence a new, expedited administrative proceeding against the non-compliant firm or it could restart the
administrative proceeding against all four firms.



If our independent registered public accounting
firm were denied, temporarily or permanently, the ability to practice before the SEC, and we are unable to find in a timely manner
another registered public accounting firm which can audit and issue a report on our financial statements, our financial statements
could be determined to not be in compliance with the requirements for financial statements of public companies with a class of
securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such a determination could ultimately
lead to the SEC’s revocation of the registration of our common stock under the Exchange Act, which would cause the immediate
delisting of our common stock from the NASDAQ Capital Market, and the effective termination of the trading market for our common
stock in the United States, which would likely have a significant adverse effect on the value of our common stock.



RISKS RELATED TO THIS OFFERING AND THE MARKET FOR OUR SECURITIES
GENERALLY



If we fail to comply with the continued
listing requirements of NASDAQ, we would face possible delisting, which would result in a limited public market for our shares
and make obtaining future debt or equity financing more difficult for us.



Our
common stock is traded and listed on the Nasdaq Capital Market under the symbol “KBSF.” The common stock may be delisted
if we fail to maintain certain Nasdaq listing requirements. On March 20, 2014, we received a letter from the Listing Qualifications
Department of The Nasdaq Stock Market LLC stating that Nasdaq’s staff had determined that the Company was not in compliance
with Listing Rule 5550(a)(3), which rule requires that the Company maintain a minimum of 300 public holders for continued listing
of its securities on Nasdaq. On September 8, 2014, we received a notification from Nasdaq that Staff has determined the Company’s
Common Stock  have satisfied the requirements for initial listing on the Nasdaq Capital Market in connection with the Share
Exchange. In addition, on August 25, 2014 we received a letter from the Nasdaq Staff, indicating that the Staff has determined
to delist the Company’s Warrants and Units from the NASDAQ Stock Market as the Company failed to regain compliance with
the Listing Rule 5550(a)((3). As a result, the Company’s Warrants and Units are currently quoted on the OTC Markets under
the symbols “KBSW” and “KBSU”, respectively.



On May 5, 2015,
we received notice from NASDAQ indicating that, due to our failure to timely file our annual report on Form 20-F for the fiscal
year ended December 31, 2014, we no longer comply with the NASDAQ Listing Rule 5250(c)(1). After we submitted a plan to regain
compliance, NASDAQ granted us a grace period of 180 days or until October 27, 2015 to regain compliance. With the filing of this
annual report, we believe that we will regain compliance. However, we cannot
assure you that we will continue to be able to meet this or other continued listing requirements of NASDAQ.



20







If our
common stock is no longer listed on The NASDAQ Capital Market, our shares would likely trade  on the over-the-counter market.
If our shares were to trade on the over-the-counter market, selling our shares could be more difficult because smaller
quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of
us may be reduced. In addition, in the event our shares are delisted, broker-dealers have certain regulatory burdens imposed
upon them, which may discourage broker-dealers from effecting transactions in our shares, further limiting the liquidity of
our shares. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares. Such
delisting from The NASDAQ Capital Market and continued or further declines in our share price could also greatly impair our
ability to raise additional necessary capital through equity or debt financing, and could significantly increase the
ownership dilution to shareholders caused by our issuing equity in financing or other transactions.



If we were delisted from NASDAQ,
we may become subject to the trading complications experienced by “Penny Stocks” in the over-the-counter market.



Delisting from
NASDAQ may cause our shares of common stock to become the SEC’s “penny stock” rules. The SEC generally defines
a penny stock as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to specific exemptions. One such exemption is to be listed on NASDAQ. The market price of our common stock
is currently about $4.00 per share. However, because the daily trading volume in our common stock is very low, significant price
movement can be caused by the trading in a relatively small number of shares. Therefore, were we to be delisted from NASDAQ, our
common stock may become subject to the SEC’s “penny stock” rules. These rules require, among other things, that
any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure document, (ii) disclosure
of market quotations, if any, (iii) disclosure of the compensation of the broker and its salespersons in the transaction and (iv)
monthly account statements showing the market values of our securities held in the customer’s accounts. A broker would be
required to provide the bid and offer quotations and compensation information before effecting the transaction. This information
must be contained on the customer’s confirmation. Generally, brokers are less willing to effect transactions in penny stocks
due to these additional delivery requirements. These requirements may make it more difficult for shareholders to purchase or sell
our shares. Because the broker, not us, prepares this information, we would not be able to assure that such information is accurate,
complete or current.



Trading in our shares over the last
three months has been very limited, so our stock price is highly volatile, leading to the possibility that you may not be able
to sell as much stock as you want at prevailing prices.



Because approximately
70% of our then issued and outstanding shares of common stock was tendered in the tender offering closed on July 29, 2014, we
currently have a limited amount of shares eligible for public trading. The average daily trading volume in our common stock over
the last three months is very limited. If limited trading in our common stock continues, it may be difficult for investors to
sell their shares in the public market at any given time at prevailing prices. Moreover, the market price for shares of our common
stock may be made more volatile because of the relatively low volume of trading in our common stock. When trading volume is low,
significant price movement of our common stock can be caused by the trading in a relatively small number of shares. Volatility
in our common stock could cause stockholders to incur substantial losses.



Numerous factors, many of which
are beyond our control, may cause the market price of our common stock to fluctuate significantly.



There are numerous additional factors, many of which are beyond
our control, may cause the market price of our common stock to fluctuate significantly. These factors include:



| | · | our
                                         earnings releases, actual or anticipated changes in our earnings, fluctuations in our
                                         operating results or our failure to meet the expectations of financial market analysts
                                         and investors;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | changes
                                         in financial estimates by us or by any securities analysts who might cover our shares;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| | · | speculation
                                         about our business in the press or the investment community;
| | - | -----------------------------------------------------------------------------------------------------------------

| | · | significant
                                         developments relating to our relationships with our customers or suppliers;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| | · | stock
                                         market price and volume fluctuations of other publicly traded companies and, in particular,
                                         those that are in the our industries;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | customer
                                         demand for our products;
| | - | --------------------------------------------------------------------------

| | · | investor
                                         perceptions of the our industry in general and our company in particular;
| | - | ---------------------------------------------------------------------------------------------------------------------------

| | · | the
                                         operating and stock performance of comparable companies;
| | - | -----------------------------------------------------------------------------------------------------

| | · | general
                                         economic conditions and trends;
| | - | --------------------------------------------------------------------------------

| | · | major
                                         catastrophic events;
| | - | -------------------------------------------------------------------



21







| | · | announcements
                                         by us or our competitors of new products, significant acquisitions, strategic partnerships
                                         or divestitures;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | changes
                                         in accounting standards, policies, guidance, interpretation or principles;
| | - | ---------------------------------------------------------------------------------------------------------------------------

| | · | loss
                                         of external funding sources;
| | - | --------------------------------------------------------------------------

| | · | sales
                                         of our shares, including sales by our directors, officers or significant shareholders;
                                         and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | additions
                                         or departures of key personnel.
| | - | ----------------------------------------------------------------------------------



Securities class action litigation is
often instituted against companies following periods of volatility in their share price. This type of litigation could result
in substantial costs to us and divert our management’s attention and resources. Moreover, securities markets may from time
to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies.
For example, in July 2008, the securities markets in the United States, China and other jurisdictions experienced the largest
decline in share prices since September 2001. These market fluctuations may adversely affect the price of our shares and other
interests in our company at a time when you want to sell your interest in us.



Certain of our shareholders hold
a significant percentage of our outstanding voting securities.



Mr. Keyan Yan, our Chairman and Chief
Executive Officer, is the beneficial owner of approximately 52.6% of our outstanding voting securities. As a result, he possesses
significant influence and can elect a majority of our board of directors and authorize or prevent proposed significant corporate
transactions. His ownership and control may also have the effect of delaying or preventing a future change in control, impeding
a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer.



We have elected to use the extended
transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act which allows
us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies
until those standards apply to private companies.



We are an emerging growth company as defined
in the JOBS Act, and will continue to be an emerging growth company until: (i) the last day of our fiscal year following the fifth
anniversary of our IPO, (ii) the date on which we become a large accelerated filer, or (iii) the date on which we have issued
an aggregate of $1 billion in non-convertible debt during the preceding 3 years. As an emerging growth company, we have elected
to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS
Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates
for public and private companies until those standards apply to private companies. As a result of this election, our financial
statements may not be comparable to companies that comply with public company effective dates.



Our outstanding warrants may adversely
affect the market price of our shares of common stock.



There
are currently 5,918,000 warrants outstanding, including 368,000 Placement Warrants under the Placement Units. Each warrant entitles
the holder to purchase one share of common stock at a price of $11.50. The Placement Warrants are identical to those IPO Warrants
except that the Placement Warrants may be exercised on a cashless basis even if there is not an effective registration statement
relating to the shares underlying the Placement Warrants and the Placement Units and underlying securities are subject to certain
transfer restrictions. We also issued to the representative of the underwriters, concurrently with our IPO, for a purchase price
of $100, an Underwriters’ Unit Purchase Option to purchase 250,000 units, each unit representing one share of common stock
and one IPO Warrant. The sale or possibility of sale of the shares underlying the warrants could have an adverse effect on the
market price for our shares of common stock or our ability to obtain future financing. If and to the extent these warrants are
exercised, you may experience dilution to your holdings.



22







You will not be able to exercise your redeemable warrants
if we do not have an effective registration statement and a prospectus in place when you desire to do so.



No redeemable warrants will be exercisable,
and we will not be obligated to issue shares of common stock upon exercise of redeemable warrants by a holder unless, at the time
of such exercise, we have a registration statement or post-effective amendment under the Securities Act covering the shares of
common stock issuable upon the exercise of the redeemable warrants and a current prospectus relating to shares of common stock.
Under the terms of a redeemable warrant agreement between American Stock Transfer & Trust Company as warrant agent, and us,
we have agreed to use our best efforts to have a registration statement in effect covering shares of common stock issuable upon
exercise of the redeemable warrants from the date the redeemable warrants become exercisable and to maintain a current prospectus
relating to shares of common stock until the redeemable warrants expire or are redeemed, and to take such action as is necessary
to qualify the shares of common stock issuable upon exercise of the redeemable warrants for sale in those states in which the
IPO was initially qualified. However, we cannot assure you that we will be able to do so. We may be unable to have a registration
statement in effect covering shares of common stock issuable upon exercise of the redeemable warrants or to maintain a current
prospectus relating to such shares of common stock if, for example, we lack the current financial statements necessary to be included
in such registration statement or prospectus. We have no obligation to settle the redeemable warrants for cash, in any event,
and the redeemable warrants may not be exercised and we will not deliver securities therefor in the absence of an effective registration
statement and a prospectus available for use. The redeemable warrants may be deprived of any value, the market for the redeemable
warrants may be limited if there is no registration statement in effect covering the shares of common stock issuable upon the
exercise of the redeemable warrants or the prospectus relating to the shares of common stock issuable upon the exercise of the
redeemable warrants is not current and the redeemable warrants may expire worthless. If you are unable to exercise or sell your
redeemable warrants, you will have paid the full unit price for only the shares of common stock underlying the units.



Holders of warrants included in
the placement units may exercise these warrants even if an effective registration statement and a prospectus is not in place,
which means they may be able to exercise such warrants while public warrants might not be exercisable and may expire worthless.



Unlike the warrants underlying the units
issued in connection with our IPO, the warrants included in the placement units will not be restricted from being exercised in
the absence of a registration statement under the Securities Act in effect covering the shares of common stock issuable upon the
exercise of the such warrants and a current prospectus relating to shares of common stock. Therefore, the holders thereof will
be able to exercise such warrants regardless of whether the issuance of the underlying shares of common stock is registered under
the Securities Act, while public warrants might not be exercisable and may expire worthless.



We are a “foreign private
issuer” and have disclosure obligations that are different than those of U.S. domestic reporting companies, so you should
not expect to receive the same information about us as a U.S. domestic reporting company may provide. Furthermore, if we or lose
our status as a foreign private issuer, we would be required to comply fully with the reporting requirements of the Exchange Act
applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that we
would not incur as a foreign private issuer.



We are a foreign private issuer as defined
in Rule 405 under the Securities Act and, as a result, we are not subject to certain of the requirements imposed upon U.S. domestic
issuers by the SEC. For example, we are not required by the SEC or the federal securities laws to issue quarterly reports or file
proxy statements with the SEC. We are also allowed to file our annual report with the SEC within four months of our fiscal year
end. We are also not required to disclose certain detailed information regarding executive compensation that is required from
U.S. domestic issuers. Further, our directors and executive officers are not required to report equity holdings under Section
16 of the Securities Act. As a foreign private issuer, we are also 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. We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5.
Since many of the disclosure obligations required of us as a foreign private issuer are different than those required by U.S.
domestic reporting companies, our shareholders should not expect to receive all of the same types of information about us and
at the same time as information is received from, or provided by, U.S. domestic reporting companies. We are liable for violations
of the rules and regulations of the SEC which do apply to us as a foreign private issuer. Violations of these rules could affect
our business, results of operations and financial condition.



If we lose our status as a foreign private
issuer at some future time, we will be required to comply fully with the reporting requirements of the Exchange Act applicable
to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that it would not
incur as a foreign private issuer.



23







As a foreign private issuer, we
are permitted to rely on exemptions from certain Nasdaq corporate governance standards applicable to domestic U.S. issuers. This
may afford less protection to holders of our securities.



We are exempted from certain corporate
governance requirements of the Nasdaq Stock Market by virtue of being a foreign private issuer. As a foreign private issuer, we
are permitted to follow the governance practices of our home country, the Republic of the Marshall Islands in lieu of certain
corporate governance requirements of Nasdaq. As result, the standards applicable to us are considerably different than the standards
applied to domestic U.S. issuers. For instance, we are not required to:



| | · | have
                                         a majority of the board be independent (although all of the members of the audit committee
                                         must be independent under the U.S. Securities Exchange Act of 1934, as amended, or the
                                         Exchange Act);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | have
                                         a compensation committee and a nominating committee to be comprised solely of "independent
                                         directors; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | hold
                                         an annual meeting of shareholders no later than one year after the end of the Company’s
                                         fiscal year-end.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result, you may not have the same
protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate governance requirements.



Future sales or perceived sales of our shares of common
stock could depress our stock price.



As of the date of this report, we have
25,417,329 shares of common stock outstanding. Many of these shares will become eligible for sale in the public market, subject
to limitations imposed by Rule 144 under the Securities Act. If the holders of these shares were to attempt to sell a substantial
amount of their holdings at once, the market price of our common stock could decline. Moreover, the perceived risk of this potential
dilution could cause shareholders to attempt to sell their shares and investors to short the common stock, a practice in which
an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price
to cover the sale. As each of these events would cause the number of shares of our common stock being offered for sale to increase,
our common stock market price would likely further decline. All of these events could combine to make it very difficult for us
to sell equity or equity-related securities in the future at a time and price that we deem appropriate.



Holders of our securities may face
difficulties in protecting their interests because we are incorporated under the Republic of the Marshall Islands law.



We are a company incorporated under the
laws of the Marshall Islands, and almost all of our assets are located outside the United States. In addition, majority of our
directors and officers, and their assets, are located outside of the United States. As a result, you may have difficulty serving
legal process within the United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside
the United States, judgments you may obtain in U.S. courts against us or these persons in any action, including actions based
upon the civil liability provisions of U.S. federal or state securities laws. You may also have difficulty bringing an original
action in the appropriate court of the Marshall Islands to enforce liabilities against us or any person based upon the U.S. federal
securities laws.



Provisions of our articles of incorporation
may impede a takeover or make it more difficult for shareholders to change the direction or management of the Company, which could
reduce shareholders’ opportunity to influence management of the Company.



Our articles of incorporation permit our
board of directors to issue up to five million shares of preferred stock with a par value of $0.0001 from time to time, with such
rights and preferences as they consider appropriate. These terms may include voting rights including the right to vote as a series
on particular matters, preferences as to dividends and liquidation, conversion rights and redemption rights provisions. The issuance
of any preferred stock could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the board of directors
to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect
a change-in-control, which in turn could prevent shareholders from recognizing a gain in the event that a favorable offer is extended
and could materially and negatively affect the market price of our common stock.



24







|ITEM 4. | INFORMATION ON THE COMPANY
|------- | --------------------------



A. History and Development of the Company



We are a Republic of the Marshall Islands
Company incorporated under the Marshall Islands Business Corporations Act (“BDA”) on January 26, 2012. We were originally
organized under the name “Aquasition Corp.” for the purpose of acquiring through a merger, capital stock exchange,
asset acquisition, stock purchase, or similar acquisition transaction, one or more operating businesses or assets. The address
of the Company’s principal executive office is Xingfengge Building, Baogaiyupu Industrial Park, Shishi City, Fujian Province
of china..



On November 1, 2012, we closed
our initial public offering (the “IPO”) of 5,000,000 units with each unit consisting of one share of common stock
and one five-year warrant (the “IPO Units”). Each warrant entitles the holder to purchase one share of common stock
at a price of $11.50. On November 7, 2012, the underwriters of the IPO exercised their over-allotment option in part, for a total
of an additional 550,000 IPO Units, generating total gross proceeds of $55,500,000 in connection with the IPO. We also issued
to the underwriters in the IPO an option to purchase 250,000 units comprised of 250,000 shares of common stock and warrants to
purchase 250,000 shares of common stock, at an exercise price of $12.50 per unit (the “Underwriters’ Unit Purchase
Option”). In addition, we sold an aggregate of 368,000 units (the “Placement Units”) to our founding stockholders
and their designees at $10.00 per unit, generating gross proceeds of $3,685,000. Each Placement Unit consists of one share of
common stock and one warrant entitling the holder to purchase one share of common stock.



Following the consummation of our IPO
until August 1, 2014, we were searching for a suitable target business to acquire. On March 24, 2014, we entered into a share
exchange agreement and plan of liquidation (the “Exchange Agreement”), with KBS International, Hongri International,
a then wholly owned subsidiary of KBS International and Cheung So Wa and Chan Sun Keung, each an individual and shareholder of
KBS International (each, a “Principal Stockholder”). The Exchange Agreement was subsequently amended on June 21, 2014.
The transactions contemplated in the Exchange Agreement (the “Share Exchange”) were closed on August 1, 2014. At the
closing, we acquired 100% of the issued and outstanding equity interest in Hongri International from KBS International. In exchange,
we issued an aggregate of 22,957,455 shares of common stock of the Company to KBS International. In addition, on July 29, 2014,
we completed a tender offer related to the Share Exchange and redeemed the 4,981,736 shares of common stock validly tendered and
not withdrawn. Pursuant to the Exchange Agreement, KBS International was liquidated and dissolved in August 2014 and the 22,957,455
shares of common stock of the Company were distributed to each shareholder of KBS International according to their respective
ownership of KBS International. As a result, following the consummation of the Share Exchange, we had a total of 25,417,329 shares
of common stock outstanding.



On October 31, 2014, we held a special
shareholder meeting and amended our Articles of Incorporation to change our name to KBS Fashion Group Limited.



Corporate Structure



All of our business operations are conducted through our PRC
subsidiaries. The chart below presents our corporate structure as of the date of this report.



25











Principal Capital Expenditures and
Divestitures



For the years ended December 31, 2013
and 2014, our total capital expenditures and divestitures were $17.5 million and $11.1 million, respectively. Such expenditures
were primarily used for our second and third phase construction of production facility and purchasing production equipment.



B. Business Overview



We are a leading casual menswear company
in China with a demonstrated track record of designing, marketing, and selling our own line of fashion menswear. Our products
include men's apparel, footwear and accessories, primarily targeting urban males between the ages of 20 and 40 in the Tier II
and Tier III cities in China. Tier II cities generally refer to major cities located in each province of China other than the
capital city of such province. Tier III cities generally refer to county-level cities in China. Tier III cities that we focus
on are the national top 100 county cities identified by the State Statistics Bureau of China each year. These cities are characterized
by higher GDP, higher disposable income, better education and better infrastructure as compared with other county-level cities.



Our apparel products include outerwear,
knitwear, denim, tops, bottoms, accessories and footwear. Since 2006, we have launched 1,008 collections of new products, each
year with a different theme to highlight the current trends in menswear for the season.



26







We have established a nationwide distribution
network covering 17 of China’s 32 provinces and centrally administered municipalities. As of December 31, 2014, this network
was comprised of 18 corporate stores owned and operated by the company and 84 franchised stores operated by 23 third party distributors
or their sub-distributors. The number of stores has grown significantly from 1 corporate store and 7 franchised stores as of December
31, 2006. In the years ended December 31, 2014 and 2013, sales through our corporate stores accounted for 27.4% and 19.2% of our
total revenues respectively, and sales through distributors accounted for 69.1% and 78.5% of our revenues, respectively. Total
revenue from corporate stores sales for fiscal year 2014 was $16.13 million, compared to $19.1 million for 2013. In 2014 both
sales of corporate stores and distribution sales decreased as compared to last year because of the economic downturn in general
and fierce competition from online stores.



We have experienced rapid growth in recent
years but slowed down in year 2014 and sales developed as a curve footstep. From 2009 through 2014, total net sales increased
from $28.1 million to $58.83 million while the net profit decreased from $9.0 million to $6.9 million.



Our Competitive Strengths



We believe that the following competitive
strengths enable us to compete effectively in and capitalize on the growing casual menswear industry in China.



| | · | There
                                         is a sizable market for our products. We believe that we have a sizeable potential
                                         market. Our target customers are male middle-class consumers in the 20-40 age range.
                                         According to the national census in 2010, the population in China between 15-59 years-old
                                         was 940 million. Our target group falls into this category and is estimated to be more
                                         than 200 million people. As a result of the growing affluence in the PRC and increased
                                         purchasing power of the PRC population, we believe that PRC consumers are becoming more
                                         willing and able to purchase casual menswear. In addition, we believe that the purchasing
                                         decision of PRC consumers is becoming more predicated upon brand image, product design
                                         and style, rather than just price considerations. With rising affluence and improvement
                                         in lifestyle, we also believe the overall Chinese population is generally growing more
                                         brand name conscious and style oriented and has shown a propensity for increased spending
                                         on casual menswear.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We
                                         have a strong focus on design and product development. We believe that our in-house
                                         design and product development capabilities allow us to create unique products that appeal
                                         to our customers. We have established a strong in-house design and product development
                                         team of 10 employees as of October 17, 2015. Our team identifies new fashion trends by
                                         attending fashion shows and exhibitions as well as by drawing from creative ideas in
                                         magazines and other media. Each spring and fall, we carefully plan and create a new product
                                         line for our fall/winter and spring/summer collections of 528 SKU that encompasses our
                                         full range of product offerings, including outerwear, tops, bottoms and accessories.
                                         We introduce new design elements into our product lines each season. With our highly
                                         skilled and creative team of designers, we have extensive experience in creating unique
                                         designs to meet the preferences and needs of our target customer base.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our
                                         trademarked brand has earned a following in China. Our brand was developed in
                                         2006. Our marketing concept is “French origin, Korean design and made for Chinese.”
                                         Our customers are middle-class consumers in the 20-40 age range. We believe that their
                                         products’ concept, marketing, design and packaging fully match with the pro-western
                                         attitude and life styles of their target customers. We believe the KBS brand is essential
                                         to our success to penetrate to the casual menswear market in China.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We
                                         have an extensive and well-managed nationwide distribution network. We have an
                                         extensive distribution network throughout China. As of December 31, 2014, we had 18 KBS
                                         branded corporate stores and 84 franchised stores across 17 of China’s 32 provinces
                                         and centrally administered municipalities. The KBS branded corporate stores are required
                                         to sell only our products. We have been building up our selected distributor network
                                         since 2007. As of December 31, 2014, we had 23 distributors operating 84 franchise stores.
                                         All of our distributors have been working with us from 3 to 7 years. We select our distributors
                                         based on a number of criteria, including experience in the menswear retail industry,
                                         sales channels, business resources, brand promotion capabilities and ability to help
                                         us implement our broader business strategies. Our distributors help us respond to changing
                                         consumer tastes in a timely manner by providing regular feedback on our products at our
                                         semi-annual sales fairs and frequent communications. The financial resources of our distributors
                                         allow us to expand our retail network with less working capital investment from us than
                                         would be required for establishing direct stores, as our distributors are responsible
                                         for the store rentals and cost of inventory in their stores. We sold a substantial amount
                                         of our products through our distributors, which have allowed us to distribute our products
                                         to a wide geographic area and penetrate markets by leveraging the local market knowledge
                                         of our distributors and their sub- distributors. We believe that our distribution network
                                         has enabled us to expand our business and increase our sales efficiently and with less
                                         operational risk. This model has also minimized our operational risk because we typically
                                         start production after we receive orders from our distributors. We believe that using
                                         a distribution network to sell a substantial amount of our KBS products has enabled us
                                         to devote our resources to our core competitive strengths of design, brand management
                                         and product development.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27







| | · | We
                                         have an experienced management team. Our management team has extensive
                                         R&D, marketing and financial experience, led by our Chief Executive Officer, Mr.
                                         Keyan Yan. Mr. Yan has over 24 years of experience in the apparel industry and also has
                                         developed a differentiated product by international cooperation with a Korean designer.
                                         After working in the garment industry for more than 16 years, Mr. Yan acquired and developed
                                         the KBS brand. With his strong understanding of the apparel industry, Mr. Yan has successfully
                                         established this brand name in the market. We are committed to attract and retain top
                                         management level executives who we believe are and will continue to be the driving force
                                         behind our product development and growth.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our Growth Strategy



We intend to further strengthen our market position in the
casual menswear market in China by implementing the following strategies:



| | · | We
                                         plan to develop more wholesales to online stores. We intend to continue to strengthen
                                         and expand our brand awareness by do more advertising and improve wholesales to online
                                         stores, such as wechat stores, which are increasingly popular in China. We plan to focus
                                         on building our network across China through webchat stores, which we believe can help
                                         further promote awareness of our brand, showcase our complete product collections, stimulate
                                         sales in corporate stores in nearby regions and improve our overall business performance.
                                         By the end of 2015, we plan to increase sales to online stores to 20% of our total sales.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We
                                         plan to establish additional marketing and branch offices.We plan to establish
                                         a marketing office in Shanghai by the end of 2015. Our marketing and R&D team will
                                         move to the Shanghai office, and our distributors will come to Shanghai for our trade
                                         fair, instead of Shishi City in Fujian. Shanghai is one of the fashion centers in China
                                         with some of the top fashion institutes and designers. We believe that this strategic
                                         relocation will enable us to quickly adapt to domestic and international fashion trends
                                         and to have better access to a high quality pool of designers which, in turn, will strengthen
                                         our product design capabilities and our ability to compete more effectively against our
                                         competitors. We also plan to establish branch offices in Hunan, Sichuan, Liaoning, Hubei
                                         and Zhejiang provinces to better coordinate the development of corporate and franchised
                                         stores. Our branch offices will also be responsible for national and regional marketing
                                         campaigns, fast feedback reporting system monitoring, inventory control and performance
                                         evaluation. In August 2010, we opened up our first branch office in Jiangsu and it was
                                         successful in identifying large, well-positioned distributors and good locations for
                                         opening up our self-run stores.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We
                                         plan to continue to raise the profile of the KBS brand through enhanced advertising and
                                         promotional activities. We believe that the strong association of KBS brand with
                                         our concept of “French origin, Korean design and made for Chinese” has helped
                                         drive our brand positioning and customers’ receptivity to our products. We intend
                                         to further build our brand and deliver a consistent brand image from product design to
                                         sales and marketing. We seek to promote and enhance our presence in China’s casual
                                         menswear market by continuing to adopt proactive marketing strategies and produce high
                                         quality, well- designed casual menswear for our target market. In particular, we aim
                                         to increase awareness of our brand through: (1) multi-channel advertising strategies
                                         through national television, fashion magazines, billboards and other media channels;
                                         (2) further assisting our distributors’ regional advertising efforts; (3) distinctive
                                         store and product launch campaigns, including special events for new product launches
                                         and large-scale grand opening events for new stores, particularly new corporate stores;
                                         (4) update of the decoration and layout of a number of existing stores which have been
                                         in operation for years to improve the shopping experience; (5) participation in fashion
                                         shows; and (6) sponsorships of selected high-impact events. We believe that these advertising
                                         and promotional activities will help to further strengthen brand awareness in our target
                                         market and enhance customer loyalty.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28







| | · | We
                                         plan to expand and build upon our design and product development capabilities.
                                         We intend to further strengthen our design and product development capabilities by accelerating
                                         the commercialization of design concepts, expanding our product offerings and continuing
                                         to develop what we believe is unique casual menswear. We plan to relocate our design
                                         and product development center to Shanghai and plan to further invest in design and product
                                         development and expand our design and product development team by attracting talented
                                         designers, either domestic or international, and training young graduates from leading
                                         fashion design institutes. We believe that combining western fashion design experience
                                         with our local designer’s understanding of the China market and aesthetic will
                                         enable us to create fashionable yet popular casual menswear for consumers in China. We
                                         also intend to cooperate with our suppliers to develop new materials and fabrics which
                                         we believe will give customers a unique fashion product and create new market opportunities.
                                         We believe that our focus on designing unique and quality casual menswear will allow
                                         us to maintain our competitiveness and help to enhance our sales and overall profitability.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We
                                         plan to expand our production capacity to expand and diversify our product offerings.
                                         Our production facility is located in Taihu City in Anhui Province, China. Currently
                                         the facility has a production capacity of 2 million pieces of clothes per year and the
                                         facility is on a leased term. This production facility mainly produces ODM products for
                                         famous sportswear producers. Since 2011, we have been negotiating with the local government
                                         to acquire land use rights for land adjacent to their current facility consisting of
                                         110,557 square meters to build a new facility, a portion of which already been acquired.
                                         The construction commenced in 2011 and is to occur in four phases: Phase 1 consists of
                                         a 5-story dormitory located at a piece of land of approximately 7,405 square meters that
                                         we have already acquired, which was completed in 2012. Phase 2 is to add facilities on
                                         another acquired parcel of land of approximately 2,440 square meters with estimated annual
                                         production capacity of five million pieces of clothes, and has been completed in 2015.
                                         Phase 3 construction is to add additional facilities with estimated annual production
                                         capacity of 5 million pieces and is expected to be finished by the end of 2015. Phase
                                         4 will include production facilities with estimated annual production capacity of 10
                                         million pieces, an office building, staff quarters and living facilities, and is expected
                                         to be completed by the end of 2018. Upon completion, the new facility is expected to
                                         have a production capacity of 20 million pieces and accommodate 5,000 workers. Please
                                         see “—Production” below for a more complete explanation of our plans
                                         for the expansion of our production capacity. We anticipate that the new production facility
                                         will allow us to further refine our existing product lines by offering more styles within
                                         our existing apparel and accessories categories and to introduce additional, complementary
                                         apparel and accessories categories into our product line. We currently introduce 450
                                         to 600 different styles of products each season and intend to increase the number of
                                         our product offerings in the future.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We
                                         plan to implement an ERP system. We plan to implement an ERP system (which includes
                                         a point-of- sale system) to streamline and secure the data simulation process with our
                                         distributors and internal communication in 2016. The ERP system will enhance the timing
                                         and accuracy of sales information of each store. It collects data and shows records for
                                         daily sales, inventory balance and sales analysis. It will also have better control of
                                         cash and credit card vouchers management. With the ERP system, reconciliation of bank
                                         and cash balances of each store will be easier to achieve. On a national basis, we will
                                         track customer preferences and fashion trends geographically in order to keep up with
                                         our designs. The ERP system will provide us not only the store and sales analysis, but
                                         also just-in-time management and forward looking information such as raw material levels,
                                         delivery schedules, cost and management accounting information. As such, we will be able
                                         to make prompt responses to market demand. We expect to invest around $1.3 million to
                                         implement the system, which will enable us to effectively communicate with our distributors
                                         with respect to market information, thus shortening our response time to changing consumer
                                         preferences. We intend to rely on cash on hand and anticipated cash flow from its operations
                                         to fund the project.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The KBS Brand



We are engaged in a highly competitive
industry in which brand image and recognition is critical to attracting customers to purchase our products. We have adopted KBS
as a uniform brand name and image for all stores in our distribution network and on all products sold in those stores. The KBS
brand was created by Ms. Qinghua Ye in 2006 and registered with the trademark administration authority in 2008. Subsequently,
Ms. Ye assigned the KBS trademark to Hongri PRC in 2008. In 2009, Hongri PRC transferred this trademark to France Cock, which
then licensed such trademark back to Hongri PRC. Based on our sharp rise in revenue since 2006, we believe that the KBS brand
has gained a following in the casual menswear market in the cities where our products are sold.



29







To promote our brand, we have developed
and implemented brand management policies in all of our corporate stores and franchised stores. Our brand management policies
set out detailed requirements for store decorations and display of products. This enables us to project a consistent brand image.
In addition, each season, our design and product development team develops display concepts, including the presentation of our
collections in the stores and the color schemes for the backdrops. We also work closely with our distributors to supervise the
daily operations of franchised stores through unscheduled visits to ensure that our brand management policies are properly followed.



We may suspend the supply of our products
or terminate distribution agreements in the event that any of our distributors or their sub-distributors consistently fails to
comply with our brand management policies.



Our Products



Our apparel products include cotton and
down jackets, sweaters, shirts, T-shirts, jeans and trousers. Accessories include shoes, bags, socks and caps. In 2014, the suggested
retail prices of our products ranged from RMB 169 to RMB 1,699 (approximately $27.6 to $277.7) for our apparel products and RMB
15 to RMB 999 (approximately $2.45 to $163.26) for our accessory products. Since 2006, we have launched 1,008 collections of new
products, each year with a different theme to highlight the current trends in menswear for the season.



Our Design



We believe one of our key strengths is
our internal design and product development team, which designs products that reinforce our brand image. All of our products are
designed by our internal design and product development team with the collaboration of Korean designers. As of December 31, 2014,
our design and product development team comprised 10 members, including one senior designer with over five years of working experience.
Final design concepts are approved by Mr. Yan Keyan, who has more than 24 years of experience in the industry. All of the other
designers are graduates of professional design schools in China. We believe that our design and product development team is innovative
and passionate and that the individual experience of each of our designers helps bring new and exciting products to our customers.
Our design and product development team conceptualizes each season’s collections through an interactive process, taking
into account our brand strategy, product image and market feedback, drawing inspirations from domestic and international fashion
trends and collaborating with both our suppliers and distributors to fine-tune our designs. In particular, we collaborate with
our suppliers to develop a variety of materials and fabrics for our products. We also involve distributors in our product selection
process to take advantage of their market intelligence, which helps us to adapt to constantly changing customer preferences in
local markets. Our designers also attend various domestic and international fashion shows to keep abreast of the latest fashion
trends.



In a typical season, we design and make
around 600 prototypes. After the initial product selection, internal cost analysis of approved prototypes and final selection
by distributors at the sales fairs, we eventually select approximately 450 designs for mass production. Final design of all of
our products will be approved by our Chairman, Mr. Yan.



We plan to relocate our design and product
development center from Shishi City, Fujian Province to Shanghai for product design and market research and analysis by the end
of 2016. Shanghai is one of the fashion centers in China with some of the top fashion institutes and designers. We believe that
this strategic relocation will enable us to quickly adapt to domestic and international fashion trends and to have better access
to a high quality pool of designers which, in turn, will strengthen our product design capabilities and our ability to compete
more effectively against our competitors.



Our Distribution Network



We have established a nationwide distribution
network consisting of corporate stores and franchised stores covering 17 of China’s 32 provinces and centrally administered
municipalities.



30







Corporate Stores



As of December 31, 2014, we owned and
operated 18 corporate stores with an average floor area of approximately 110 square meters. The number of corporate stores has
grown significantly in recent years from 1 as of December 31, 2006, with the aggregate floor area increasing from approximately
60 square meters as of December 31, 2006 to approximately 1,974 square meters as of December 31, 2014. In the years ended December
31, 2014 and 2013, sales through our corporate stores accounted for 27.4% and 19.2% of our total revenues respectively.



We directly own and operate all of our
corporate stores. This direct control enables us to have closer relationship with our ultimate customers and better understanding
of market trends and consumer preferences. Required capital for opening of each store depends on the location and area of the
designated store. On average, the renovation cost per store is around $50,000 and the first year of rent payment is around $380,000
including premium paid to last owner. Rental period varies from two to five years. The total capital required to open a new store
is generally around $430,000 per store. Once negotiation of rent is concluded, it takes one to two months to open up a store.
We usually open up stores right before a peak season, such as labor holiday in May, National holiday in October and Chinese New
Year in January/February. On average, new stores break even after one to three months of operation.



We have two standard designs for our corporate
stores. For corporate stores opened in second tier cities, we have a higher aesthetic standard compared with corporate stores
in third and fourth tier cities. We generally locate our corporate stores at street level to access high pedestrian flow. Normally,
we will sell in-season stock in our second-tier city corporate stores. Our second-tier city corporate stores are also designed
to showcase our marketability to potential distributors so as to induce them to join our distributorship. For stores opened in
the third and fourth tier cities, we normally sell some of our slow-moving or off-season stock at a discount due to our awareness
of the generally lesser amount of disposable income available to residents of these cities. During certain times of the year,
such as the New Year, Chinese New Year and Labor Day, we will organize promotional discounts together with our franchised stores
to attract more customers and increase our stock turnover.



Franchised
Stores



We sell a substantial amount of our products
to our franchised distributors who in turn sell them to retail customers through KBS branded retail stores operated by our distributors
or their sub-distributors. Since 2013, we have also been selling products to 3 provincial distributors without their own stores,
or the no-store distributors, on a trial basis. We do not have any ownership in, or controlling relationship with, these franchised
stores, but we have entered into distribution agreements with them in the Company’s standard form, pursuant to which we
require distributors and their sub-distributors to sell only KBS products in these stores. Distributors are responsible for selecting
and ordering products from us and overseeing the sales in the stores operated by them and their sub-distributors. By selling directly
to our distributors, we can recognize revenues upon delivery to our distributors and delegate the distribution responsibilities
to our distributors. This allows us to distribute our merchandise to a wide geographic area and penetrate markets by leveraging
the local market knowledge of our distributors and their sub-distributors. This also minimizes our inventory and sales risks while
allowing us to allocate our resources to our core competitive strengths of design, brand management and product development. We
believe that our cooperation with distributors has enabled us to expand our business and accelerate our sales growth at much lower
costs and operational risk and achieve brand recognition throughout China.



We have been building up our selected
franchised distributor network since 2007. As of December 31, 2014, we had 23 franchised distributors who operated 84 retail stores
directly or through their sub-distributors, all of which were stand-alone stores, which were typically located in commercial centers,
including department stores or shopping malls, in their cities. All these distributors have worked with us for more than 3 to
7 years. We have not encountered any material dispute or financial difficulty with our key distributors. The average floor area
of each retail store was approximately 78 square meters as of December 2014. The number of retail stores has grown significantly
in recent years from 7 as of December 31, 2006, with the aggregate floor area increasing from 560 square meters as of December
31, 2006 to 6,592 square meters as of December 31, 2014. In the years ended December 31, 2014 and 2013, sales through our distributors
accounted for 69.1% and 78.5% of our revenues, respectively.



During the fiscal year ended December
31, 2013, we had 3 customers exceeding 10% of net sales, namely Youfu Jiang, Zhiyan Wang and Jinshu Chi accounted for 16%, 14.9%
and 15% of revenues, respectively. During the fiscal year ended December 31, 2014, we had one customer exceeding 10% of our net
sales, which accounted for 16.40% of our revenues.



31







Sales generated by our five best-performing
franchised distributors accounted for approximately 43.93% and 54.04% of our revenues in the years ended December 31, 2014 and
2013, respectively. Those top distributors have been with us since 2007 or 2008 and have grown organically with us. As the same
time, we are exploring more distributors in other regions including relatively small distributors to grow with their businesses.
Although we rely on distributors for the sales and marketing of our products, we believe our business is not substantially dependent
on any individual distributor.



We are highly selective in appointing
distributors. We select our distributors based on a number of criteria, including experience in the menswear retail industry,
sales channels, business resources, brand promotion capabilities and ability to help us implement our broader business strategies.
We maintain good relationships with many regional or local distributor candidates which we identify through our internal research
and external referrals but only appoint a handful of them to become our distributors. We evaluate the relevant experience of the
distributor candidates in operating retail stores, their financial condition and sources of funding required for the establishment
of a regional distribution network and their ability to develop a network of retail stores in the designated distribution region
of a given distributor before we make any appointment.



Once appointed, each distributor must
enter into a distribution agreement with us. We do not own any interest in any of our distributors, their sub-distributors or
the retail stores they operate. The distribution agreements we typically enter into with distributors do not allow us to be involved
in the daily operating, financing or other activities of the distributors, except that distributors need to comply with our brand
management policies and pricing and store management guidelines. Key terms of our standard distribution agreement include:



| | · | Product
                                         Exclusivity. Our distributors are required to sell only our products at KBS branded
                                         retail outlets managed by them or authorized retailers.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Geographic
                                         Coverage. Distributors are granted exclusive rights to distribute our products (directly
                                         and indirectly through their sub-distributors) in the retail stores within the specified
                                         geographic area with no overlapping of distributors within our distribution network.
                                         However, we retain the right to operate direct stores anywhere regardless of whether
                                         we have appointed distributors there.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Duration.
                                         The distribution agreements generally have an initial term of one year and are renewable
                                         at our discretion after taking into account factors such as compliance with our brand
                                         management policies and sales performance.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Distributor
                                         Pricing. Distributors agree to order our products at a discount from our suggested
                                         retail prices. The discounted wholesale prices to distributors are classified into the
                                         following three categories: provincial distributor at a discount of 65%, district distributor
                                         is 60% and single store is 52%.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Minimum
                                         Purchase Requirement. Each of our distributors is customarily expected to purchase
                                         a minimum amount of our products for each trade fair held biannually according to their
                                         present and expected distribution network. The minimum is typically RMB800,000 for each
                                         store.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Payment
                                         and Delivery.Normally, we expect distributors to pay us RMB0.5 million to RMB1 million
                                         as a deposit upon placing an order. Upon delivery of the orders, we will deduct amounts
                                         on deposit from the purchase price. For new and small district distributors, we normally
                                         require them to pay the balance before the delivery of its products. We may also accept
                                         payment on credit terms to the extent requested by distributors experiencing working
                                         capital difficulties or encouraging them to order more. The amount and duration of credit
                                         granted to each distributor will depend on its financial position and creditworthiness.
                                         We handle the arrangements for delivery of our products, but the distributors are normally
                                         expected to bear the related costs and expenses.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Return
                                         of Products. We will only accept product returns from distributors for quality reasons
                                         and only if the distributors followed our standard procedures in processing the returned
                                         products. So far, we have not experienced any product returns due to expressed quality
                                         reasons.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Retail
                                         Pricing. Other than at times when we launch promotional campaigns or adjust our strategies,
                                         distributors must adopt, and are required to procure their sub-distributors to adopt,
                                         our suggested retail prices for products. Distributors must obtain our consent before
                                         launching any distributor specific special offers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32







| | · | Brand
                                         Management. Distributors must comply with our brand management policies and store
                                         management guidelines. We may impose penalties, forfeiture of deposit, suspend supply
                                         of products and terminate the agreement in the event of any breach of such policies.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Termination.
                                         We may generally terminate the distribution agreements and seek indemnification in the
                                         event of breach by distributors. In the event of some types of breach, we may not terminate
                                         the agreement but have other remedies. For example, if a distributor fails to order all
                                         products provided for under the distributorship agreement, we may instead impose forfeiture
                                         of deposit or withhold certain benefits.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



When opening new retail stores, our distributors
conduct research on the market potential of the proposed retail sites, after which they will provide us with an application for
opening a new retail store. In reviewing applications, we consider factors including the store location, store layout, available
area, market opportunities, competitors and estimated sales. We conduct selected on-site investigations to verify applications
filed by our distributors. Our retail stores are generally located in convenient retail locations in their respective cities and
thus benefit from high volumes of pedestrian traffic.



Effective monitoring of distributors and
their retail stores is critical to our success. We have a team in our marketing, sales and distribution department to monitor
our distributors’ and their sub-distributors’ performance, who conduct on-site inspections of selected retail stores
each quarter without prior notice to ensure compliance with our store management guidelines. According to the results of our inspections,
we, from time to time, make suggestions to our distributors with respect to the opening or closure of their retail stores. Distributors
also need to submit to us their annual/ semi-annual plans to estimate their orders for the next season and their plan to improve
the performance of existing retail stores or expand by opening new retail stores. This reporting system enables us to access up-to-date
sales projections of our distributors and their sub-distributors, which reflects the overall level of retail sales of our products.
It also provides us with the expansion plan of each distributor which helps us prepare our overall development plan in a more
accurate manner.



We invite our distributors, as well as
a select number of their sub-distributors and retail store managers, to attend our sales fairs, which are held twice a year. During
the sales fairs, we discuss with our distributors and their sub-distributors the upcoming product line. Apart from participating
in two sales fairs each year, our distributors visit us from time to time and contact us as necessary, which allows us to have
access to updated market information. We also provides training for distributors and their sub-distributors in the areas of sales
techniques, customer service and product knowledge, typically prior to the launch of our new collections each year. We believe
that these investments help to improve the operations of the sales network and provide additional value-added services to retain
our distributors and their sub-distributors.



33









The following table lists by region the number of retail stores
operated by distributors and sub-distributors as of December 31, 2014:



|Location       |  | As of December 31, 2014
|-------------- |  | -----------------------
|Fujian         |  | 12                     
|Guangdong      |  | 4                      
|Guangxi        |  | 2                      
|Jiangsu        |  | 5                      
|Anhui          |  | 1                      
|Zhejiang       |  | 1                      
|Chongqing      |  | 11                     
|Inner Mongolia |  | 1                      
|Tianjin        |  | 9                      
|Beijing        |  | 3                      
|Jilin          |  | 3                      
|Hebei          |  | 6                      
|Heilongjian    |  | 6                      
|Sichuan        |  | 11                     
|Total          |  | 84                     



Pricing Policy



We sell our products to our distributors
at uniform discounts from our suggested retail prices. We have a suggested retail price policy that applies to all our stores
to help maintain brand image, ensure consistent pricing levels from region to region and prevent price competition among our distributors.
In determining our pricing strategies, we take into account market supply and demand, production cost and the prices of our competitors’
similar products. Our sales representatives collect and record the retail prices of our products sold by our retailers. We analyze
the information collected and engage in discussions with our distributors to ensure that they follow our pricing policy. See “—Franchised
Stores” above.



Production



Our production facility was originally
located in Shishi City in Fujian Province and started production in 2006. Our production facility is currently located in Taihu
City in Anhui Province, China. The facility currently has a production capacity of 2 million pieces of clothes per year and the
facility is on a leased term. This production facility mainly produces ODM products for famous sportswear producers. Our production
facility had been operating at full capacity between 2009 and 2012. In 2013, we produced about 0.46 million units at the operating
capacity of 23%, while in 2014, we produced about 0.39 million units at the operating capacity of 19.5%.



Since 2011, we have been negotiating with
the local government to acquire land use rights for land adjacent to our current facility consisting of 110,557 square meters
to build a new facility. We obtained a portion of such land use rights for two parcels of land of 7,405 square meters and 2,440
square meters on March 19, 2012 and May 28, 2012, respectively, and are in the process of obtaining approval from the relevant
government bureau for the remaining land use right transfer. The construction commenced in 2011 and is to occur in four phases:
Phase 1 consists of a 5-story dormitory located at a piece of land of approximately 7,405 square meters that we have already acquired,
which was completed in 2012. Phase 2 is to add facilities on another acquired parcel of land of approximately 2,440 square meters
with estimated annual production capacity of five million pieces of clothes, and the construction has been completed in 2015.
Phase 3 construction is to add additional facilities with estimated annual production capacity of 5 million pieces and is expected
to be finished by the end of 2015. Phase 4 will include production facilities with estimated annual production capacity of 10
million pieces, an office building, staff quarters and living facilities, and is expected to be completed by the end of 2018.
Upon completion, the new facility is expected to have a production capacity of 20 million pieces and accommodate 5,000 workers.
All of the products produced by our ODM contract manufacturers bear the brand name KBS. As of June 30, 2014, we had 6 ODM contract
manufacturers. In the years ended December 31, 2013 and 2012, we had 6 and 7 ODM contract manufacturers, respectively. Our sourcing
strategy is based upon the quality of fabrics and workmanship that our customers expect from the KBS brand. The costs of our outsourced
production amounted to approximately $23.2 million and $53.8 million for years ended December 31, 2014 and 2013, respectively,
accounting for approximately 96.6% and 94% of our total cost of sales in the respective periods.



34







As of December 31, 2014, our principal ODM contract suppliers
included the following:



|No. |                                          
|--- | -----------------------------------------
|1   | Shishi Chen Xin Sports Goods Co. Ltd.    
|2   | Shishi Bieqi Apparel Co., Ltd.           
|3   | Shishi Kai Quan Apparel Co., Ltd.        
|4   | Shishi Nanya Economic Development Co.,Ltd
|5   | Quanzhou Mou He Apparel Co., Ltd.        
|6   | Shishi Xufu Apparel Co., Ltd.            
|7   | Ju Long (Quanzhou) Industrial Co., Ltd   



We are not materially reliant on any single ODM contract supplier.



Inventory Management



We recognize that controlling the level
of inventory is important to our overall operational efficiency and cost control. Based on the purchase orders our distributors
and the department store chains place at our biannual sales fairs, we are able to anticipate the demand for our products in advance
and plan ahead for our own manufacturing and the orders we will be required to place with our ODM contract manufacturers. We generally
plan purchases of raw materials and place manufacturing orders with our ODM contract manufacturers immediately after each of our
two seasonal sales fairs, usually in May for our autumn and winter products and in October for our spring and summer products,
where we confirm sales orders with our distributors and department store chains. This enables us and our ODM contract manufacturers
to have sufficient time, ranging from two to eight weeks, to produce the products and provide our products suitable for a specific
season to our distributors and department store chains on a just-in-time basis so as to minimize our inventory levels.



Quality Control



Product quality control is a critical
aspect of our business. Our dedicated quality control team performs various quality inspection and testing procedures, including
random sample testing at different stages of our production process, to ensure that our products meet or exceed the expectations
of our consumers. We also perform routine product inspections on every batch of our products and sample testing to ensure consistent
quality of our products, including semi-finished and finished products.



We have implemented a centralized system
for procurement and inspection of raw materials and ancillary components to help ensure a stable and high quality supply. Those
materials and components that fail to meet our tests may be returned to the suppliers for replacement. Our quality control team
also carries out quality control procedures on the products produced by our ODM contract manufacturers. We conduct on-site inspections
of our ODM contract manufacturers before we enter into business relationships with them. We also send our in-house quality control
staff on-site to our ODM contract manufacturers to monitor the entire production process. The initial product inspections are
performed on-site by our staff before these products are shipped to our headquarters for further inspection and storage in our
warehouse. We also provide technical training to ODM contract manufacturers to assist them with quality control of the production
processes and inspect pre-production samples and finished products from ODM contract manufacturers. We have not encountered any
material disruptions to our business as a result of the failure of any of our ODM contract manufacturers to meet our quality standards.



In order to further improve the quality
of our products and shorten our delivery cycle, we intend to increase our control over the manufacturing process and production
cycle of our ODM contract manufacturers, primarily by requiring our ODM contract manufacturers to implement stricter and more
comprehensive quality control procedures, which cover each stage of the production process, from raw material selection and procurement
to finished products packaging and delivery. We also intend to apply more stringent standards for inspecting products manufactured
for us by our ODM contract manufacturers.



35







Marketing and Advertising



We have conducted multi-channel marketing
campaigns to advertise our products to our target customers through advertising in newspapers, magazines, the Internet, and billboards,
and organizing regular and frequent in-store marketing activities and road shows.



We have implemented strict requirements
on our distributors with respect to the display and promotion of our products to ensure consistent branding and enhance marketing
results. Our distributors are required to ensure that our marketing strategies are implemented at the retail outlets managed or
authorized by them, including displaying our products according to our specifications and using our billboard advertisements.
We also assign sales representatives to monitor the in-store displays of our products at various retail outlets on a regular basis
to help ensure that our retailers have followed our product display policies.



In the years ended December 31, 2014 and
2013, our total advertising and promotional expenses amounted to approximately $1.63 million and $2.5 million, respectively, which
accounted for approximately 2.8% and 2.5% of our revenues in the respective periods.



Competition



The menswear industry in China is a fragmented
industry. Competition mainly comes from local market players such as Exceed, Xiniya, Zuoan and Cabbeen. We believes that we differentiate
ourselves by providing more fashionable, younger-looking and leisure products, and competitive pricing without giving up the casual
feel of our products.



We compete primarily on the basis of product
design, brand recognition, operational efficiency and a low cost structure. Some of our domestic competitors have a stronger customer
base, greater resources and more industry expertise than us. However, we believe that we can continue to successfully compete
with our local competitors due to our unique product designs.



Intellectual Property



We currently have the licenses to use two registered trademarks
in the PRC.



The registered trademarks on which we have licenses are the
following:



|Trademark |  | Registration
    No. |         |  | Valid
    Term
|--------- |  | -------------------- | ------- |  | --------------
|KBS       |  |                      | 4342760 |  |               
|          |  |                      |         |  |               
|          |  |                      | 3199344 |  |               



We believe that these trademarks provide
significant value as they are important for marketing and building brand recognition. We are not aware of any third party currently
using trademarks similar to our trademarks in the PRC on the same products.



Insurance



We do not have any business liability,
interruption or litigation insurance coverage for our operations in China. Insurance companies in China offer limited business
insurance products. While business interruption insurance is available to a limited extent in China, we have determined that the
risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. Therefore, we are subject to business and product liability exposure.
See “Risk Factors—Risks Related to Our Business—We have limited insurance coverage in China and may not be able
to recover insurance proceeds if we experience uninsured losses.”



36







Regulation



Because our primary operating subsidiaries
are located in China, we are subject to China’s national and local laws detailed below. We believe that we are in material
compliance with all registrations and requirements for the issuance and maintenance of all licenses required by the governing
bodies and that all license fees and filings are current.



Foreign Invested Entity and Foreign Investment in Commerce
Sectors



The establishment, alteration, registered
capital requirement, corporate governance, and similar matters, of Hongri PRC will be governed by the Wholly Foreign Owned Enterprise
Law of the PRC, which was promulgated on April 12, 1986 and amended on October 31, 2000, and its Implementation Rules which were
promulgated on December 1990 and amended on April 12, 2001 and February 19, 2014.



In addition, on April 16, 2004, MOFCOM
issued the FICE Regulation to open up the commerce sector to foreign investment, and also to provide for various market entry
restrictions against foreign investment in companies engaged in the wholesale, retail, commissioned sale and/or franchise business,
or FICEs. FICEs are required to obtain special approvals from the national or provincial-level MOFCOM offices to conduct the foregoing
commerce business.



Product Quality



The principal legal provisions governing
product liability are set forth in the PRC Product Quality Law, which was promulgated in February 1993 by the SCNPC and amended
in July 2000 and August 2009.



The PRC Product Quality Law stipulates
the responsibilities and obligations of product sellers and producers. Violations of the PRC Product Quality Law may result in
the imposition of fines. In addition, the seller or producer may be ordered to suspend its operations, and its business license
may be revoked. There may also be criminal liability in serious cases.



According to the PRC Product Quality Law,
consumers or other victims who suffer injury or property losses due to product defects may demand compensation from the manufacturer
as well as the seller. After compensating the consumer, the seller may recover the corresponding amount from the manufacturer
if the manufacturer is responsible for the product defects, and vice versa.



Consumer Protection



The principal legal provisions for the
protection of consumer interests are set forth in the Law of the PRC on Protection of Consumer Rights and Interests, or the Consumer
Protection Law, which was promulgated in October 1993 amended in October 2013. The Consumer Protection Law sets forth standards
of behavior that businesses must observe in their dealings with consumers.



Violations of the Consumer Protection
Law may result in the imposition of fines. In addition, the violating entity may be ordered to suspend its operations, and its
business license may be revoked. There may also be criminal liability in serious cases.



According to the Consumer Protection Law,
if the legal rights and interests of a consumer are violated during the purchase or use of goods, the consumer may seek compensation
from the seller. If the manufacturer or an upstream distributor is responsible, after compensating the consumer, the seller may
recover the corresponding amount from the manufacturer or the upstream distributor. Consumers or other persons who suffer personal
injury or property damages due to defects in products may seek compensation from the manufacturer as well as the seller. After
compensating the consumer, the seller may recover the corresponding amount from the manufacturer if the manufacturer is responsible
for the product defects, and vice versa.



Trademarks



The PRC Trademark Law, adopted in 1982
and revised in 2001 and 2013, protects the proprietary rights to registered trademarks. The Trademark Office under the State Administration
of Industry and Commerce handles trademark registration and grants a term of ten years to registered trademarks and another ten
years to trademarks as requested upon expiry of the prior term. Trademark license agreements and transfer agreements must be filed
with the Trademark Office for record.



37







Dividend Distributions



Substantially all of our sales are earned
by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments
to their offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their
accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries
are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance
with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations
to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances,
or cash dividends.



We are currently subject to PRC corporate
income and other taxes at the level of our PRC operating subsidiaries, to a 5% dividend withholding tax on profits distributed
from our PRC operating subsidiaries to their HK holding company, and, if the Company is subject to US taxation, to US taxes on
amounts received in distribution from its subsidiary(ies). There is no income tax in Hong Kong, the BVI or the Marshall Islands
on amounts distributed up through the entities from the PRC, or any dividend withholding tax in HK, the BVI or the Marshall Islands.
The combined entities' obligation to pay dividends to the shareholders of the Company is calculated on an after-tax basis, and
therefore is net of the taxes.



Environmental Matters



Our facilities are subject to various
governmental regulations related to environmental protection. We use a myriad of chemicals in our operations and produce emissions
that could pose environmental risks. Our manufacturing facilities are subject to various pollution control regulations with respect
to noise, water and air pollution and the disposal of waste and hazardous materials, including, China’s Environmental Protection
Law, Law of the People’s Republic of China on Appraising of Environment Impacts, China’s Law on the Prevention and
Control of Water Pollution and its implementing rules, China’s Law on the Prevention and Control of Air Pollution and its
implementing rules, China’s Law on the Prevention and Control of Solid Waste Pollution, and China’s Law on the Prevention
and Control of Noise Pollution. We are subject to periodic inspections by local environmental protection authorities.



We did not incur material costs in environmental
compliance in fiscal years 2014 and 2013. We believe we are in material compliance with the relevant PRC environmental laws and
regulations. We are not currently subject to any pending actions alleging any violations of applicable PRC environmental laws.



Circular 37



On July 14, 2014, SAFE issued the Circular
on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Roundtrip Investment through Special Purpose
Vehicles (“Circular 37”), which replaced the Circular 75. Circular 37 requires PRC residents to register with local
branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas
investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore
assets or interests, referred to in Circular 37 as a “special purpose vehicle.” Circular 37 further requires amendment
to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease
of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event
that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC
subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from
carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability
to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements
described above could result in liability under PRC law for evasion of foreign exchange controls.



38







As we stated under “Risk factors—Risks
Related to Doing Business in China— Failure to comply with PRC regulations relating to the investment in offshore special
purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire
PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits
to us or otherwise materially adversely affect us,” we have notified substantial beneficial owners of our company who we
know are PRC residents to comply with the registration obligation. However, we may not be aware of the identities of all our beneficial
owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot assure you that all of
our PRC resident beneficial owners will comply with Circular 37. The failure of our beneficial owners who are PRC residents to
register or amend their SAFE registrations in a timely manner pursuant to Circular 37 or the failure of future beneficial owners
of our company who are PRC residents to comply with the registration procedures set forth in Circular 37 may subject such beneficial
owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration may also limit our
ability to contribute additional capital to our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries
or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.



Employee Stock Option Plans or Incentive Plans



In December 2006, the People’s Bank
of China promulgated the Administrative Measures on Individual Foreign Exchange, or the Individual Foreign Exchange Regulations,
setting forth the requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under the current
account and the capital account. Pursuant to Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed
companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore
special purpose companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic
Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by
SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas stock exchanges
under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which
may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct
the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants, and (iii)
retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares
or interests and funds transfers. We have not granted any incentive shares or share options to our PRC citizen employees; however,
if we do so in the future, our PRC citizen employees who are granted restricted shares or share options will be subject to these
rules.



M&A Rule



On August 8, 2006, six PRC regulatory
agencies promulgated the Foreign M&A Rule, which was later amended in June 2009.



The Foreign M&A Rule, among other
things, govern the approval process by which a PRC company may participate in an acquisition of assets or equity interests by
foreign investors. The Foreign M&A Rule allow PRC government agencies to assess the economic terms of a business combination
transaction. Parties to a business combination transaction may have to submit to MOFCOM and other relevant government agencies
an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval,
depending on the structure of the transaction. The Foreign M&A Rule also prohibit a transaction at an acquisition price obviously
lower than the appraised value of the PRC business or assets and in certain transaction structures, requires that consideration
must be paid within defined periods, generally not in excess of a year. The Foreign M&A Rule also limit our ability to negotiate
various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions,
indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures
involving trusts, nominees and similar entities are prohibited.



In addition, the Foreign M&A Rule
regulates “Round-trip Investments.” For further information, please see the discussion under “Risk Factors –
Risks Related to Doing Business in China – our business and financial performance may be materially adversely affected if
the PRC regulatory authorities determine that our acquisition of Hongri PRC constitutes a Round-trip Investment without MOFCOM
approval.”



C. Organizational Structure



See “—A. History and Development
of the Company—Corporate Structure” above for details of our current organizational structure.



39







D. Property, Plants and Equipment



Our company
has established a nationwide distribution network covering 17 of China’s 32 provinces and centrally administered municipalities.
As of December 31, 2014, this network was comprised of 18 corporate stores owned and operated and 84 franchised stores operated
by 23 third-party distributors or their sub-distributors.



Relocated from Shishi City, Fujian, China
in March 2011, our company’s production facility is currently located in Taihu City in Anhui Province, China. The facility
has a production capacity of 2 million pieces per year and is on a year-on-year renewable lease basis. By relocating from the
coastal area to Anhui Province, our new facility takes advantage of lower labor costs and a more stable labor supply. We manufacture
a variety of menswear products, including, jeans, shirts, suits and socks. Because of its variety and complexity in the production
process, these products require special sewing machines and workmanship, which we currently do not possess. In addition, as of
December 31, 2014, we had only 134 employees employed in production operations and therefore did not have a sufficient skilled
work force to produce our branded products at our own facility. As a result, the company is not yet able to produce KBS branded
products and has outsourced its KBS branded product manufacturing to other established ODM manufacturers. The company has completed
building a new factory for the second phase at the end of 2014. This second phase has an annual production capacity of 5 million
pieces if we purchase enough production facility in year 2015. We expect to be able to produce at least 60% of our own branded
products in terms of pieces (accounting for approximately 76% of revenue) upon completion of the second phase. We do not expect
to produce jeans, shirts and suits and other accessories in the short term, which amounted to 40% by pieces (accounting for approximately
24% of revenue) in 2014. For the products it does not manufacture, we will still uses a reliable and extensive network of outsource
manufacturers in the Fujian and Zhejiang regions.



Our company
is acquiring land adjacent to its current facility consisting of 110,557 square meters to build a new facility. We obtained a
portion of such land use rights for two pieces of land of 7,405 square meters and 2,440 square meters on March 19, 2012 and May
28, 2012, with the book value of RMB 3,570,484 and RMB 957,331 respectively. And we are in the process of obtaining approval from
the relevant government bureau for the remaining land use right transfer. Once completed, our total production capacity of the
facility is expected to increase to 20 million pieces per year from the current capacity of 2 million pieces per year. Due to
the local government’s need for additional time to conclude negotiations with local residents over appropriate resettlement
terms, the timeline of the construction of the adjacent facility has been delayed. We will be in a better position to schedule
our construction plan once we acquires the land use right, but we currently expect the construction of the new production facilities
to be completed by 2018.



We lease the premises for our 18 corporate
stores. Seven of these stores are located in shopping malls. A further ten stores are in other locations. We have undertaken various
measures to verify the lessors’ rights to the property leased to us in respect of its stores. In China, all land is owned
by the State or other governmental bodies, and “ownership” is generally evidenced by a land use rights certificate.
We has requested and received copies of land use rights certificates for all seven stores located in shopping malls and two stores
located in other places. The remaining eight stores are located in rural areas where land use rights are held collectively by
villages, where records regarding the ownership of land use rights are frequently not kept. In these cases, the company has confirmed
our ability to lease the stores through communications with village authorities, and has reviewed electricity and water bills
to confirm utilities are being paid by the parties leasing the premises to us. Based on the results of these efforts, we believes
the risk of third party claims against our leases of these stores is relatively small and the measures taken by our company are
sufficient to verify the land use rights for all of its stores. In addition, the property used as our head office and corporate
store is leased from a related party, whose ownership of the property has been verified by our company.



We paid a total of RMB 3,148,000 and RMB
3,106,000 as rental fees for the 18 corporate stores in fiscal years 2013 and 2014, respectively. The total area of these 18 corporate
stores is 1972 square meters. The sales of each store and its location are shown below:



40







|Area                   |  | Sales in fiscal year 2013( USD) |            |  | Sales in fiscal year 2014(USD) | 
|---------------------- |  | ------------------------------- | ---------- |  | ------------------------------ | 
|shop at shishi factory |  |                                 | 1,403,005  |  |                                | 
|Jinjiang Hankou        |  |                                 | 584,186    |  |                                | 
|Shishi zhixiang        |  |                                 | 502,989    |  |                                | 
|Shishi Yongning        |  |                                 | 782,524    |  |                                | 
|Shishi Jinshang        |  |                                 | 424,041    |  |                                | 
|Jinjiang Longhu        |  |                                 | 694,050    |  |                                | 
|Nanan                  |  |                                 | 809,919    |  |                                | 
|Wukeng                 |  |                                 | 751,392    |  |                                | 
|Yinglin                |  |                                 | 758,285    |  |                                | 
|Gouxi                  |  |                                 | 838,716    |  |                                | 
|Xiamen Wanda shop      |  |                                 | 587,415    |  |                                | 
|Xingjiang Dongshi      |  |                                 | 759,142    |  |                                | 
|Zhangzhou Wanda        |  |                                 | 738,115    |  |                                | 
|Fuzhou Shimao          |  |                                 | 1,170,975  |  |                                | 
|Putian Wanda Shop      |  |                                 | 1,260,334  |  |                                | 
|Quanzhou Dayang        |  |                                 | 405,366    |  |                                | 
|Quanzhou Wanda         |  |                                 | 286,156    |  |                                | 
|Ningde Wanda           |  |                                 | 84,310     |  |                                | 
|Total:                 |  |                                 | 12,840,916 |  |                                | 



|ITEM 4A. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------



Not required.



|ITEM 5. | OPERATING AND FINANCIAL
    REVIEW AND PROSPECTS
|------- | ------------------------------------------------



A. Operating Results



We are engaged in the design, development,
marketing and sale of casual menswear in China, including apparel and accessories, which we market under the KBS brand. The KBS
brand was developed in 2006. Before 2012, we were engaged in the design, development, marketing and sale of fashion sportswear
in China. Since our products feature a unique and stylish design that is more fashionable than traditional sportswear, as well
as quality fabrics and materials and the sportswear market was becoming more and more competitive, in late 2011 we turned our
focus on casual menswear market which has higher profit margin. KBS’s apparel products include cotton and down jackets,
sweaters, shirts, T-shirts, Jeans and trousers. Accessories include shoes, bags, belts and caps. In 2014, the suggested retail
prices of KBS’s products ranged from RMB 169 to RMB 1,699 for its apparel products and RMB 15 to RMB 999 for its accessory
products. KBS holds new products launch events twice every year, one in spring and the other in autumn. Since 2006, we have launched
999 collections of new products each year with a different theme to highlight the current trends for the season. KBS’s marketing
concept is “French origin, Korean design and made for Chinese.” KBS’s customers are male middle-class consumers
in the 20-40 age range, primarily located in tier two and tier three cities in China. The company has adopted “KBS”
as a uniform brand name, which stands for “Keep Best Style”, and KBS are designed by us for a uniform look and feel
that fits our brand image, with in-store displays that accentuate the quality and style of our products across all stores in our
distribution network and on all products sold in those stores. We believe that the KBS brand has become a recognized brand name
in the cities where their products are sold.



We have established a nationwide distribution
network covering 17 of China’s 32 provinces and centrally administered municipalities. As of December 31, 2014, this network
was comprised of 18 corporate stores owned and operated and 84 franchised stores operated by 23 third-party distributors or their
sub-distributors. The number of stores has grown significantly in recent years, from 1 corporate store and 7 franchised stores
as of December 31, 2006 to 31 corporate stores as of December 31, 2012 and 96 franchised stores as of December 31, 2013, and decreased
to 84 stores as of December 31, 2014. In 2014, the distributors closed 12 franchised stores because of the decreased sales demand
significantly reduced profitability. The number of our corporate stores remained the same in year 2014, and our original strategy
is to attract more distributors to join our franchised model. Because of the economic slowdown in China and fierce competition
from our competitors and online stores sales from franchised stores went down compared to fiscal year 2013. Our management believes
that we are well positioned to develop more ODM and online sales directly to customers and consumers within 2015. Excluding sales
from the franchised stores and corporate stores, the Company expects the portion of other sale including ODM and wholesale to
online or other shops will account for more than 20 percent of total sales in 2015.



41







KBS acts as an original design manufacturer,
or ODM, upon request. Income from such services accounted for 3.47%, 2.36% and 3.90% of revenue for the years ended December 31,
2014, 2013 and 2012, respectively.



Relocated from Shishi City, Fujian, China
in March 2011, KBS’s production facility is currently located in Taihu City in Anhui Province, China. The facility has a
production capacity of 2 million pieces per year and is on a year-on-year renewable lease basis. The company believes that the
shortage of labor and rising wage expectations in China, especially in the coastal area, could have a material impact on our operations
as well as its suppliers’ cost of manufacturing. By relocating from the coastal area to inland Anhui Province, Our new facility
takes advantage of lower labor costs and a more stable labor supply. Since the company’s original production team was not
ready to produce the new style KBS products, KBS has outsourced its product manufacturing to other established ODM manufacturers.
As such, KBS’s own production facility in Taihu mainly takes ODM orders from other sportswear companies, like Xtep. KBS
is acquiring land adjacent to its current facility consisting of 110,557 square meters to build a new facility. We obtained a
portion of such land use rights for two pieces of land of 7,405 square meters and 2,440 square meters on March 19, 2012 and May
28, 2012, respectively and is in the process of obtaining approval from the relevant government bureau for the remaining land
use right transfer. Once completed, total production capacity of the facility is expected increase to 20 million pieces per year
from the current capacity of 2 million pieces per year. Due to the local government’s need for additional time to conclude
negotiations with local residents over appropriate resettlement terms, the timeline of the construction of the adjacent facility
has been delayed. The company will schedule its construction plan once it acquires the land use right and expects the construction
of new production facilities to be completed by 2018. Due to the local government’s need for additional time to conclude
negotiations with local residents over appropriate resettlement terms, the timeline of the construction of the adjacent facility
has been delayed. We will be in a better position to schedule our construction plan once we acquire the land use right, but we
currently expect the construction of the new production facilities to be completed by 2018. We do not necessarily rely on our
own production facility to satisfy the demand of our products as we may outsource some or all of the production work to various
ODM manufacturers in China. At the same time, by building our own factory will have the ability to maintain control over our production
process in the longer term.



Principal Factors Affecting Financial Performance



KBS’s operating results are primarily affected by the
following factors:



| | · | Growth
of China’s menswear industry. With approximately one-fifth of the world’s population and a fast-growing gross
domestic product, China represents a significant growth opportunity for a wide variety of retail goods, including apparel. The
enhanced living standards and increased disposable income that has resulted from the vibrant economic growth has driven the rapid
development of the men’s apparel market in China in recent years. China is currently one of the world’s largest men’s
apparel markets and it is larger than the U.S. market based on retail sales of men’s apparel products in 2011. As a leading
provider of casual menswear in China, KBS believes they are well positioned to capitalize on the favorable economic, demographic
and industry trends in this sector.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Brand recognition.
    KBS derives all of KBS’s revenues from sales of the KBS branded products in China, and KBS’s success depends on
    the market perception and acceptance of the KBS brand and the culture, lifestyle and images associated with this brand. Market
    acceptance of KBS’s brand may affect the selling prices and market demand for KBS’s products, the profit margin
    of KBS can achieve, and KBS’s ability to grow.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



42







| | · | Ratio of franchised
    stores to corporate stores in KBS’s sales network.The ratio of franchised stores to corporate stores
    in terms of floor area in KBS’s sales network affects KBS’s results of operations in a given period. The franchised
    stores operated by KBS’s distributors have been and will continue to be the main contributor to KBS’s revenue
    for the foreseeable future. Under the distribution business model, KBS sells directly to KBS’s distributors and recognize
    revenues upon delivery of KBS’s products to them. Such distribution network has enabled KBS to accelerate sales growth
    at a much lower cost than opening direct stores and has limited KBS’s inventory and sales risks. Corporate stores operated
    by us, despite incurring more significant capital expenditures as compared with franchised stores, allow KBS more control
    over our brand and the consumer’s shopping experience, which are important factors for the overall success of KBS’s
    business. In addition, KBS’s corporate store sales generally have a higher gross profit margin than sales to distributors
    because KBS is able to sell the products at retail prices directly to the end-consumers and because KBS recognizes expenses
    relating to KBS’s corporate stores as selling and distribution expenses. Therefore, the ratio of franchised stores to
    corporate stores in KBS’s sales network will affect KBS’s gross profit margin.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Product offering
    and pricing. KBS’s success depends on KBS’s ability to identify, originate and define menswear trends
    as well as to anticipate, gauge and react to changing consumer demands for menswear in a timely manner. Most of KBS’s
    products are subject to changing consumer preferences and fashion trends that cannot be predicted with certainty. KBS’s
    new products may not receive consumer acceptance as consumer preferences could shift rapidly, and KBS’s future success
    depends in part on KBS’s ability to anticipate and respond to these changes.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Fluctuations in raw
    material supply and prices.The per unit cost of producing KBS’s products depends on the supply and price
    of raw materials, particularly fabrics such as cotton, wool and polyester, which have experienced volatility in past years.
    Increases in the price of raw materials would negatively impact KBS’s gross margins if KBS is not able to offset such
    price increases through increases in KBS’s selling price or changes in product offerings and mix.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



KBS believes that the global economic
crisis and macroeconomic trends could continue to put significant pressure on consumer spending in most markets worldwide, so
KBS’s future performance remains subject to the inherent uncertainty presented by volatile macroeconomic conditions. These
conditions could continue to affect Target’s business in a number of direct and indirect ways, including lower revenues
from decreased product demand, compressed margins and/or increased costs, lack of credit availability and business disruptions
due to difficulties experienced by suppliers and customers. KBS strives to position ourselves, from both a financial and an operational
perspective, as a company that can react quickly and adapt effectively to evolving macroeconomic conditions, fluctuations in product
demand and changes in liquidity and capital demands.



Financial Statement Presentation



Revenue. During the periods covered by this section,
we generated revenue from sales of our menswear products.



Cost of sales. During the periods
covered by this section, our cost of sales primarily consisted of the costs of our outsourcing cost, raw materials, labor and
overhead. We did not have any inward or outward freight charges as these charges are borne by our distributors and suppliers.



Gross profit and gross margin.
For the periods covered by this section, our gross profit is equal to the difference between our net sales and cost of sales.
Our gross margin is equal to the gross profit divided by net sales. Our gross margin may not be comparable to those of other retail
entities since some retail entities include all of their distribution network costs in cost of sales and others, like us, include
these expenses in another statement of operations line item.



Administrative expenses. For the
periods covered by this section, general and administrative expenses consisted primarily of compensation and benefits to our general
management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection
with general operations.



Selling expenses. For the periods
covered by this section, our selling and marketing expenses consisted primarily of compensation and benefits to our sales and
marketing staff, store rent, business travel, coordination with distributor marketing and promotions, transportation costs and
other sales related costs.



43







Comparison of Fiscal Years Ended December 31, 2014 and
2013 (on a pro forma basis)



The
following table sets forth key components of our results of operations, on a pro forma basis as if the Share Exchange occurred
at the beginning of 2014, for the years ended December 31, 2014 and 2013, both in U.S. dollars and as a percentage of our revenue.



|                                            |  | Year ended December 31, 2014 |             |  | Year ended December 31, 2013 | 
|------------------------------------------- |  | ---------------------------- | ----------- |  | ---------------------------- | 
|                                            |  | Amount                       |             |  | % of Sales                   | 
|Revenue                                     |  |                              | 58,832,481  |  |                              | 
|Cost of sales                               |  |                              | -39,416,973 |  |                              | 
|Gross profit                                |  |                              | 19,415,508  |  |                              | 
|Operating expenses                          |  |                              |             |  |                              | 
|Distribution and selling expenses           |  |                              | -7,191,606  |  |                              | 
|Administrative expenses                     |  |                              | -4,649,229  |  |                              | 
|Total operating expenses                    |  |                              | -11,840,835 |  |                              | 
|Other income                                |  |                              | 252,748     |  |                              | 
|Other gains and losses                      |  |                              | -2,036,508  |  |                              | 
|Profit from operations                      |  |                              | 5,790,913   |  |                              | 
|Finance costs                               |  |                              | -23,630     |  |                              | 
|Change in fair value of warrant liabilities |  |                              | 3,417,053   |  |                              | 
|Profit before tax                           |  |                              | 9,184,336   |  |                              | 
|Income tax                                  |  |                              | -2,307,354  |  |                              | 
|Profit for the year                         |  |                              | 6,876,982   |  |                              | 



A breakdown of revenue, percentage of
revenue and percentage of gross margin by segment is as follows:



|By business                 |  | Distribution network |            |   | Corporate stores |  |            | ODM        |  |  | Consolidated |  
|--------------------------- |  | -------------------- | ---------- | - | ---------------- |  | ---------- | ---------- |  |  | ------------ | -
|                            |  | Year ended           |            |   | Year ended       |  |            | Year ended |  |  | Year ended   |  
|                            |  | December             |            |   | December         |  |            | December   |  |  | December     |  
|                            |  | 31, 2014             |            |   | 31, 2013         |  |            | 31, 2014   |  |  | 31, 2013     |  
|Sales to external customers |  |                      | 40,654,657 |   |                  |  | 78,111,563 |            |  |  | 16,134,537   |  
|Segment revenue             |  |                      | 40,654,657 |   |                  |  | 78,111,563 |            |  |  | 16,134,537   |  
|% of Sales                  |  |                      | 69         | % |                  |  | 78         | %          |  |  | 27           | %
|Segment gross margins       |  |                      | 12,382,562 |   |                  |  | 28,162,776 |            |  |  | 6,327,728    |  
|Gross margin rate           |  |                      | 30         | % |                  |  | 36         | %          |  |  | 39           | %



Segment sales



For the year ended December 31 2014, total
revenue reached approximately $58.8 million, decreasing 40.1% from $99.5 million for year ended December 31, 2014. The Company
reports financial and operating results in three segments: distributor network, corporate stores and ODM.



Distributor Network —Revenue
from the Company's distributor network reached approximately $40.6 million for year ended December 31, 2014, a decrease of 48%
from $78.1 million in the prior year. The distributor segment accounted for 69% of the total revenue, compared to 78% during last
year. Gross profit margin for the Company's distributor network decreased to 30% from 36% for last year. The gross profit decreased
due to the reduction of unit price in year 2014, which order to assist our distributor’s to improve their sales. Revenue
from distribution sales increased in year 2013 and decreased in year 2014, some distributors’ sales went down in year 2014
because they bought in too many stock at the end of year 2013, the stock was not sold well and the distributors was unable to
repay all the debts to us, so we suspended to provide new product before the distributors return the debt to the company.



The Company's distributor network consisted
of 26 distributors in 17 provinces during the year of 2014. Most of these distributors, either directly or through their sub-distributors,
operate KBS-branded stores. As of December 31, 2014, distributor operated a total of 84 KBS-branded stores, primarily in second
and third tier cities. KBS products distributed to the fourth and fifth tier cities are primarily sold in multi-branded department
stores.



Corporate Stores —Total
revenue for corporate stores for the fiscal year 2014 reached approximately $16.1 million, compared to $19.1 million during the
same period last year. As of December 31, 2014, the Company operated 18 corporate stores, all located in Fujian, maintaining the
same number of stores as of December 31, 2013.



44







The corporate stores segment contributed
27% of total revenue, compared to 19% in year 2013. Gross profit margin for the Company's corporate stores was 39%, compared to
70% in year 2013. This margin compression is primarily due to store composition as more of the Company's remaining corporate stores
are located in shopping malls which tend to be more promotional than freestanding stores. Additionally, we reduced the sale price
of our goods in corporate stores to stimulate sales.



ODM —The ODM segment is
comprised of products that are designed and manufactured by the Company and then rebranded and sold by other firms. Revenue from
the ODM segment decreased by 13.2% to $2.04 million for the year ended December 31, 2014, compared to $2.3 million during the
same period last year. Gross profit margin increased to 35% from 31.9% of year 2013.



Cost of sales and gross profit rate



Cost of sales was $39.4 million for the
year of 2014, decreased by 31% from $57.3 million in the prior year period. Gross profit for year 2014 was $19.4 million, compared
to $42.1 million in year 2013. Due to a higher percentage of sales from franchised stores and the decreased unit price to improve
sales in year 2014, the gross profit rate decreased from 42% in year 2013 to 33% in year 2014. The company also launched a promotional
event to sell at lower prices to attract more customers, which made the gross profit rate lower compared to previous year.



Administrative expenses



Administrative expenses increased by $2.5
million, or 109%, to $4.7 million for the year ended December 31, 2014, from $2.2 million for the prior year period. The increase
of $2.5 million was mainly due to the non-recurring legal and professional fees from the Share Exchange and additional expenses
incurred on outsourcing design of products.



Distribution and selling expenses



Selling and distribution expenses increased
by $0.95 million, or 15.2%, to $7.19 million for the year ended December 31, 2014, from $6.24 million for the prior year period.
Selling expenses accounted for 12% of total revenue, compared to 6% for the same period last year. The increase in selling expenses
was mainly due to the increase in advertisement expense of about $1.63 million for 2014.



Other gains and losses



Other gains and losses decreased by $2.13
million, or 216%, to -$2.04 million for the year ended December 31, 2014, from $0.09 million for the prior year period. The increased
loss was primary attributable to the additional provision on bad debt from a client.



Change in fair value of warrant liabilities



We currently have 5,918,000 warrants outstanding.
The fair value of outstanding warrants decreased to $15,369 as of December 31, 2014 from $3,432,440 as of December 31, 2013. Change
in fair value of warrant liability increased to $3.4 million for the year ended December 31, 2014, from $0.04 million for year
2013.



Profit for the year



Profit for the year was $6.88 million
for the year ended December 31, 2014, compared to $25.42 million for the same period in 2013, representing a decrease of $18.54
million or 72% in year 2014. Net margin was 12% for the year ended December 31, 2014, compared to 25.9% during the same period
last year.



Profit for the year decreased due to some
reasons: (1) the unit selling price cut down make the gross profit decrease,(2) the expense on corporate shops keep same with
2013 but the revenue from corporate shops decreased, (3) the administrative expenses and distribution and selling expenses still
keep high portion of revenue. (4) the promotion sales did not contribute profit for the company.



45







Earning per fully diluted share was $0.27
for the year ended December 31 of 2014, compared to $1.00 in the prior year period.



B. Liquidity
and Capital Resources



As of December 31, 2014, we had cash and
cash equivalents of $20.6 million. To date, we have financed our operations primarily through net cash flow from operations and
the proceeds from the Share Exchange. Our cash flows are driven by key performance indicators including the number of orders placed
by distributors, number of outlets that each distributor operates, the pricing of our products, and sales of our corporate stores.
Currently there is only minimal cash held by offshore subsidiaries and there is no need for these subsidiaries to transfer cash
to Hongri PRC.



The following table provides detailed
information about our net cash flow for all financial statement periods presented in this prospectus:



|                                                     |  | Cash Flow                     |            
|---------------------------------------------------- |  | ----------------------------- | -----------
|                                                     |  | (all amounts in U.S. dollars) |            
|                                                     |  | Fiscal Year Ended             |            
|                                                     |  | 31-Dec                        |            
|                                                     |  | 2014                          |            
|Net cash provided by (used in) operating activities  |  | $                             | -3,336,527 
|Net cash provided by (used in) investing activities  |  |                               | -17,538,013
|Net cash provided by (used in) financing activities  |  |                               | -1,991,843 
|Net increase (decrease) in cash and cash equivalents |  |                               | -22,866,383
|Effects of exchange rate change in cash              |  |                               | -229,122   
|Cash and cash equivalents at beginning of the period |  |                               | 43,700,087 
|Cash and cash equivalent at end of the period        |  | $                             | 20,604,583 



Operating Activities



Net cash used in operating activities
was $3.3 million in the year ended December 31, 2014, compared with $15.9 million provided by operating activities in 2013. This
change was mainly due to the increase of trade receivables of $11 million as the Company had account receivables in an amount
of $13 million as of December 31, 2013 which have not been collected during 2014. The Company intends to enhance its credit control
policy of its distributors.



Investing Activities



Net cash used in investing activities
in the year ended December 31, 2014 was $17 million, compared with $11 million net cash used in investing activities in the same
period last year. The increase in net cash used in investing activities was mainly due to payments for construction cost of our
production facility in Taihu City in Anhui Province, China.. The prepaid amount of $ 15.7 million for the construction of our
production facility was made against the phase 2 and 3 of the Taihu facilities construction. Related payment for the Taihu factory
was $11.2 million in 2013. In addition, in 2014, the Company spent an additional $1.9 million purchasing new plant and equipment.



46







Financing Activities



Net cash used in financing activities
in fiscal year 2014 was $1.99 million, as compared to $1.0 million in fiscal year 2013. The decrease of net cash provided by financing
activities was mainly attributable to repayment of bank loans of $1.97 million raised by our Anhui facilities for its own working
capital purpose. The company made interest payments of $23,630 in fiscal year 2014 as compared with $116,421 in fiscal year 2013



Accounts payable due to KBS International



The accounts payable of $5.3 million due
to KBS International from Hongri International has been transferred to reserves of Hongri International with KBS' consent in connection
with the Acquisition and dissolution of KBS.



Loans, Other Commitments, Contingencies



As of December 31, 2014, we do not have
any bank loans. We may, however, in the future, require additional cash resources due to changing business conditions, implementation
of our strategy to expand our business or other investments or acquisitions we may decide to pursue. If our own financial resources
are insufficient to satisfy the capital requirements, we may seek to sell additional equity or debt securities or obtain additional
credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness
would result in increased debt service obligations and could require us to agree to operating and financial covenants that would
restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us
to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could
harm our overall business prospects.



C. Research and Development, Patents and Licenses, Etc.



Our industry is characterized by
rapid technological change, evolving industry standards and changing customer demands. These conditions require continuous
expenditures on product research and development to enhance existing products, create new products and avoid product
obsolescence. For the years ended December 31, 2014 and 2013, our researched and development expenses amounted to $0.57
million and $0.07 million, respectively, accounting for approximately 0.97% and 0.07%, of our total revenue, respectively.
These expenses consist primarily of outsourced design service fee and salary expenses of research and design department.



D. Trend Information



Other than as disclosed elsewhere in this
annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2014
that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital
resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results
or financial conditions.



E. Off Balance Sheet Arrangements



We do not have any off balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment
in our securities.



F.
Tabular Disclosure of Contractual Obligations



The table below shows our material contractual obligations
as of December 31, 2014.



|                                        |  | Payments Due by Period |           
|--------------------------------------- |  | ---------------------- | ----------
|                                        |  | Less than              |           
|Contractual Obligations                 |  | 1 year                 |           
|Construction Obligations                |  | $                      | 72,111,518
|Operating Lease Obligations             |  |                        | 509,206   
|Purchase of finished goods and material |  |                        |           
|Total                                   |  | $                      | 72,620,724



47







Anhui Factory Construction Contract



On November 20, 2010, Hongri PRC entered
into an agreement with a third party for the construction of a new plant with a total size of 110,557 square meters, at Taihu
City, Anhui at a consideration of RMB 690 million (equivalent to approximately $112 million). This is the frame contract for the
construction of Anhui factory and round estimation , until December 31,2014 we already paid $ 41.11 million in total on the phase
1, 2, 3 of construction based on detailed phase contract, the balance of $ 72 million just for reference, the balance of cost
on construction of the Anui factory need to be based on the on time budget on every phase. The capital on construction most will
come from the cash balance on the account as at December 31, 2014 and the new profit of following year.



Anhui Land Use Right Acquisition Contract



On September 2, 2010, Hongri PRC entered
into an agreement with a third party to acquire a land use right in relation to the development of factories in Taihu City, Anhui
Province, at a total consideration of RMB 43 million (approximately $6.3 million). Full consideration was paid in September 2010.
We obtained the land use right of two pieces of land of 7,405 square meter and 2,440 square meter on March 19, 2012 and May 28,
2012 respectively and is in the process of obtaining approval from the relevant government bureau for the remaining land use right
transfer.



Except as set forth above, we have no other material long-term
debt, capital or operating lease or fixed purchase obligations.



Inflation



Inflation and changing prices have not
had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business
in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and the apparel industry
and continually maintain effective cost controls in operations.



Seasonality



Our business, like that of many retailers,
is seasonal. Historically, we have realized more of our revenue and earnings in the fourth quarter, which includes the majority
of the holiday shopping season, than in any other fiscal quarter.



Critical Accounting Policies



The preparation of financial statements
is in conformity with IFRS as issued by the IASB. It requires the Company’s management to make assumptions, estimates and
judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies,
if any. The Company has identified certain accounting policies that are significant to the preparation of Company’s financial
statements. These accounting policies are important for an understanding of the Company’s financial condition and results
of operation. Critical accounting policies are those that are most important to the portrayal of the Company’s financial
condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result
of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the
possibility that future events affecting the estimate may differ significantly from management’s current judgments. The
Company believes the following critical accounting policies involve the most significant estimates and judgments used in the preparation
of the Company’s financial statements.



Revenue Recognition



We recognize our revenue when the amount
of revenue can be reliably measured, it is probable that future economic benefits will flow to us and when specific criteria have
been met for each of our activities as described below.



Sales of goods—wholesaleRevenues
are recognized upon delivery of products to distributors, and when there is no unfulfilled obligation that could affect acceptance
of products by distributors. Delivery costs do not occur until the products have been delivered to the specific location and the
risk of loss has been transferred to distributors. Delivery costs incurred by us are recorded in selling and distribution expenses.



48







Revenues are recorded based on the price
specified in the sales contracts, net of value-added tax, and sales rebates and returns estimated at the time of sale. Provisions
for estimated sales return were estimated at nil 2013 and 2014. Sales rebates are estimated based on anticipated annual purchases
and the annual rebates are settled by offsetting the accounts receivables from each of these distributors at the end of the year.
We accept product returns from distributors for quality reasons and only if the distributors follow our procedures in processing
the returned products. Accumulated experience is used to estimate and provide for returns. No element of financing is deemed present
as sales are made with a credit term of 240 days for our distributors, which is consistent with market practice. Credit terms
were 90 days from 2013 to 2014.



Although none of the distributor agreements
contained or contains any right of return provisions or other similar rights, we implemented an initiative in 2014 to buyback
certain excessive inventory from certain distributors so that the relationship with authorized retailers and distributors can
be developed in a healthier long-term manner.



Sales of goods—retailwe
have 18 corporate shops as at December 31, 2014. Revenues generated from these corporate shops are recognized at the time of register
receipt. Retail sales returns within three days will be accepted only for quality reasons. Accumulated experience is used to estimate
and provide for such returns at the time of sale. We do not operate any retail customer loyalty programs. Loyalty programs may
be offered by distributors and authorized retailers, who bear all related program costs.



Interest incomeInterest income
is recognized using the effective interest method.



Impairment of Trade and Other Receivables



We assess the collectability of trade
and other receivables. Such assessment is based on the credit history of our distributors and current market conditions. We reassess
the impairment losses at each statement of financial position date and make provisions, if necessary.



Net Realizable Value of Inventories



Net realizable value of inventories is
the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses. These
estimates are based on current market conditions and the historical expense of selling products of a similar nature. Changes in
selling price could be significant as a result of changed competitive conditions.



Provision for Estimated Sales Return



We reassess the provision for estimated
sales return at each statement of financial position date based on current market conditions and adjust provision, if necessary.



Provision for Liability



We reassess the provision for constructive
liability at each statement of financial position date based on current market conditions and adjust provision, if necessary.



Income Tax



We are required to pay income taxes in
the PRC. In order to determine the provision for income taxes, we have to exercise critical judgment. During the ordinary course
of our business, there may be ultimate determinations on income taxes that contain uncertainty. We recognize liabilities for expected
taxes based on our estimates of whether additional taxes may be due. When the final tax outcome of these matters is different
from the amounts that were initially recognized, such differences will impact the current and deferred tax provisions in the period
in which such determination is made.



G. Safe Harbor



See “Introductory Notes—Forward-Looking Information.”



49







|ITEM 6. | DIRECTORS, SENIOR MANAGEMENT
    AND EMPLOYEES
|------- | ----------------------------------------------



A. Directors and Senior Management



Our current directors and executive officers, their ages and
positions are as follows:



|NAME                  |  | AGE |  | POSITION                                      
|--------------------- |  | --- |  | ----------------------------------------------
|                      |  |     |  |                                               
|Keyan Yan             |  | 43  |  | Chairman, Director and Chief Executive Officer
|                      |  |     |  |                                               
|Themis Kalapotharakos |  | 39  |  | Executive Director                            
|                      |  |     |  |                                               
|Lixia Tu              |  | 34  |  | Chief Financial Officer                       
|                      |  |     |  |                                               
|John Sano             |  | 44  |  | Independent Director                          
|                      |  |     |  |                                               
|Matthew C. Los        |  | 49  |  | Independent Director                          



Mr. Keyan Yan. Mr. Yan has been
the Chairman of our board of directors and Chief Executive Officer since the closing of the Share Exchange on August 1, 2014.
Mr. Yan has over 15 years of senior management experience. He served as Chairman and Chief Executive Officer of KBS International
between March 2011 and August 2014. From 1994 to present, Mr. Yan has served as general manager of Hongri PRC. Prior to joining
us, Mr. Yan served as workshop manager, production manager and marketing manager of Zhenshi Knitting Factory in Shishi, China
from 1989-1994. Mr. Yan obtained a certificate of corporate management from Xiamen University in 1992.



Ms. LixiaTu.Ms. Tu became the
Company’s Chief Financial Officer on June 25, 2015. Ms. Tu has more than eight years of accounting and audit experience,
familiar with IFRS, US GAAP, Sarbanes-Oxley and the compliance requirements of SEC. After she worked as a project manager at BDO
China Fu Jian SHU LUN PAN Certified Public Accountants for four years, she worked as a CFO or a financial consultant for some
other companies. Ms. Tu holds a Master’s degree in professional accounting from the University of Deakin in Australia. Ms.
Tu is also a member of the Chartered Association of Certified Accountants.



Mr. Themis
Kalapotharakos.Mr. Kalapotharakos became our executive director on June 15, 2015. Mr. Kalapotharakos has acquired a range
of expertise of a wide spectrum of business activities. He has extensive high-level experience at the Shipping, Trading and Finance
industries where he has founded, developed and operated various businesses starting from the ground up. His roles involved
regular communication and coordination with investors, financial
institutions, capital market authorities, custodian and administrative banks, auditors and legal counsel. He holds a Bachelor’s
degree from Cardiff University and an MSc Degree from Cass usiness School in the UK.



John
Sano.Mr. Sano has been an independent director of the Company since the closing of the Share Exchange on August 1, 2014.Mr. Sano has over 20 years of experience in apparel & home furnishings concept, design,
sourcing, production, and e-commerce. He has extensive experience in all aspects of the retail clothing supply chain, from conceptualization
to final production and distribution. Mr. Sano has also advised and worked closely with numerous top brands in the US. He has
been General Director of Sano Design Services since 2002. Mr. Sano has an associate’s degree in interior design from Traphagen
School of Design.



Mr. Matthew C. Los.Mr. Los became
our director on October 8, 2015. Mr. Los has acquired a range of expertise of a wide spectrum of business activities. He has over
20 years’ experience at high level management, and has founded, developed and operated various businesses in the shipping,
energy, telecommunications real estate industries starting from the ground up. He also has experience in the capital markets
and was the CEO of Aquasition Corp., the predecessor of the Company, prior to the Share Exchange. Mr. Los has a BSc in Mechanical
Engineering and Computer Aided Design from University of Westminster in the UK.



No family relationship exists between
any of the persons named above.



50







B. Compensation



In 2014, we paid an aggregate of approximately
$306,000 in cash as compensation to our directors and senior management as a group. We do not set aside or accrue any amounts
for pension, retirement or other benefits for our directors and senior management. However, we reimburse our directors for out-of-pocket
expenses incurred in connection with their services in such capacity.



Employment Agreements



Please refer to Item 10 “Additional
Information—C. Material Contracts.”



C. Board Practices



As of December 31, 2014, the Company’s
board of directors consisted of seven members, Keyan Yan, Stanley Wong, Stylianos Stergios Sougioultzoglou, Y. Tristan Kuo, John
Sano, Meng Zhou and Chi Yee Gaw, who were elected to serve until their successors are duly elected and qualified. Our directors
may be elected by the holders of the shares representing a majority of the total voting power of the then-outstanding capital
stock of the Company entitled to vote generally in the election of directors. Each director so elected holds office for the term,
if any, as may be specified in the resolution appointing him or until his earlier death, disqualification, resignation or removal.
The directors may appoint one or more directors to fill a vacancy on the Board of Directors.



Effective March 15, 2015, Stanley Wong
resigned as CFO and as a member of the Company’s Board of Directors. Stylianos Stergios Sougioultzoglou, a representative
of Aqua Investments Corp, resigned from the Board effective May 11, 2015, and was replaced with Themis Kalapotharakos, effective
as of June 15, 2015. In addition, our three independent directors, Y. Tristan Kuo, Meng Zhou and Chi Yee Gaw resigned from the
Board and all of its committees, effective May 11, 2015. The Company appointed Matthew C. Los to its board of directors and chairman
of the Audit Committee on October 8, 2015. As a result, our board of directors currently consists of four members, Keyan Yan,
John Sano, Themis Kalapotharakos and Matthew C. Los.



The Board has established the Audit Committee,
which is comprised entirely of independent directors. From time to time, the Board may establish other committees.



Audit
Committee

Our Audit Committee is currently composed
of two members: John Sano and Matthew C. Los. Our Board of Directors determined that each member of the Audit Committee meets
the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership. Each Audit
Committee member also meets NASDAQ’s financial literacy requirements. Matthew C. Los serves as Chair of the Audit Committee.



Our
Board of Directors has determined that Matthew C. Los is the “audit committee financial expert” as such term is defined
in Item 407(d) of Regulation S-K promulgated by the SEC and also meets NASDAQ’s financial sophistication requirements.



The Audit Committee oversees our accounting and financial reporting
processes and the audits of the financial statements of our Company. The Audit Committee is responsible for, among other things:



| | · | the
                                         appointment, compensation, retention and oversight of the work of the independent auditor;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing
                                         and pre-approving all auditing services and permissible non-audit services (including
                                         the fees and terms thereof) to be performed by the independent auditor;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing
                                         and approving all proposed related-party transactions;
| | - | ---------------------------------------------------------------------------------------------------------



| | · | discussing
                                         the interim and annual financial statements with management and our independent auditors;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing
                                         and discussing with management and the independent auditor (a) the adequacy and effectiveness
                                         of the Company’s internal controls, (b) the Company’s internal audit procedures,
                                         and (c) the adequacy and effectiveness of the Company’s disclosure controls and
                                         procedures, and management reports thereon;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reviewing
                                         reported violations of the Company’s code of conduct and business ethics; and
| | - | --------------------------------------------------------------------------------------------------------------------------------



51







| | · | reviewing
                                         and discussing with management and the independent auditor various topics and events
                                         that may have significant financial impact on the Company or that are the subject of
                                         discussions between management and the independent auditors.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



D. Employees



As of December 31, 2014, we employed 357
full-time employees, of which 162 employees at our production facility in Anhui Province, China, are contracted with through a
labor agency. The following table sets forth the number of our full-time employees by function.



|Function                               |  | Number of Employees of 2014
|-------------------------------------- |  | ---------------------------
|Management and Administration          |  | 55                         
|Marketing, Sales and Distribution      |  | 122                        
|Design and Product Development         |  | 10                         
|Production                             |  | 137                        
|Procurement, Warehousing and Logistics |  | 21                         
|Quality and Assurance                  |  | 12                         
|TOTAL                                  |  | 357                        



We believe that we have maintained a satisfactory
working relationship with our employees, and we have not experienced any significant labor disputes or any difficulty in recruiting
staff for company’s operations. None of company’s employees is represented by a labor union.



Our employees in China participate in
a state pension plan organized by Chinese municipal and provincial governments. The company is required to make monthly contributions
to the plan for each employee at the rate of 23% of his or her average assessable salary. In addition, the company is required
by Chinese law to cover employees in China with various types of social insurance. The company believes that it is in material
compliance with the relevant PRC laws.



E. Share Ownership



The following table sets forth information
regarding beneficial ownership of each class of our voting securities as of October 23, 2015 (i) by each person who is known by
us to beneficially own more than 5% of our voting securities; (ii) by each of our officers and directors; and (iii) by all of
our officers and directors as a group.



|Name                                                          |  | Office, If Any              |  | Title of Class |  | Amount and Nature of Beneficial Ownership(1) |            |  | Percent of Class(2) | 
|------------------------------------------------------------- |  | --------------------------- |  | -------------- |  | -------------------------------------------- | ---------- |  | ------------------- | 
|Officers and Directors                                       
|Keyan Yan(3)                                                  |  | Chairman, CEO and President |  | Common Stock   |  |                                              | 13,164,796 |  |                     | 
|Lixia Tu                                                      |  | Chief Financial Officer     |  | Common Stock   |  |                                              | 0          |  |                     | 
|Themis Kalapotharakos                                         |  | Director                    |  | Common Stock   |  |                                              | 2,281,500  |  |                     | 
|John Sano                                                     |  | Director                    |  | Common Stock   |  |                                              | 0          |  |                     | 
|Matthew C. Los                                                |  | Director                    |  | Common Stock   |  |                                              | 2,281,500  |  |                     | 
|All officers and directors as a group (5 persons named above) |  |                             |  |                |  |                                              | 15,446,296 |  |                     | 
|5% Security Holders                                          
|Keyan Yan(3)                                                  |  |                             |  | Common Stock   |  |                                              | 13,364,796 |  |                     | 
|Aqua Investments Corp.(4)                                     |  |                             |  | Common Stock   |  |                                              | 2,281,500  |  |                     | 
|Nicholas John Frangos                                         |  |                             |  | Common Stock   |  |                                              | 2,281,500  |  |                     | 
|Anna Polemis (4)                                              |  |                             |  | Common Stock   |  |                                              | 2,281,500  |  |                     | 
|Matthew C. Los(4)                                             |  |                             |  | Common Stock   |  |                                              | 2,281,500  |  |                     | 
|Stylianos Stergios Sougioultzoglou(4)                         |  |                             |  | Common Stock   |  |                                              | 2,281,500  |  |                     | 
|Themistoklis Kalapotharakos(4)                                |  |                             |  | Common Stock   |  |                                              | 2,281,500  |  |                     | 
|Bay Peak, LLC(5)                                              |  |                             |  | Common Stock   |  |                                              | 1,369,725  |  |                     | 
|Cory Roberts (5)                                              |  |                             |  | Common Stock   |  |                                              | 1,369,725  |  |                     | 
|China Canadian Opportunity, L.P.(6)                           |  |                             |  | Common Stock   |  |                                              | 1,490,585  |  |                     | 
|Ground Floor Capital (China) Inc.(6)                          |  |                             |  | Common Stock   |  |                                              | 1,440,667  |  |                     | 
|David Steele(6)(7)                                            |  |                             |  | Common Stock   |  |                                              | 2,704,505  |  |                     | 

* Less than 1%



52







|(1) | Beneficial Ownership is
    determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.
    Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect
    to our common stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | As of October 23, 2015,
    a total of 25,417,329 shares of commons stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1). For each
    Beneficial Owner above, any securities that are exercisable or convertible within 60 days have been included in the denominator.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | On
    March 9, 2011, Keyan Yan entered into an option agreement with Mr. Chan Sun Keung, which was amended on August 1, 2014. Pursuant
    to the option agreement, as amended, Mr. Yan has the option to acquire all of the shares of common stock of the Company that
    Chan Sun Keung acquired.  Mr. Yan exercised the option in September, 2015.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Including 368,000 shares
    underlying warrants owned by Aqua Investments Corp., control of which is shared by the indicated persons.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



|(5) | Mr. Cory Roberts is the
    principal of Bay Peak, LLC and has voting and investment control over the securities held by it.
|--- | ----------------------------------------------------------------------------------------------------------------------------



|(6) | China Canadian Opportunity,
    L.P.’s voting and dispositive decisions with regard to its partnership interests are made by Ground Floor Capital (China)
    Inc., its general partner. Ground Floor Capital (China) Inc.’s voting and dispositive decisions with regard to its shares
    are made by Mr. David Steele, its President and Director. Therefore, both Ground Floor Capital (China) Inc. and Mr. Steele
    may be deemed to have voting and dispositive power with respect to the shares held by China Canadian Opportunity, L.P.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Includes 244,630 shares
    of our common stock held by China - Ground Floor Holdings, L.P, 84,543 shares of our common stock held by China – Ground
    Floor Holdings VI, L.P., 1,440,667 shares of our common stock held by China Canadian Opportunity, L.P., 837,169 shares of
    our common stock held by China Canadian Opportunity VI, L.P., 96,047 shares of our common stock held by Kema Management (USA),
    Inc., 181 shares of our common stock held by Kema Management LTD, and 1,268 shares of our common stock held by Mr. David Steele.
    China - Ground Floor Holdings, L.P and China – Ground Floor Holdings VI, L.P.’s voting and dispositive decisions
    with regard to each entity’s partnership interests are made by Ground Floor Capital, LLC ("Ground Floor LLC"),
    its general partner. Ground Floor LLC’s voting and dispositive decisions with regard to its membership interests are
    made by Mr. David Steele, its sole member. China Canadian Opportunity, L.P.’s voting and dispositive decisions with
    regard to its partnership interests are made by Ground Floor Capital (China) Inc. (“Ground Floor Inc.”), its general
    partner. Ground Floor Inc.’s voting and dispositive decisions with regard to its shares are made by Mr. David Steele,
    its President and Director. China Canadian Opportunity VI, L.P.’s voting and dispositive decisions with regard to its
    membership interests are made by Ground Floor Capital (China 88) Inc. (“China 88”), its general partner. China
    88’s voting and dispositive decisions with regard to its shares are made by Mr. David Steele, its President and Director.
    Each of Kema Management (USA), Inc. and Kema Management LTD’s voting and dispositive decisions with regard to its stock
    are made by David Steele, each entity’s President. Therefore, Mr. Steele may be deemed to share voting and dispositive
    power with Ground Floor LLC with respect to the shares of our common stock held by China - Ground Floor Holdings, L.P and
    China – Ground Floor Holdings VI, L.P.; Mr. Steele may be deemed to share voting and dispositive power with Ground Floor
    Inc. with respect to the shares of our common stock held by China Canadian Opportunity, L.P.; Mr. Steele may be deemed to
    share voting and dispositive power with China 88 with respect to the shares of our common stock held by China Canadian Opportunity
    VI, L.P.; and Mr. Steele may be deemed to have voting and dispositive power with respect to the shares of our common stock
    held by each of Kema Management (USA), Inc. and Kema Management LTD.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



53







None of our existing shareholders
has voting rights that differ from the voting rights of other shareholders. We are not aware of any arrangement that may, at a
subsequent date, result in our change in control.



|ITEM 7. | MAJOR SHAREHOLDERS AND
    RELATED PARTY TRANSACTIONS
|------- | -----------------------------------------------------



A. Major Shareholders



Please refer to Item 6 “Directors,
Senior Management and Employees—E. Share Ownership.”



B. Related Party Transactions



On March 15, 2012, for an aggregate consideration
of $25,000, we issued 1,437,500 shares of common stock to Aqua Investments Corp., an entity controlled by the funders of the Company.
In December 2012, 50,000 of these shares were forfeited for no consideration because the underwriters did not fully exercise the
over-allotment option.



Aqua Investments Corp. also purchased
an aggregate of 337,750 units for an aggregate purchase price of $3,377,500, or $10.00 per unit. In addition, Aqua Investments
Corp. purchased 30,250 additional units for an aggregate purchase price of $302,500, or $10.00 per unit, to the extent that the
over-allotment option was exercised by the underwriters, such that the total amount of the proceeds of the IPO and the sale of
the placement units placed in our trust account was $10.30 per unit sold in the IPO.



Concurrently with the IPO, we issued to
the underwriters as additional compensation, for a purchase price of $100, a Underwriters’ Unit Purchase Option to purchase
250,000 units for $12.50 per unit. The Underwriters’ Unit Purchase Option is exercisable at any time, in whole or in part,
commencing on August 1, 2014 and expiring on October 25, 2017.



We agreed to pay to Seacrest Shipping
Co. Ltd. a total of $7,500 per month for office space, administrative services and secretarial support for a period commencing
on the date of our IPO and ending on the consummation of the Share Exchange. Seacrest Shipping Co. Ltd. agreed that after 4 months
the monthly fee will begin to accrue and will only be payable thereafter upon completion of the Share Exchange. Seacrest Shipping
Co. Ltd. is an agent of Remi Maritime Corp., an affiliate of our founders. This arrangement was agreed to by Seacrest Shipping
Co. Ltd. for our benefit and is not intended to provide Seacrest Shipping Co. Ltd. compensation. We believe that such fees are
at least as favorable as we could have obtained from an unaffiliated third-party. The lease between us and Seacrest Shipping Co.
Ltd. was terminated upon the consummation of the Share Exchange on August 1, 2014.



Hongri PRC executed a non-cancelable tenancy
agreement on December 21, 2005 with Shishi Lingxiu Hongri Knitwear Factory (“Lingxiu”) which became effective on January
1, 2006. Pursuant to this agreement Lingxiu leased an office building to Hongri PRC at an annual rate of RMB600,000 (equivalent
to $88,020 as of December 31, 2008) for a lease term of 20 years. As set out in the terms of the tenancy agreement, Hongri PRC
was required to pay the total rent due over the duration of the lease term in advance amounting to RMB12,000,000. On February
1, 2010, Hongri PRC entered into a revised cancelable tenancy agreement with Lingxiu at an annual rate of RMB503, 434 (equivalent
to $73,803), that can be terminated solely by either Hongri PRC or Lingxiu at any time, by providing 3-month notice. The new lease
terms of the revised tenancy agreement take retroactive effect from January 1, 2009 to April 22, 2052. As set out in the terms
of the tenancy agreement, the total rent due over the duration of the lease term amounting to RMB21,815,462 (equivalent to approximately
$3.2 million) was required to be paid in advance. This $3.2 million was settled by offsetting the amount due from the director,
Chen Bizhen of approximately $1.7 million and of which approximately $1.5 million was rolled over with the unutilized prepayments
of the old agreement. As of June 30, 2011 and December 31, 2010, the prepayment under operating lease represented the amount paid
in accordance with the tenancy agreement less accumulated amortization of prepaid rental to expense. The amortization of this
lease was $19,130 and $18,310 for the three months ended March 31, 2011 and 2010, respectively. As of December 31, 2013, the prepayment
of $3,620,916 under operating lease represented the amount paid in accordance with the tenancy agreement less accumulated amortization
of prepaid rental to expense. Hongri PRC and Lingxiu are related parties because Lingxiu is owned by Bizhen Chen, wife of our
Chairman and Chief Executive Officer.



54







Hongri PRC and Roller Rome entered into
a Technology Development Service Contract on December 18, 2006, and supplementary agreements on December 28, 2006, December 30,
2007, December 30, 2008, December 28, 2009 and December 29, 2010 pursuant to which Roller Rome shall provide design and development
services, including market research, product development, design, technical consulting and staff training, to Hongri PRC for an
annual fee ranging from 90% to 99% of Hongri PRC’s net income before tax. The agreement reflects a financial and tax arrangement,
and through this arrangement the Company expects that the overall tax burden of Hongri PRC may be minimized. The Technology Development
Service Contract is for a term of 5 years commencing from January 1, 2006. We paid RMB 34.05 million (approximately $5.2 million)
to Roller Rome in July 2010. We have formally extended by agreement the deadline for the remaining payments until December 31,
2013. Hongri PRC has extended the Technology Development Service Contract with Roller Rome for a further year to December 31,
2011. Hongri PRC and Roller Rome are related parties because they are both owned, directly or indirectly, by the Company’s
subsidiary Hongri International Holdings Ltd. and their director is our Chief Financial Officer, Mr. Stanley Wong.



From time to time, Hongri has borrowed
amounts from our Chairman and Chief Executive Officer, Mr. Keyan Yan, to pay for Hongri expenses. These amounts are interest-free,
unsecured and repayable on demand. As of December 31, 2013 and 2014, the balance of these amounts was $209,116 and $781,844, respectively.
The highest amount we borrowed from Mr. Yan is $529,962 in 2013 and $781,844 in 2014.



C. Interests of Experts and Counsel



Not applicable.



|ITEM 8. | FINANCIAL
    INFORMATION
|------- | -------------------------



A. Consolidated Statements and Other Financial Information



Financial Statements



We have appended consolidated financial statements filed as
part of this report. See Item 18 “Financial Statements.”



Legal Proceedings



We may be subject to legal proceedings,
investigations and claims incidental to the conduct of our business from time to time.  We are currently not party to
any legal or arbitration proceedings, including those relating to bankruptcy, receivership or similar proceedings and those involving
any third party, which may have, or have had in the recent past, significant effects on our financial position or profitability.



Dividend Policy



As required by the Exchange Agreement,
promptly following the consummation of the Share Exchange , the Board of Directors will adopt a dividend policy for the payment
of an annual dividend for the first two fiscal years post-closing in an amount equal to at least twenty percent (20%) of our distributable
profits after tax and after compulsory statutory reserves, which can be no less than 10% of after-tax income in China. After the
first two years, the Board of Directors may elect to modify the dividend policy. We understand that the dividend would not be
due until the end of fiscal year 2015.



B. Significant Changes



No significant change has occurred since
the date of our consolidated financial statements filed as part of this annual report.



55







|ITEM 9. | THE OFFER AND LISTING
|------- | ---------------------



A. Offer and Listing Details



Our
common stock is listed on the NASDAQ Capital Market and trade under the symbol “KBSF.” Between January 23, 2013 and
November 3, 2014, our common stock was traded on the NASDAQ Capital Market under the symbol “AQU.” Our Warrants and
Units are quoted on the OTC Markets under the symbols “KBSFW” and “KBSFU”, respectively. Prior to November
3, 2014, our Warrants and Units were quoted on the OTC Markets under the symbols “AQUUF” and “AQUUU”,
respectively. Before their quotation on the OTC Markets, our Units commenced to trade on the Nasdaq Stock Market on October 26,
2012 and our Warrants commenced to trade separately from its Units on January 23, 2013.



The following table provides the high
and low reported market prices of our securities as reported by Nasdaq Stock Market for the periods indicated.



|                                     |  | Units |       |  | Common Stocks |   |      | Warrants | 
|------------------------------------ |  | ----- | ----- |  | ------------- | - | ---- | -------- | 
|                                     |  | High  |       |  | Low           |   |      | High     | 
|                                     |  |       |       |  |               |   |      |          | 
|Annual Highs and Lows                |  |       |       |  |               |   |      |          | 
|                                     |  |       |       |  |               |   |      |          | 
|2012                                 |  | $     | 10.05 |  |               | $ | 9.97 |          | 
|2013                                 |  |       | 10.38 |  |               |   | 10   |          | 
|2014                                 |  |       | 10.74 |  |               |   | 5.5  |          | 
|                                     |  |       |       |  |               |   |      |          | 
|Fiscal Quarterly Highs and Lows 2012 |  |       |       |  |               |   |      |          | 
|Fourth Quarter                       |  | $     | 10.05 |  |               | $ | 9.97 |          | 
|                                     |  |       |       |  |               |   |      |          | 
|Fiscal Quarterly Highs and Lows 2013 |  |       |       |  |               |   |      |          | 
|                                     |  |       |       |  |               |   |      |          | 
|First Quarter                        |  | $     | 10.05 |  |               | $ | 10   |          | 
|Second Quarter                       |  |       | 10.17 |  |               |   | 10.1 |          | 
|Third Quarter                        |  |       | 10.38 |  |               |   | 10.1 |          | 
|Fourth Quarter                       |  |       | 10.38 |  |               |   | 10.3 |          | 
|                                     |  |       |       |  |               |   |      |          | 
|Fiscal Quarterly Highs and Lows 2014 |  |       |       |  |               |   |      |          | 
|First Quarter                        |  | $     | 10.74 |  |               | $ | 10.1 |          | 
|Second Quarter                       |  |       | 10.5  |  |               |   | 10.3 |          | 
|Third Quarter                        |  |       | 10.72 |  |               |   | 8.26 |          | 
|Fourth Quarter                       |  |       | 5.5   |  |               |   | 5.5  |          | 
|                                     |  |       |       |  |               |   |      |          | 
|Monthly Highs and Lows               |  |       |       |  |               |   |      |          | 
|Jul-14                               |  |       | 10.72 |  |               |   | 8.26 |          | 
|Aug-14                               |  |       | 9.11  |  |               |   | 8.26 |          | 
|Sep-14                               |  |       | 9.99  |  |               |   | 8.5  |          | 
|Oct-14                               |  |       | 8.5   |  |               |   | 5.5  |          | 
|Nov-14                               |  |       | 5.5   |  |               |   | 5.5  |          | 
|Dec-14                               |  |       | 5.5   |  |               |   | 5.5  |          | 



56







Approximate Number of Holders of Our
Securities



On October 23, 2015, there was 1 holder
of record of our units, 247 shareholders of record of our common stock and 1 holder of record of our warrants. Certain of our
securities are held in nominee or street name so the actual number of beneficial owners of our securities is greater than the
number of record holders set forth above.



B. Plan of Distribution



Not applicable.



C. Markets



See our disclosures above under “A. Offer and Listing
Details.”



D. Selling Shareholders



Not applicable.



E. Dilution



Not applicable.



F. Expenses of the Issue



Not applicable.



ITEM 10. ADDITIONAL INFORMATION



A. Share Capital



Our Amended and Restated Articles of Incorporation
authorize the Company to issue up to 155,000,000 shares with a par value of $0.0001, consisting of 150,000,000 shares of common
stock and 5,000,000 shares of preferred stock.



| | · | As
                                         of date of this report, there are 25,417,329 shares of common stock issued and outstanding,
                                         including 518,708 shares of common stock included in the IPO Units issued in the IPO
                                         and 368,000 shares of common stock included in the Placement Units. We have never issued
                                         any preferred stock.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | As
                                         of date of this report, we have 518,708 IPO Units outstanding. In addition, there are
                                         368,000 Placement Units outstanding.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | As
                                         of date of this report, we have 5,918,000 warrants outstanding (including the 368,000
                                         warrants underlying the 368,000 Placement Units), each warrant entitles the holder to
                                         purchase one share of common stock at a purchase price of $11.50.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | As
                                         of date of this report, we have one Underwriters’ Unit Purchase Option outstanding,
                                         which entities the holder to purchase 250,000 units at an exercise price of $12.50 per
                                         unit, each unit consisting of one share of common stock and one warrant, each to purchase
                                         one share of common stock at a price of $11.50.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



B. Memorandum and Articles of Association



The following represents a summary
of certain key provisions of our articles of incorporation and bylaws. The summary does not purport to be a summary of all of
the provisions of our articles of incorporation and bylaws. For more complete information you should read our amended and restated
articles of incorporation and bylaws, each listed as an exhibit to this report.



57







We were incorporated in the Marshall Islands
on January 26, 2012 under the Marshall Islands Business Corporations Act (“BCA”). The purpose of the Company is to
engage in any lawful act or activity for which corporations may now or hereafter be organized under the BCA. Our amended and restated
articles of incorporation and bylaws do not impose any limitations on the ownership rights of our stockholders.



Description of Common Stock



Each outstanding
share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Upon our dissolution,
liquidation or winding up of the affairs of the Company, after payment in full of all amounts required to be paid to creditors
and to the holders of preferred stock having liquidation preferences, if any, the holders or our common stock will be entitled
to receive pro rata our remaining assets available for distribution. Holders of common stock do not have conversion, redemption
or preemptive rights to subscribe to any of our securities.



Blank Check Preferred Stock.



Our Board of Directors is authorized,
without any further vote or action by our stockholders, to issue up to 5,000,000 shares of preferred stock in different classes
and series and, with respect to each class or series, to determine the designations, powers, preferences, privileges and other
rights, including dividend rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may
be greater than the powers and rights associated with the common stock, at such times and on such other terms as they think proper.
Our Board of Directors may issue shares of preferred stock on terms calculated to discourage, delay or prevent a change of control
of our company or the removal of our management.



Warrants



As of date of this report, we have 5,918,000
warrants outstanding, among which 5,550,000 warrants were issued to the public in our IPO (the “IPO Warrants”). Each
of the IPO Warrants entitles the holder to purchase one share of common stock at a price of $11.50 expiring on August 1, 2019,
provided that there is an effective registration statement covering the shares of common stock underlying the IPO Warrants.



The Company may redeem the IPO Warrants
at a price of $0.01 per warrant upon 30 days’ notice, after they become exercisable and prior to their expiration, only
in the event that the last sale price of the shares of common stock is at least $17.50 per share for any 20 trading days within
a 30-trading day period (“30-Day Trading Period”) ending three business days prior to the date on which notice of
redemption is given, provided there is a current registration statement in effect with respect to the shares of common stock underlying
such IPO Warrants throughout the 30-day redemption period. The Company is only required to use its best efforts to maintain the
effectiveness of the registration statement covering the underlying common stock of the IPO Warrants. There are no contractual
penalties for failure to deliver securities if a registration statement is not effective at the time of exercise. Additionally,
in the event that a registration statement is not effective at the time of exercise, the holder of such warrant shall not be entitled
to exercise such warrant for cash and in no event (whether in the case of a registration statement not being effective or otherwise)
will the Company be required to net cash settle the warrant exercise.



In addition, Aqua Investments Corp., an
entity controlled by certain founding shareholders of the Company, acquired 368,000 warrants, each entitles the holder to purchase
one share of common stock at a price of $11.50, expiring on August 1, 2019 (the “Placement Warrants”). The Placement
Warrants are identical to the IPO Warrants except that the Placement Warrants (i) may be exercised for cash or on a cashless basis;
(ii) will not be redeemable by the Company and (ii) may be exercised even if there is not an effective registration statement
relating to the shares underlying the warrants, so long as they are held by the initial purchaser or any of its permitted transferees.



Underwriters’ Unit Purchase
Option



In connection with our IPO, we also issued
Lazard Capital Markets LLC, the representative of the underwriters, a Underwriters’ Unit Purchase Option to purchase 250,000
units, each unit consisting of one share of common stock and one warrant, each to purchase one share of common stock at a price
of $11.50. The option is exercisable at any time, in whole or in part, by October 25, 2017 at an exercise price of $12.50 per
unit. The units issuable upon exercise of this option are identical to those offered to the public in the IPO, except that the
underlying warrants (i) will expire on October 25, 2017, (ii) may be exercised on a cashless basis and (iii) may not be redeemed
by the Company. The holder of the Underwriters’ Unit Purchase Option has certain demand and piggy-back registration rights.
..



58







Directors



The business and affairs of the Company
are managed by or under the direction of our Board of Directors.



Our directors are elected by the holders
of the shares representing a majority of the total voting power of the then-outstanding capital stock of the Company entitled
to vote generally in the election of directors (“Voting Stock”). Our amended and restated articles of incorporation
provide that cumulative voting shall not be used to elect directors. Each director will be elected to serve until the next annual
meeting of shareholders and until his/her successor shall have been duly elected and qualified, except in the event of his/her
death, resignation, removal or the earlier termination of his/her term of office.



Any director or the entire Board of Directors
may be removed at any time, with or without cause, by the affirmative vote of the holders of at least a majority of the total
voting power of the Voting Stock entitled to vote thereon or with cause by directors constituting at least two-thirds of the entire
Board.



Vacancies in the Board of Directors occurring
by death, resignation, the creation of new directorships, the failure of the shareholders to elect the whole board at any annual
election of directors, or, except as herein provided, for any other reason, including removal of directors for cause, may be filled
either by the affirmative vote of a majority of the remaining directors then in office, although less than a quorum, at any special
meeting called for that purpose or at any regular meeting of the Board. Vacancies occurring by removal of directors without cause
may be filled only by vote of the shareholders.



Shareholder Meetings



Annual stockholder meetings will be held
at a time and place selected by our board of directors. The meetings may be held in or outside of the Marshall Islands.



Under our amended and restated articles
of incorporation, special meetings may be called by the board of directors, or by the secretary of the Company requested by stockholders
representing certain amount of voting power. Our board of directors shall give not less than 15 days and not more than 60 days
prior written notice of a shareholders’ meeting to each shareholder of record entitled to vote thereat and to each shareholder
of record who, by reason of any action proposed at such meeting would be entitled to have his/her shares appraised if such action
were taken, and the notice shall include a statement of that purpose and to that effect.



Our bylaws provide that a meeting of shareholders
is duly constituted if, at the commencement of the meeting, there are shareholders present in person or by proxy representing
not less than a majority of the votes of the shares issued and outstanding and entitled to vote on resolutions of shareholders
to be considered at the meeting.



If a quorum is present, the affirmative
vote of a majority of the shares of stock represented at the meeting will be the act of the shareholders. At any meeting of shareholders,
each shareholder entitled to vote any shares on any manner to be voted upon at such meeting shall be entitled to one vote on such
matter for each such share. Any action required or permitted to be taken at a meeting, may be taken without a meeting if a consent
in writing setting forth the action so taken, is signed by all the shareholders entitled to vote with respect to the subject matter
thereof.



Dissenters’ Rights of Appraisal and Payment.



Under the BCA, our stockholders have the
right to dissent from various corporate actions, including any merger or sale of all or substantially all of our assets not made
in the usual course of our business, and receive payment of the fair value of their shares. However, the right of a dissenting
stockholder to receive payment of the fair value of his or her shares shall not be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation.
In the event of any further amendment of our articles of incorporation, a stockholder also has the right to dissent and receive
payment for his or her shares if the amendment alters certain rights in respect of those shares. The dissenting stockholder must
follow the procedures set forth in the BCA to receive payment. In the event that we and any dissenting stockholder fail to agree
on a price for the shares, the BCA procedures involve, among other things, the institution of proceedings in the circuit court
in the judicial circuit in the Marshall Islands in which our Marshall Islands office is situated. The value of the shares of the
dissenting stockholder is fixed by the court after reference, if the court so elects, to the recommendations of a court-appointed
appraiser.



59







Stockholders' Derivative Actions



Under the BCA, any of our stockholders
may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder
bringing the action is a holder of common stock both at the time the derivative action is commenced and at the time of the transaction
to which the action relates.



Indemnification of Officers and
Directors



The BCA authorizes
corporations to limit or eliminate the personal liability of directors and officers to corporations and their stockholders for
monetary damages for breaches of directors’ fiduciary duties. Our amended and restated articles of incorporation include
a provision that eliminates the personal liability of directors for monetary damages for actions taken as a director to the fullest
extent permitted by law. We must indemnify our directors and officers to the fullest extent authorized by law. We are also expressly
authorized to advance certain expenses (including attorneys’ fees and disbursements and court costs) to our directors and
offices and carry directors’ and officers’ insurance providing indemnification for our directors, officers and certain
employees for some liabilities.



The limitation
of liability and indemnification provisions in our amended and restated articles of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against directors for breach of their fiduciary duty.  These provisions may also have the effect
of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful,
might otherwise benefit us and our stockholders.  In addition, your investment may be adversely affected to the extent
we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.



C. Material Contracts



Information concerning our material contracts
governing the business of the Company is included elsewhere in this report or in the information incorporated by reference herein.



On August 1, 2014, the Company entered
into an employment agreement with Keyan Yan, pursuant to which Mr. Yan agreed to act as the Chief Executive Officer of the Company.
The employment agreement has a term of three years which term may be extended by agreement between Mr. Yan and the Company. The
annual base salary of Mr. Yan is $105,000. His compensation will be reviewed from time to time according to the Company’s
policies. Mr. Yan is eligible to participate in annual performance bonus plans as may be established by the Company from time
to time as well as the Company’s equity incentive plan when and if such a plan is adopted by the Board.



On June 25, 2015, our Hong Kong subsidiary,
Vast Billion Investment Limited (“Vast Billion”) entered into an employment agreement with Lixia Tu, pursuant to which
Ms. Tu agreed to act as the Chief Financial Officer of Vast Billion. The employment agreement has a term of two years. With or
without cause, either Vast Billion or Ms. Tu may terminate the agreement at any time upon a 30-day written notice to the other
party. Ms. Tu’s initial annual after-tax base salary was RMB 800,000(approximately $128,000) She is eligible to participate
in annual performance bonus plans as may be established by the Company from time to time as well as the Company’s equity
incentive plan when and if such a plan is adopted.



D. Exchange Controls



Marshall Islands Exchange Controls



Under Marshall Islands law, there are
currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions that affect
the remittance of dividends, interest or other payments to nonresident holders of our shares.



60







BVI Exchange Controls



There are no material exchange controls
restrictions on payment of dividends, interest or other payments to the holders of our common stock or on the conduct of our operations
in the BVI. There are no material BVI laws that impose any material exchange controls on us or that affect the payment of dividends,
interest or other payments to nonresident holders of Hongri ordinary shares. BVI law and Hongri’s memorandum and articles
of association do not impose any material limitations on the right of non-residents or foreign owners to hold or vote its ordinary
shares.



PRC Exchange Controls



Under the Foreign Currency Administration
Rules promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and other relevant PRC government authorities,
RMB is convertible into other currencies without prior approval from SAFE only to the extent of current account items, such as
trade related receipts and payments, interest and dividends and after complying with certain procedural requirements. The conversion
of RMB into other currencies and remittance of the converted foreign currency outside PRC for the purpose of capital account items,
such as direct equity investments, loans and repatriation of investment, requires the prior approval from SAFE or its local office.
Payments for transactions that take place within China must be made in RMB. Unless otherwise approved, PRC companies must repatriate
foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated
foreign exchange banks subject to a cap set by SAFE or its local office. Unless otherwise approved, domestic enterprises must
convert all of their foreign currency proceeds into RMB.



On October 21, 2005, SAFE issued the Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005. According to the notice, a special
purpose company, or SPV, refers to an offshore company established or indirectly controlled by PRC residents for the special purpose
of carrying out financing of their assets or equity interest in PRC domestic enterprises. Prior to establishing or assuming control
of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration
procedures with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established
or acquired control of these SPVs that previously made onshore investments in China were required to complete the relevant overseas
investment foreign exchange registration procedures by March 31, 2006. These PRC residents must also amend the registration with
the relevant SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment
or assets of a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material
change in the capital of the SPV. Under the rules, failure to comply with the foreign exchange registration procedures may result
in restrictions being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends
and other distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign
exchange administration regulations.



On August 29, 2008, SAFE promulgated Circular
142 which regulates the conversion by a foreign-funded enterprise of foreign currency into RMB by restricting how the converted
RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of Circular
142. Under Circular 142 and Circular 45, 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 foreign-invested enterprises. The use of such RMB capital may not be changed
without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans
have not been used. Violations of Circular 142 and Circular 45 could result in severe penalties, such as heavy fines as set out
in the relevant foreign exchange control regulations.



SAFE also promulgated Circular 59 in November
2010, which tightens the regulation over settlement of net proceeds from overseas offerings and requires, among other things,
the authenticity of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled
in the manner described in the offering documents.



In May, 2013 SAFE promulgated Circular
21 which provides for and simplifies the operational steps and regulations on foreign exchange matters related to direct investment
by foreign investors, including foreign exchange registration, account opening and use, receipt and payment of funds, and settlement
and sales of foreign exchange.



61







E. Taxation



The following is a general summary
of the material Marshall Islands, Hong Kong, BVI, PRC and U.S. federal income tax consequences relevant to an investment in our
units, shares of common stock and warrants to acquire our shares of common stock, sometimes referred to collectively in this summary
as our “securities”. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any
particular prospective purchaser. The discussion is based on laws and relevant interpretations thereof in effect as of the date
of this prospectus, all of which are subject to change or different interpretations, possibly with retroactive effect. The discussion
does not address United States state or local tax laws, or tax laws of jurisdictions other than the Marshall Islands, Hong Kong,
the BVI, the PRC and the United States. We recommend that you consult your own tax advisors with respect to the consequences of
acquisition, ownership and disposition of our securities.



Marshall Islands Taxation



The following are the material Marshall
Islands tax consequences of our activities to us and to our stockholders and warrant holders of investing in our common stock
and warrants. Under current Marshall Islands law, we are not subject to tax on income or capital gains, and no Marshall Islands
withholding tax or income tax will be imposed upon payments of dividends by us to our stockholders or proceeds from the disposition
of our common stock and warrants, provided such stockholders or warrant holders, as the case may be, are not residents in the
Marshall Islands. There is no tax treaty between the United States and the Republic of the Marshall Islands.



BVI Taxation



The BVI does not impose a withholding
tax on dividends paid to us by our BVI subsidiary, nor does the BVI levy any capital gains or income taxes on us or our BVI subsidiary.
However, our BVI subsidiary is required to pay the BVI government an annual license fee based on the number of shares it is authorized
to issue.



There is no income tax treaty or convention currently in effect
between the United States and the BVI.



Hong Kong Taxation



Our Hong Kong subsidiaries, under the current laws of Hong
Kong, are subject to profits tax of 16.5%. No provision for Hong Kong profits tax has been made as our Hong Kong subsidiaries
have no taxable income.



PRC Taxation



We are a holding company incorporated
in the Marshall Islands, which indirectly holds our equity interests in our PRC operating subsidiaries. The EIT Law and its implementation
rules, both of which became effective as of January 1, 2008, provide that a PRC enterprise is subject to a standard income tax
rate of 25% and China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent,
will normally be subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties between the overseas parent’s
jurisdiction of incorporation and China to reduce such rate.



Under the Arrangement between the Mainland
and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income, or the Double Taxation Arrangement, effective as of January 1, 2007, such dividend withholding tax
rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC company distributing the dividends. Under the
aforesaid arrangement, any dividends that our PRC operating subsidiaries pay to their Hong Kong holding companies may be subject
to a withholding tax at the rate of 5% if they are not considered to be a PRC “resident enterprise” as described below.
However, if the Hong Kong holdings companies are not considered to be the “beneficial owner” of such dividends under
the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties promulgated by the State Administration
of Taxation on October 27, 2009 (and not a PRC “resident enterprise”), such dividends would be subject to the withholding
tax rate of 10%. The withholding tax rate of 5% or 10% applicable will have a significant impact on the amount of dividends to
be received by us and ultimately by shareholders.



62







According to the Notice Regarding Interpretation
and Recognition of Beneficial Owners under Tax Treaties, the term “beneficial owner” refers to a person who has the
right to own and dispose of the income and the rights or properties generated from the said income. The “beneficial owner”
may be an individual, a company or any other organization which is usually engaged in substantial business operations. A conduit
company is not a “beneficial owner.” The term “conduit company” refers to a company which is usually established
for purposes of dodging or reducing taxes, and transferring or accumulating profits. Such a company is only registered in the
country of domicile to satisfy the organizational form as required by law, but it does not engage in such substantial business
operations as manufacturing, distribution and management. As our Hong Kong holding companies are controlling companies and are
not engaged in substantial business operations, they could be considered as conduit companies by tax authorities and we do not
expect them to be a beneficial owner.



In addition to the changes to the current tax structure, under
the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered
a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term
“de facto management bodies” as “an establishment that exercises, in substance, overall management and control
over the production, business, personnel, accounting, etc., of a Chinese enterprise.”



It remains unclear whether the PRC tax
authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently
consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income
tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source
income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing
rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that
such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the
withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated
as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect
to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed
on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring
our shares.



U.S. Federal Income Taxation



The following is a discussion of certain
material U.S. federal income tax consequences of the acquisition, ownership and disposition of our securities. It does not purport
to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s situation.
The discussion applies only to holders that hold their securities as capital assets (generally property held for investment) within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This discussion is based on the Code,
income tax regulations promulgated thereunder, judicial positions, published positions of the Internal Revenue Service, or the
IRS, and other applicable authorities, all as in effect as of the date hereof and all of which are subject to change, possibly
with retroactive effect. This discussion is general in nature and is not exhaustive of all possible tax considerations, nor does
the discussion address any state, local or foreign tax considerations or any U.S. tax considerations (e.g., estate or gift tax)
other than U.S. federal income tax considerations, that may be applicable to particular holders.



This discussion does not address all aspects
of U.S. federal income taxation that may be relevant in light of particular circumstances, nor does it address the U.S. federal
income tax consequences to persons who are subject to special rules under U.S. federal income tax law, including:



| | · | banks,
                                         insurance companies or other financial institutions;                                                                                                                                        
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | persons
                                         subject to the alternative minimum tax;                                                                                                                                                    
| | · | tax-exempt
                                         organizations;                                                                                                                                                                          
| | · | controlled
                                         foreign corporations, passive foreign investment companies and corporations that accumulate
                                         earnings to avoid United States federal income tax;
| | · | certain
                                         former citizens or long-term residents of the United States;                                                                                                                               
| | · | dealers
                                         in securities or currencies;                                                                                                                                                               
| | · | traders
                                         in securities that elect to use a mark-to-market method of accounting for their securities
                                         holdings;                                              



63







| | · | persons
                                         that own, or are deemed to own, more than five percent of our capital stock;                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | holders
                                         who acquired our stock as compensation or pursuant to the exercise of a stock option;
                                         or                    
| | · | persons
                                         who hold our shares as a position in a hedging transaction, “straddle,” or
                                         other risk reduction transaction.



For purposes of this discussion, a U.S.
holder is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes; (ii) a corporation,
or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the
United States (or treated as such under applicable U.S. tax laws), any state thereof, or the District of Columbia; (iii) an estate
the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust if (a) a U.S. court is able
to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control
all substantial decisions of the trust, or (b) it has a valid election in effect under applicable law and regulations to be treated
as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a holder that is neither a U.S. holder nor a partnership
or other entity classified as a partnership for U.S. federal income tax purposes.



In the case of a partnership or entity
classified as a partnership for U.S. federal income tax purposes, the U.S. federal income tax treatment of a partner generally
will depend on the status of the partner and the activities of the partnership. Partners of partnerships should consult their
tax advisors regarding the U.S. federal income tax consequences to them of the merger or of the ownership and disposition of our
shares.



As a result of consummation of the Share
Exchange, (i) we acquired substantially all the properties of KBS International, a U.S. corporation, and (ii) the former
shareholders of KBS International held at least 80 percent of our common stock by reason of having held stock of KBS International.
Accordingly, under Section 7874 of the Code, we are treated for U.S. federal tax purposes as a U.S. corporation and, among other
consequences, are subject to U.S. federal income tax on our worldwide income. This discussion assumes that Section 7874 of the
Code continues to apply to treat us as a U.S. corporation for all purposes under the Code. If, for some reason (e.g., future repeal
of Section 7874 of the Code), we were no longer treated as a U.S. corporation under the Code, the U.S. federal income tax consequences
described herein could be materially and adversely affected.



U.S. Federal Income Tax Consequences
for U.S. Holders



Distributions



In the event that distributions are paid
on our common stock, the gross amount of such distributions will be included in the gross income of the U.S. holder as dividend
income on the date of receipt to the extent that the distribution is paid out of current or accumulated earnings and profits,
as determined under U.S. federal income tax principles. Such dividends will be eligible for the dividends-received deduction allowed
to corporations in respect of dividends received from other U.S. corporations. Dividends received by non-corporate U.S. holders,
including individuals, may be subject to reduced rates of taxation under current law. A U.S. holder may be eligible to claim a
foreign tax credit with respect to any PRC withholding tax imposed on dividends paid by us. However, the foreign tax credit rules
are complex, and their application in connection with Section 7874 of the Code and the Agreement Between the Government of the
United States of America and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the
Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC Tax Treaty, is not entirely clear at this time. U.S.
holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit
rules and the U.S.-PRC Tax Treaty.



To the extent that dividends paid on our
common stock exceed current and accumulated earnings and profits, the distributions will be treated first as a tax-free return
of tax basis on our common stock, and to the extent that the amount of the distribution exceeds tax basis, the excess will be
treated as gain from the disposition of those common stock. Because Section 7874 of the Code has applied to treat us as a U.S.
corporation only since consummation of the Share Exchange in 2014, we may not be able to demonstrate to the IRS the extent to
which a distribution on our common stock exceeds our current and accumulated earnings and profits (as determined under U.S. federal
income tax principles), in which case all of such distribution will be treated as a dividend for U.S. federal income tax purposes.



64







Sale or Other Disposition



U.S. holders of our common stock will
recognize taxable gain or loss on any sale, exchange, or other taxable disposition of common stock equal to the difference between
the amount realized for the common stock and the U.S. holder’s tax basis in the common stock. This gain or loss generally
will be capital gain or loss. Under current law, non-corporate U.S. holders, including individuals, are eligible for reduced tax
rates if the common stock has been held for more than one year. The deductibility of capital losses is subject to limitations.
A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed on gain from the sale
or other disposition of common stock. However, the foreign tax credit rules are complex, and their application in connection with
Section 7874 of the Code and the U.S.-PRC Tax Treaty is not entirely clear at this time. U.S. holders should consult their own
tax advisors with respect to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.



Unearned Income Medicare
Contribution



Certain U.S. holders who are individuals,
trusts or estates are required to pay an additional 3.8% Medicare tax on, among other things, dividends on and capital gains from
the sale or other disposition of shares of stock for taxable years beginning after December 31, 2012. U.S. holders should consult
their own advisors regarding the effect, if any, of this legislation on their ownership and disposition of our common stock.



U.S. Federal Income Tax Consequences
for Non-U.S. Holders



Distributions



The rules applicable to non-U.S. holders
for determining the extent to which distributions on our common stock, if any, constitute dividends for U.S. federal income tax
purposes are the same as for U.S. holders. See “–U.S. Federal Income Tax Consequences for U.S. Holders– Distributions.”



Any dividends paid to a non-U.S. holder
by us are treated as income derived from sources within the United States and generally will be subject to U.S. federal income
tax withholding at a rate of 30% of the gross amount of the dividends, or at a lower rate provided by an applicable income tax
treaty if non-U.S. holders provide proper certification of eligibility for the lower rate (usually on IRS Form W-8BEN or W-8BEN-E).
Dividends received by a non-U.S. holder that are effectively connected with such holder’s conduct of a U.S. trade or business
(and, if an income tax treaty applies, are attributable to a permanent establishment maintained by the non-U.S. holder in the
U.S.) are exempt from such withholding tax, provided that applicable certification requirements are satisfied. In such case, however,
non-U.S. holders will be subject to U.S. federal income tax on such dividends, net of certain deductions, at the rates applicable
to U.S. persons. In addition, corporate non-U.S. holders may be subject to an additional branch profits tax equal to 30% or such
lower rate as may be specified by an applicable tax treaty on dividends received that are effectively connected with the conduct
of a trade or business in the United States.



If non-U.S. holders are eligible for a
reduced rate of U.S. withholding tax pursuant to an applicable income tax treaty, such non-U.S. holders may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the IRS.



Sale or Other Disposition



Except as described below for a reduced
rate of U.S. withholding tax pursuant to an applicable income tax treaty, any gain realized by a non-U.S. holder upon the sale
or other disposition of our common stock generally will not be subject to U.S. federal income tax unless:



| | · | the
                                         gain is effectively connected with the conduct of a trade or business in the United States
                                         by such non- U.S. holder, and, if an income tax treaty applies, is attributable to a
                                         permanent establishment maintained by such non-U.S. holder in the U.S.;                                                       
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | the
                                         non-U.S. holder is an individual who is present in the United States for 183 days or
                                         more in the taxable year of the disposition, and certain other conditions are met; or                                                                                                                                                                             
| | · | We
                                         are or have been a “U.S. real property holding corporation,” or USRPHC, for
                                         U.S. federal income tax purposes at any time during the shorter of the five-year period
                                         ending on the date of disposition or the period during which the holder has held our
                                         common stock.



65







Non-U.S. holders whose gain is described
in the first bullet point above will be subject to U.S. federal income tax on the gain derived from the sale, net of certain deductions,
at the rates applicable to U.S. persons. Corporate non-U.S. holders whose gain is described in the first bullet point above may
also be subject to the branch profits tax described above at a 30% rate or lower rate provided by an applicable income tax treaty.
Individual non-U.S. holders described in the second bullet point above will be subject to a flat 30% U.S. federal income tax rate
on the gain derived from the sale, which may be offset by U.S.-source capital losses, even though such non-U.S. holders are not
considered to be residents of the United States.



A corporation will be a USRPHC if the
fair market value of its U.S. real property interests equals or exceeds 50 percent of the aggregate of its real property interests
(U.S. and non-U.S.) and its assets used or held for use in a trade or business. Because we do not currently own significant U.S.
real property, we believe that we are not currently and will not become a USRPHC. However, because the determination of whether
we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business
assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long
as our common stock are regularly traded on an established securities market, such common stock will be treated as U.S. real property
interests only if a non-U.S. holder actually or constructively holds more than 5% of such regularly traded common stock at any
time during the applicable period that is specified in the Code.



Foreign Account Tax Compliance



The Foreign Account Tax Compliance provisions
of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”), imposes a U.S. federal withholding
tax of 30% on certain “withholdable payments” (generally certain U.S.-source income, including dividends, and the
gross proceeds from the sale or other disposition of assets producing U.S. source dividends or interest ) to foreign financial
institutions and other non-U.S. entities that fail to comply with certain certification and information reporting (generally relating
to ownership by U.S. persons of interests in or accounts with those entities). The obligation to withhold under FATCA applies
to, among other items, (i) U.S.-source dividend income that is paid on or after July 1, 2014 and (ii) to gross proceeds from the
disposition of property that can produce U.S.-source dividends paid on or after January 1, 2017. Non-U.S. holders should consult
their tax advisors concerning application of FATCA to our common stock in their particular circumstances.



Information Reporting and
Backup Withholding



Payments of dividends or of proceeds on
the disposition of stock made to a holder of our common stock may be subject to information reporting and backup withholding at
a current rate of 28% unless such holder provides a correct taxpayer identification number on IRS Form W-9 (or other appropriate
withholding form) or establishes an exemption from backup withholding, for example by properly certifying the holder’s non-U.S.
status on a Form W-8BEN, W-8BEN-E or another appropriate version of IRS Form W-8. Payments of dividends to holders must generally
be reported annually to the IRS, along with the name and address of the holder and the amount of tax withheld, if any. A similar
report is sent to the holder. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available
to tax authorities in the holder’s country of residence.



Backup withholding is not an additional
tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld.
If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the
required information is furnished to the IRS in a timely manner.



F. Dividends and Paying Agents



Not applicable.



G. Statement by Experts



Not applicable.



H. Documents on Display



We have filed this report on Form 20-F
with the SEC under the Exchange Act. Statements made in this report as to the contents of any document referred to are not necessarily
complete. With respect to each such document filed as an exhibit to this report, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.



66







We are subject to the informational requirements
of the Exchange Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information
filed by us with the SEC, including this report, may be inspected and copied at the public reference room of the SEC at 100 F
Street, N.E., Washington D.C. 20549. You can also obtain copies of this report by mail from the Public Reference Section of the
SEC, 100 F. Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this material may be obtained from
the SEC’s Internet site at http://www.sec.gov. The SEC’s telephone number is 1-800-SEC-0330 free.



As a foreign private issuer, we are exempt from the rules under
the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act.



I. Subsidiary Information



Not applicable.



|ITEM 11. | QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT MARKET RISK
|-------- | --------------------------------------------------------------



Interest Rate Risk



We deposit surplus funds with Chinese
banks earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt instruments
carry fixed rates of interest. Our operations generally are not directly sensitive to fluctuations in interest rates and we currently
do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with our cash requirements
to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions
in an effort to reduce our exposure to interest rate risk.



Foreign Exchange Risk



While our reporting currency is the U.S.
dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. Substantially
all of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of
operations may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates against
the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will
decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated
at the average exchange rates and equity is translated at historical exchange rates. Any resulting translation adjustments are
not included in determining net income but are included in determining other comprehensive income, a component of equity. An average
appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $3.0
million based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of December 31, 2014.
As of December 31, 2014, our accumulated other comprehensive income was $4.2 million. We have not entered into any hedging transactions
in an effort to reduce our exposure to foreign exchange risk.



The value of RMB against the U.S. dollar
and other currencies is affected by, among other things, changes in China’s political and economic conditions. Since July
2005, RMB has not been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign
exchange market to prevent significant short-term fluctuations in the exchange rate, RMB may appreciate or depreciate significantly
in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future, PRC authorities may
lift restrictions on fluctuations in RMB exchange rate and lessen intervention in the foreign exchange market.



Inflation



Inflationary factors such as increases
in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation
has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.



67







|ITEM 12. | DESCRIPTION OF SECURITIES
    OTHER THAN EQUITY SECURITIES
|-------- | ----------------------------------------------------------



A. Debt Securities



Not applicable.



B. Warrants and Rights



Not applicable.



C. Other Securities



Not applicable.



D. American Depositary Shares



We do not have any American Depositary Shares.



68









PART II



| | ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
| | -------- | -----------------------------------------------



There has been no default of any indebtedness nor is there any
arrearage in the payment of dividends.



| | ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
| | -------- | ----------------------------------------------------------------------------



| | E. | Use
of Proceeds
| | -- | ---------------



As of August 1, 2014,
there was $57,178,033.67 held in the trust account of the Company. We used $51,314,888 in connection with the redemption of 4,981,736
shares of common stock validly tendered and not withdrawn in the tender offer. We also used a portion of the remaining cash to
pay related expenses for the Share Exchange closed on August 1, 2014.



| | ITEM 15. | CONTROLS AND PROCEDURES
| | -------- | -----------------------



| | A. | Disclosure
Controls and Procedures
| | -- | ----------------------------------



An evaluation of the effectiveness of our
disclosure controls and procedures as of December 31, 2014, was made under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, we concluded that our disclosure controls
and procedures were not effective as of the end of the period covered by this report because the Company did not employ an individual
with the necessary qualifications to prepare a complete set of financial statements and related footnotes in accordance with generally
accepted accounting principles including all applicable Securities and Exchange Commission pronouncements and the Company has a
lack of internal resources to account for the completeness of transactions to ensure that information required to be disclosed
by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and regulations, and that such information is accumulated
and communicated to the Company’s management, including the Company’s CEO, as appropriate, to allow timely decisions
regarding required disclosure. To address this issue, we have expanded our disclosure controls and procedures to include additional
analysis and other procedures over the preparation of the financial statements in this report. In addition, we engaged third party
external financial reporting specialists with expertise in IFRS and the SEC reporting regulations. Accordingly, our management
has concluded that the financial statement included in this report fairly present in all material respects our financial position,
results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. 
As a public company, we intend to implement further policies to improve the effectiveness of our disclosure controls and procedures.



Disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms.



| | B. | Management’s
Annual Report on Internal Control Over Financial Reporting
| | -- | -----------------------------------------------------------------------



Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with IFRS
and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting
principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s
management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements.



69







Because of its inherent limitations, a
system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial
statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.



As required by Section 404 of the Sarbanes-Oxley
Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, our management assessed the effectiveness
of the our internal control over the financial reporting as of December 31, 2014, using criteria established in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment
using those criteria, our management concluded that our internal control over financial reporting was not effective as of December
31, 2014.



| | C. | Attestation
Report of the Registered Public Accounting Firm
| | -- | -----------------------------------------------------------



Not required.



| | D. | Changes
in Internal Controls over Financial Reporting
| | -- | -----------------------------------------------------



There were no changes in our internal control over financial
reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the year ended December 31, 2014 that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



| | ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT
| | --------- | --------------------------------



The audit committee
of our board of directors currently consists of Matthew C. Los (who serves as chairman), and John Sano. Our board of directors
has determined that all of our audit committee members are “independent” under the Exchange Act and have the requisite
financial knowledge and experience to serve as members of our audit committee. In addition, our board of directors has determined
that Matthew C. Los is an “audit committee financial expert” as defined in Item 16A of the Instructions to Form
20-F and meets NASDAQ’s financial sophistication requirements due to his current and past experience in various companies
in which he was responsible for, amongst others, the financial oversight responsibilities.



| | ITEM 16B. | CODE OF ETHICS
| | --------- | --------------



On
October 25, 2014, our Audit Committee adopted a Code of Ethics that applies to all of the directors, officers and employees of
the Company and its subsidiaries, including our principal executive officer, principal financial officer and principal accounting
officer. The Code of Ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with
laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading
on inside information, and reporting of violations of the code. A copy of the Code of Ethics is filed as Exhibit 11.1 to this
annual report and is also available on our website at www.kbsfashion.com.



| | ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
| | --------- | --------------------------------------



The following table sets forth the aggregate
fees by categories specified below in connection with certain professional services rendered by our principal external independent
registered public accounting firms, for the periods indicated.





|                   |  | 2014 |         |  | 2013 |  
|------------------ |  | ---- | ------- |  | ---- | -
|Audit fees (1)     |  | $    | 191,479 |  |      | $
|Audit related fees |  |      | —       |  |      |  
|Tax fees           |  |      | —       |  |      |  
|Total fees         |  | $    | 191,479 |  |      | $



| | (1) | “Audit fees” means the aggregate fees billed for an audit of our financial statements.
| | --- | --------------------------------------------------------------------------------------



70







Our audit committee pre-approves all auditing
services and permitted non-audit services to be performed for us by our independent auditor, including the fees and terms thereof
(subject to the de minimums exceptions for non-audit services described in Section 10A(i)(l)(B) of the Exchange Act that are approved
by our audit committee prior to the completion of the audit). The percentage of services provided for which we paid audit-related
fees, tax fees, or other fees that were approved by our audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation
S-X promulgated by the SEC was 100%.



| | ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
| | --------- | ----------------------------------------------------------



In lieu of an audit committee comprised
of three independent directors, our audit committee is comprised of two independent members of our board of directors.



| | ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
| | --------- | ----------------------------------------------------------------------



As previously disclosed, on July 29, 2014, we completed a tender
offer and redeemed 4,981,736 shares of common stock of the Company validly tendered and not withdrawn at a price of $10.30 per
share in cash, without interest. As a result, we paid approximately $51.3 million to the tendering shareholders.



| | ITEM 16F. | CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
| | --------- | ---------------------------------------------



None.



| | ITEM 16G. | CORPORATE GOVERNANCE
| | --------- | --------------------



We are incorporated in the Republic of
the Marshall Islands (“RMI”) and our corporate governance practices are governed by applicable RMI law, our articles
of incorporation and bylaws. In addition, because our common stock is listed on NASDAQ, we are subject to NASDAQ's corporate governance
requirements.



NASDAQ Listing Rule 5615(a)(3) permits
a foreign private issuer like us to follow home country practices in lieu of certain requirements of Listing Rule 5600, provided
that such foreign private issuer discloses in its annual report filed with the SEC each requirement of Rule 5600 that it does not
follow and describes the home country practice followed in lieu of such requirement. The home country practices that we follow
in lieu of NASDAQ's corporate governance rules are as follows:



| | · | in lieu of a board of directors that is comprised by a majority of
independent directors, our board of directors is not comprised of a majority of independent directors;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | in lieu of an audit committee comprised of three independent directors,
our audit committee has two independent directors;
| | - | --------------------------------------------------------------------------------------------------------------------------



| | · | we currently do not have a nominating committee or a
compensation committee.
| | - | ----------------------------------------------------------------------------



| | ITEM 16H. | MINE SAFETY DISCLOSURE
| | --------- | ----------------------



Not applicable.



71







PART III



| | ITEM 17. | FINANCIAL STATEMENTS
| | -------- | --------------------



We have elected to provide financial statement pursuant to Item
18.



| | ITEM 18. | FINANCIAL STATEMENTS
| | -------- | --------------------



The financial statements are filed as part
of this annual report beginning on page F-1.



| | ITEM 19. | EXHIBITS
| | -------- | --------



The list of exhibits in the Exhibit Index to this report is
incorporated herein by reference.



72







SIGNATURE



The registrant hereby
certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this report on its behalf.



|Date: October 27, 2015 | KBS Fashion Group Limited
|---------------------- | -------------------------
|                       |                          
|                       | /s/ Keyan Yan            
|                       | Keyan Yan                
|                       | Chief Executive Officer  











Independent Auditor’s Report



To: the Board of Directors and Shareholders of KBS Fashion Group
Limited



We have audited the accompanying consolidated
statements of financial position of KBS Fashion Group Limited and its subsidiaries (the “Company”), as of December
31, 2014 and 2013 and the related consolidated statements of comprehensive income, statements of changes in equity and statements
of cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our
audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of KBS Fashion Group Limited and
its subsidiaries at December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in
conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.



October 27, 2015



/s/ BDO China Shu Lun Pan Certified Public Accountants LLP



Shanghai, China











KBS
Fashion Group Limited

Consolidated
Financial Statements



For
the years ended December 31, 2014 and 2013

(Stated
in US dollars)











|CONTENTS                                        |  | PAGES   
|----------------------------------------------- |  | --------
|                                                |  |         
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |  | F-2     
|                                                |  |         
|CONSOLIDATED STATEMENTS OF FINANCIAL POSITION   |  | F-3     
|                                                |  |         
|CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY    |  | F-4     
|                                                |  |         
|CONSOLIDATED STATEMENTS OF CASH FLOWS           |  | F-5- F-6
|                                                |  |         
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  |  | F-7–F-41



F-1







KBS Fashion Group Limited

Consolidated statements of comprehensive income

For the years ended December 31, 2014 and 2013

(Stated in US dollars)



|                                                               |  |       |  | Year ended December 31, |            
|-------------------------------------------------------------- |  | ----- |  | ----------------------- | -----------
|                                                               |  | Notes |  | 2014                    |            
|                                                               |  |       |  |                         |            
|Revenue                                                        |  | 8     |  |                         | 58,832,481 
|Cost of sales                                                  |  | 9     |  |                         | (39,416,973
|                                                               |  |       |  |                         |            
|Gross profit                                                   |  |       |  |                         | 19,415,508 
|                                                               |  |       |  |                         |            
|Other income                                                   |  | 10    |  |                         | 252,748    
|Other gains and losses                                         |  | 11    |  |                         | (2,036,508 
|Distribution and selling expenses                              |  | 12    |  |                         | (7,191,606 
|Administrative expenses                                        |  | 13    |  |                         | (4,649,229 
|                                                               |  |       |  |                         |            
|Profit from operations                                         |  |       |  |                         | 5,790,913  
|                                                               |  |       |  |                         |            
|Finance costs                                                  |  | 14    |  |                         | (23,630    
|Change in fair value of warrant liabilities                    |  | 32    |  |                         | 3,417,053  
|                                                               |  |       |  |                         |            
|Profit before tax                                              |  |       |  |                         | 9,184,336  
|Income tax expense                                             |  | 15    |  |                         | (2,307,354 
|Profit for the year                                            |  | 16    |  |                         | 6,876,982  
|Other comprehensive income                                     |  |       |  |                         |            
|-currency translation differences                              |  |       |  |                         | (350,810   
|                                                               |  |       |  |                         |            
|Total comprehensive income for the year                        |  |       |  |                         | 6,526,172  
|                                                               |  |       |  |                         |            
|Earnings per share of common stock attributable to the Company |  |       |  |                         |            
|-Basic                                                         |  | 19    |  |                         | 0.27       
|- Diluted                                                      |  | 19    |  |                         | 0.27       



The accompanying notes are an integral part of these consolidated
financial statements.



The consolidated financial statements on page F-2 to F-46 were
approved and authorized for issue by the Board of Directors on October 27, 2015 and are signed on its behalf by:










DIRECTOR



F-2







KBS Fashion Group Limited

Consolidated statements of
financial position

For the year ended December 31, 2014 and 2013

(Stated in US dollars)



|                                                |  |       |  | As of December 31, |            
|----------------------------------------------- |  | ----- |  | ------------------ | -----------
|                                                |  | Notes |  | 2014               |            
|                                                |  |       |  |                    |            
|Non-current assets                              |  |       |  |                    |            
|Property, plant and equipment-net               |  | 20    |  |                    | 33,315,513 
|Prepayments and premiums under operating leases |  | 21    |  |                    | 2,991,245  
|Prepayment for construction of new plant        |  | 22    |  |                    | 8,988,397  
|Prepayment for acquisition of land use right    |  | 23    |  |                    | 6,409,689  
|Prepaid lease payments                          |  | 24    |  |                    | 729,098    
|Deferred tax assets                             |  | 15    |  |                    | 495,444    
|                                                |  |       |  |                    | 52,929,386 
|                                                |  |       |  |                    |            
|Current assets                                  |  |       |  |                    |            
|Inventories                                     |  | 25    |  |                    | 793,469    
|Trade and other receivables                     |  | 26    |  |                    | 39,516,503 
|Subsidies prepaid to distributors               |  | 27    |  |                    | 534,859    
|Prepayments and premiums under operating leases |  | 21    |  |                    | 471,580    
|Prepaid lease payments                          |  | 24    |  |                    | 17,399     
|Cash and cash equivalents                       |  | 28    |  |                    | 20,604,582 
|                                                |  |       |  |                    | 61,938,392 
|                                                |  |       |  |                    |            
|Total assets                                    |  |       |  |                    | 114,867,778
|                                                |  |       |  |                    |            
|Current liabilities                             |  |       |  |                    |            
|Trade and other payables                        |  | 29    |  |                    | 5,527,158  
|Related parties payables                        |  | 30    |  |                    | 651,078    
|Income tax payable                              |  |       |  |                    | 3,056,079  
|Short-term loans                                |  | 31    |  |                    | -          
|                                                |  |       |  |                    | 9,234,315  
|                                                |  |       |  |                    |            
|Non-current liability                           |  |       |  |                    |            
|Warrant liabilities                             |  | 32    |  |                    | 15,387     
|                                                |  |       |  |                    | 15,387     
|                                                |  |       |  |                    |            
|Total liabilities                               |  |       |  |                    | 9,249,702  
|                                                |  |       |  |                    |            
|Equity                                          |  |       |  |                    |            
|Share capital                                   |  | 33    |  |                    | 2,542      
|Share premium                                   |  | 33    |  |                    | 5,624,875  
|Statutory surplus reserve                       |  | 34    |  |                    | 5,815,493  
|Retained profits                                |  | 34    |  |                    | 89,890,767 
|Foreign currency translation reserve            |  | 34    |  |                    | 4,284,399  
|                                                |  |       |  |                    | 105,618,076
|                                                |  |       |  |                    |            
|Total liabilities and equity                    |  |       |  |                    | 114,867,778



The accompanying notes are an integral part of these consolidated
financial statements.



F-3







KBS Fashion Group Limited

Consolidated statements of changes in equity

For the year ended December 31, 2014 and 2013

(Stated in US dollars)



|                                           |  |               |       |  |               |  |           | Statutory |  |  |           |  |  |                     |            |   |       | 
|------------------------------------------ |  | ------------- | ----- |  | ------------- |  | --------- | --------- |  |  | --------- |  |  | ------------------- | ---------- | - | ----- | 
|                                           |  |               |       |  |               |  |           | surplus   |  |  | Retained  |  |  | Foreign currency    |            |   |       | 
|                                           |  | Share capital |       |  | Share premium |  |           | reserve   |  |  | profits   |  |  | translation reserve |            |   | Total | 
|                                           |  | (Note 33)     |       |  | (Note 33)     |  |           | (Note 34) |  |  | (Note 34) |  |  | (Note 34)           |            |   |       | 
|                                           |  |               |       |  |               |  |           |           |  |  |           |  |  |                     |            |   |       | 
|Balance at January 1, 2013                 |  |               | 2,542 |  |               |  | 1,422,161 |           |  |  | 2,438,536 |  |  |                     | 59,814,279 |   |       | 
|Profit for the year                        |  |               |       |  |               |  | (374,714  | )         |  |  |           |  |  |                     | 25,794,080 |   |       | 
|Other comprehensive income for the year    |  |               |       |  |               |  |           |           |  |  |           |  |  |                     |            |   |       | 
|Appropriation to statutory surplus reserve |  |               |       |  |               |  |           |           |  |  | 2,625,370 |  |  |                     | (2,625,370 | ) |       | 
|Balance at December 31, 2013               |  |               | 2,542 |  |               |  | 1,047,447 |           |  |  | 5,063,906 |  |  |                     | 82,982,989 |   |       | 
|Waiver of payable to ex-shareholder        |  |               | -     |  |               |  | 5,359,811 |           |  |  | -         |  |  |                     | -          |   |       | 
|Profit for the year                        |  |               | -     |  |               |  | (782,383  | )         |  |  | -         |  |  |                     | 7,659,365  |   |       | 
|Other comprehensive income for the year    |  |               | -     |  |               |  | -         |           |  |  | -         |  |  |                     | -          |   |       | 
|Appropriation to statutory surplus reserve |  |               | -     |  |               |  | -         |           |  |  | 751,587   |  |  |                     | (751,587   | ) |       | 
|Balance at December 31, 2014               |  |               | 2,542 |  |               |  | 5,624,875 |           |  |  | 5,815,493 |  |  |                     | 89,890,767 |   |       | 



The accompanying notes are an integral part of these consolidated
financial statements.



F-4







KBS Fashion Group Limited

Consolidated statements of cash flow

For the year ended December 31, 2014 and 2013

(Stated in US dollars)



|                                                                                      |  | Year ended December 31, |            
|------------------------------------------------------------------------------------- |  | ----------------------- | -----------
|                                                                                      |  | 2014                    |            
|                                                                                      |  |                         |            
|OPERATING ACTIVITIES                                                                  |  |                         |            
|Profit for the year                                                                   |  |                         | 6,876,982  
|                                                                                      |  |                         |            
|Adjustments for:                                                                      |  |                         |            
|Finance cost                                                                          |  |                         | 23,630     
|Change in fair value of warrant liabilities                                           |  |                         | (3,417,053 
|Interest income                                                                       |  |                         | (136,911   
|Depreciation of property, plant and equipment                                         |  |                         | 2,340,082  
|Amortization of prepaid lease payments                                                |  |                         | 17,326     
|Amortization of subsidies prepaid to distributors                                     |  |                         | 1,163,913  
|Amortization of prepayments and premiums under operating leases                       |  |                         | 659,442    
|Provision/ (Reversal) of inventory obsolescence                                       |  |                         | (1,848     
|Bad debt provision of trade receivables                                               |  |                         | 1,973,459  
|Gain on disposal of property, plant and equipment                                     |  |                         | -          
|                                                                                      |  |                         |            
|Operating cash flows before movements in working capital                              |  |                         | 9,499,022  
|                                                                                      |  |                         |            
|Increase in trade and other receivables                                               |  |                         | (11,007,437
|Decrease in related parties receivables                                               |  |                         | -          
|Decrease in inventories                                                               |  |                         | (126,523   
|Increase in trade and other payables                                                  |  |                         | 1,071,032  
|Increase in related parties payables (excluding waiver of payables to ex-shareholder) |  |                         | 221,847    
|Increase in income tax payable                                                        |  |                         | (918,759   
|Increase in deferred tax assets                                                       |  |                         | (495,444   
|Prepayments and premiums paid under operating leases                                  |  |                         | (515,038   
|Withdraw the prepayments and premiums paid under operating leases                     |  |                         | -          
|Subsidies prepaid to distributors                                                     |  |                         | (1,065,227 
|                                                                                      |  |                         |            
|NET CASH USED IN / FROM OPERATING ACTIVITIES                                          |  |                         | (3,336,527 
|                                                                                      |  |                         |            
|INVESTING ACTIVITIES                                                                  |  |                         |            
|Interest received                                                                     |  |                         | 136,911    
|Prepayment for construction of new plant                                              |  |                         | (15,755,201
|Purchase of property, plant and equipment                                             |  |                         | (1,919,723 
|                                                                                      |  |                         |            
|NET CASH USED IN INVESTING ACTIVITIES                                                 |  |                         | (17,538,013



The accompanying notes are an integral part of these consolidated
financial statements.



F-5







KBS Fashion Group Limited

Consolidated statements of cash flow (continued)

For the year ended December 31, 2014 and 2013

(Stated in US dollars)





|                                                                                |  | Year ended December 31, |            
|------------------------------------------------------------------------------- |  | ----------------------- | -----------
|                                                                                |  | 2014                    |            
|                                                                                |  |                         |            
|FINANCING ACTIVITIES                                                            |  |                         |            
|Interest paid                                                                   |  |                         | (23,630    
|New bank loans raised                                                           |  |                         | -          
|Repayment of borrowings                                                         |  |                         | (1,968,213 
|Repayment of loan payable-related party                                         |  |                         | -          
|Advance from related party                                                      |  |                         | -          
|Payment of offering costs                                                       |  |                         | -          
|                                                                                |  |                         |            
|NET CASH USED IN / PROVIDED BY FINANCING ACTIVITIES                             |  |                         | (1,991,843 
|                                                                                |  |                         |            
|NET DECREASE / INCREASE IN CASH AND CASH EQUIVALENTS                            |  |                         | (22,866,383
|Effects of currency translation                                                 |  |                         | (229,122   
|                                                                                |  |                         |            
|CASH AND CASH EQUIVALENTSAT BEGINNING OF YEAR                                   |  |                         | 43,700,087 
|                                                                                |  |                         |            
|CASH AND CASH EQUIVALENTS AT END OF YEAR, represented by cash and bank balances |  |                         | 20,604,582 



The accompanying notes are an integral part of these consolidated
financial statements.



F-6







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 1. | GENERAL INFORMATION
| | -- | -------------------



| | (1) | Hongri International Holdings Limited (the "Company") formerly known as Wah Ying International
Investment Inc. was incorporated in the British Virgin Islands (the "BVI") on July 8, 2008 as a limited liability company
with authorized share capital of $50,000, divided into 50,000 common shares of $1 per value each of which 10,000 common shares
were issued at par as of December 31, 2010. On January 27, 2011, the Company issued additional 10,000 common shares at a cash consideration
of $77 per share. The principal activity of the Company is investment holding. Wong Chi Hung, Stanley, is the sole director of
Hongri International. Before the acquisition by KBS International Holding Inc. (“KBS International”), the 20,000 common
shares were held as to 30% by Cheung So Wa and 70% by Chan Sun Keung. On November 16, 2009, Yan Keyan entered into an option agreement
with Cheung So Wa and Chan Sun Keung of which Yan Keyan is entitled an exclusive right to purchase the 100% equity interest in
the Company at a cash consideration equivalent to the nominal value of issued share capital. Before the execution of the exclusive
right by Yan Keyan, the rights and obligations as a stockholder of the 100% equity interest in the Company are still vested in
Yan Keyan and the appointment of the board of directors and management is controlled by Yan Keyan. This option agreement was replaced
by a new option agreement on March 9, 2011.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | France Cock (China) Limited ("France Cock") was incorporated in Hong Kong on September
21, 2005 as a limited liability company with authorized issued and paid up capital of HK$10,000, divided into 10,000 common shares
of HK$1 par value each. The principal activity of France Cock is trademark holding. The directors of France Cock are Yan Keyan
and Wong Chi Hung, Stanley. Before the acquisition by the Company, the 10,000 common shares were held by Yan Keyan.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pursuant to a trademark transfer
agreement dated October 4, 2009, Hongri Fujian agreed to transfer a trademark "KBS" to France Cock for a consideration
of RMB100,000 (approximately $15,250). The trademark transfer procedure has been completed on October 20, 2010 and the Trademark
Authority in the People's Republic of China (the "PRC") issued a trademark registration certificate to France Cock on
March 21, 2011.



Pursuant to a trademark licensing
agreement dated December 1, 2005, France Cock agreed to license a trademark "Kabiniao" to Hongri Fujian for 10 years
commencing from January 1, 2006 at a fee of RMB1,000,000 (approximately $152,500) per annum.



Pursuant to a trademark licensing
agreement executed in 2009, France Cock agreed to license a trademark "KBS" to Hongri Fujian for 5 years commencing from
January 1, 2009 at a fee of RMB40,000,000 (approximately $6.1million) per annum. The trademark licensing agreement was updated
on August 1, 2012. In the new agreement, France Cock agreed to waive the license fee from January 1, 2012.



| | (3) | Roller Rome Limited ("Roller Rome") was incorporated in the BVI on March 28, 2006 as
a limited liability company with authorized share capital of $50,000, divided into 50,000 common shares of $1 par value each of
which 1 share was issued at par. The principal activity of Roller Rome is the provision of design and development services for
sports apparel. The directors of Roller Rome are Yan Keyan and Wong Chi Hung, Stanley. Before the acquisition by the Company, the
only one issued common share was held by Chen Bizhen.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-7







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 1. | GENERAL INFORMATION-continued
| | -- | -----------------------------



| | (4) | Vast Billion Investment Limited ("Vast Billion") was incorporated in Hong Kong on November
25, 2010 as a limited liability company with authorized share capital of HK$10,000 divided into 10,000 ordinary share of HK$1 each
of which 1 ordinary share was issued at par. Vast Billion was a dormant company until the completion of acquisition of 100% equity
interest in Hongri Fujian on February 15, 2011. The directors of Vast Billion are Wong Chi Hung, Stanley and Chan Sun Keung, the
father of Chen Bizhen. Before the acquisition by Hongri International, 1 ordinary share was held by Chan Sun Keung.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Hongri (Fujian) Sports Goods Co. Ltd. ("Hongri Fujian") was established in the People's
Republic of China (the "PRC") on November 17, 2005 with a registered and paid up capital of RMB 5,000,000 (which are
not divided into shares). On March 24, 2011, Hongri Fujian increased registered capital from RMB 70,000,000 to RMB75,000,000. As
of September 30, 2011, the paid up capital was RMB 39,551,860. Hongri Fujian is engaged in the design manufacture marketing and
sale of apparel in the PRC. On August 10, 2011, Chen Bizhen replaced Wang Feiya as legal representative of Hongri Fujian. Before
the acquisition by Vast Billion, the paid up capital of RMB 5,000,000 was held as to 50% by Yan Keyan and 50% by Chen Bizhen. On
December 18, 2006, Roller Rome entered into a buy back agreement with Yan Keyan and his wife Chen Bizhen of which Roller Rome is
entitled the exclusive right to acquire all of Yan Keyan's and Chen Bizhen's 100% equity interest in Hongri Fujian at a consideration
equivalent to the paid up capital of Hongri Fujian. Before the execution of the exclusive right by Roller Rome, i) 100% equity
interest in Hongri Fujian is pledged to Roller Rome as collateral for the annual fee due to Roller Rome; ii) Roller Rome is entitled
the exclusive right to receive all of dividend declared by Hongri Fujian; and iii) the appointment of the board of directors and
management of Hongri Fujian are controlled by Roller Rome. This buy back agreement was mutually terminated upon the completion
of acquisition of Hongri Fujian by Vast Billion.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Anhui Kai Xin Apparel Company Limited ("Anhui Kai Xin") was established in the PRC on
March 16, 2011 with a registered and paid up capital of RMB 1,000,000. Anhui Kai Xin is a wholly owned subsidiary of Hongri Fujian.
Anhui Kai Xin provides sub-contracting service for the manufacture of sports apparel to Hongri Fujian and other brand name owners
in the PRC. Yan Keyan is the director and legal representative of Anhui Kai Xin.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Shishi Hongri Brand Management Company Limited ("Brand Management”) was established
in the PRC on October 17, 2011 with a registered and paid up capital of RMB 100,000, Brand Management is a wholly owned subsidiary
of Hongri Fujian and a dormant company in the PRC. Chen Bizhen is the director and legal representative of Brand Management. Brand
Management was dissolved on November 24, 2014.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | According to a Design and Development Agreement entered into between Roller Rome and Hongri Fujian
on December 18, 2006, Roller Rome provides design and development services, including market research, product development, design
technical consulting and staff training to Hongri Fujian for an annual fee ranging from 90% to 99% of Hongri Fujian's net income
before tax. The Design and Development Agreement expired on December 31, 2011.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | On March 24, 2014, Aquasition Investments Corp. entered into a Share Exchange Agreement and Plan
of Liquidation (the “Agreement”), with KBS International Holdings, Inc., a Nevada corporation (“KBS”),
Hongri International Holdings Ltd., a company organized and existing under the laws of the British Virgin Islands and wholly owned
subsidiary of KBS (“Hongri” or the “Target”); and Cheung So Wa and Chan Sun Keung, each an individual and
shareholder of KBS (each, a “Principal Stockholder”). The aquisition is expected to be accounted for as a reverse merger
and recapitalization where KBS will be the acquirer and the Company will be the acquired company. On August 1, 2014, the acquisition
was completed, and Aquasition Investments Corp. was changed to KBS Fashion Group Limited. The Company also intends to change its
trading symbol from "AQU" to "KBSF".
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-8







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 2. | GROUP REORGANISATION AND BASIS OF PRESENTATION OF CONSOLIDATED
FINANCIAL STATEMENTS
| | -- | -----------------------------------------------------------------------------------



The Group structure
as at the reporting date is as follows:







The consolidated financial statements
have been prepared in accordance with international financial reporting standards ("IFRS") as issued by the International
Accounting Standards Board.



| | 3. | APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL
REPORTING STANDARDS ("IFRSs")
| | -- | ------------------------------------------------------------------------------------



Except as described below,
for the year ended December 31, 2014 the Company has consistently adopted all the new and revised standards, amendments and interpretations
(collectively IFRSs) issued by the International Accounting Standards Board ("IASB") and the IFRS Interpretations Committee
(formerly known as "International Financial Reporting Interpretations Committee" ("IFRIC")) of the IASB that
are effective for financial year beginning on January 1, 2014 in the preparation of the consolidated financial statements throughout
the year.



The Company has applied
the following new and revised standards, amendments or interpretations that have been issued and effective during the reporting
period:



Amendment to IAS 36, "Impairment
of assets"



Amendment to IAS 39, "Financial
instruments: Recognition and measurement"



Annual improvements to
IFRSs 2012 and 2013



Amendment to IAS 16, "Property,
plant and equipment" and IAS 38, "Intangible assets"



Its application has had
no impact on the consolidated financial statements.



F-9







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 3. | APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL
REPORTING STANDARDS ("IFRSs")-continued
| | -- | ----------------------------------------------------------------------------------------------



At the date these consolidated
financial statements are authorized for issuance, the IASB has issued the following new and revised International Accounting Standards
("IASs"), IFRSs, amendments and IFRICs which are not yet effective in respect of the years. The Company has not early
applied the following new and revised standards, amendments or interpretations that have been issued but are not yet effective:



Amendment to IAS 32, "Financial
Instruments: Presentation"



IFRS 9, "Financial instruments"



IFRS 15, "Revenue from
Contract with Customers".



Annual improvements to IFRSs
2012–2014s



The directors of the Company
anticipate that the application of the new and revised standards, amendments or interpretations will have no material impact on
the consolidated financial statements of the Company.



| | 4. | SIGNIFICANT ACCOUNTING POLICIES
| | -- | -------------------------------



The principal accounting
policies adopted in the preparation of the financial statements are set out below. The policies have been consistently applied
to all the years presented, unless otherwise stated.



First-time adoption of IFRS



These financial statements,
for the year ended December 31, 2014, are the first time the Company has prepared in accordance with IFRS. For periods up to and
including the year ended 31 December 2013, the Company prepared its financial statements in accordance with U.S. generally accepted
accounting principles (U.S. GAAP). Accordingly, the Company has prepared financial statements which comply with IFRS applicable
for periods ending on or after December 31, 2014, together with the comparative period data as at and for the year ended December
31, 2013, as described in the accounting policies. In preparing these financial statements, the Company’s opening statement
of financial position was prepared as at January 1, 2013 the Company’s date of transition to IFRS.



The Company’s main
business activity was investment and only some administrative expenses and distribution and selling expenses incurred in the Company.
There were no substantial differences between the amounts under U.S. GAAP and IFRS. Therefore, no principal adjustments made by
the Company in restating its U.S. GAAP statement of financial position as at 1 January 2013 and its previously published U.S.
GAAP financial statements as at and for the year ended December 31, 2013.



F-10







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 4. | SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | -------------------------------------------



Basis
of preparation



The consolidated financial statements
have been prepared on the historical cost basis and in accordance with IFRS as issued by the IASB. The principal accounting policies
are set out below.



Basis of consolidation



The consolidated financial statements
incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved
where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.



Where necessary, adjustments
are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members
of the Group.



All intra-group transactions, balances, income
and expenses are eliminated on consolidation.



Foreign currencies



Functional and presentation currency



Items included in the
financial statements are measured using the currency of the primary economic environment in which the entity operates (the
"functional currency").



The Group conducts its business predominately
in the PRC and hence its functional currency is the Renminbi (RMB).



Translation from RMB to USD found place at the
following rates:



|                  |  | Period end rates     |  | Average rates      
|----------------- |  | -------------------- |  | -------------------
|                  |  |                      |  |                    
|December 31, 2013 |  | USD 1.00= RMB 6.0969 |  | USD 1.00=RMB 6.1896
|                  |  |                      |  |                    
|December 31, 2014 |  | USD 1.00= RMB 6.1190 |  | USD 1.00=RMB 6.1448



The results and financial positions in functional
currency are translated into the presentation currency of its intended ultimate legal parent as follows:



(1) Assets and liabilities for each balance
sheet presented are translated at the closing rate at the date of that balance sheet;



(2) Income and expenses for each income statement
are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the
rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions);



(3) Share equity, share premium and dividends
are translated at historical exchange rates; and



(4) All resulting exchange differences are recognized
in foreign currency translation reserve, a separate component of equity.



F-11







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 4. | SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | -------------------------------------------



Segment reporting



Operating segments, and
the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly
to the Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance
of, the Group’s various lines of business and geographical locations.



Individually material operating
segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are
similar in respect of the nature of products and services, the nature of production processes, the type or class of customers,
the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments
which are not individually material may be aggregated if they share a majority of these criteria. The Group’s three segments
are wholesale, retail and subcontracting.



Revenue recognition



Revenue is measured at the fair
value of the consideration received or receivable and represents amounts receivable for goods sold in the normal course of business,
net of discounts and sales related taxes.



The Group’s revenue originating
(i) from corporate owned stores, (ii) distributors and (iii) the services performed as an original design manufacturer. Revenue
from all above categories is recognized when all the following conditions are satisfied:



| | l | the Group has transferred
to the buyer the significant risks and rewards of ownership of the goods;
| | - | ---------------------------------------------------------------------------------------------------



| | l | the Group retains
neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods
sold;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | l | the amount of revenue
can be measured reliably;
| | - | -----------------------------------------------



| | l | it is probable
that the economic benefits associated with the transaction will flow to the Group; and the costs incurred or to be incurred in
respect of the transaction can be measured reliably.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Specifically, revenue from
sale of goods is recognized when the goods are delivered and title has passed.



Value added tax (VAT)



Output VAT is 17% of product
sales and taxable services revenue, according to tax laws. The remaining balance of output VAT, after subtracting the deductible
input VAT of the period, is VAT payable.



Borrowing costs



Borrowing costs directly
attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial
period of time to get ready for their intended use or sale, are added to the cost of those assets until such time as the assets
are substantially ready for their intended use or sale.



All other borrowing costs
are recognized in profit or loss in the period in which they are incurred.



F-12







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 4. | SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | -------------------------------------------



Retirement benefit costs



Pursuant to the relevant
regulations of the PRC government, the Group participates in a local municipal government retirement benefits scheme (the "Scheme"),
whereby the subsidiaries located in the PRC are required to contribute a certain percentage of the basic salaries of its employees
to the Scheme to fund their retirement benefits. The local municipal government undertakes to assume the retirement benefits obligations
of all existing and future retired employees of the subsidiaries located in the PRC. The only obligation of the Group with respect
to the Scheme is to pay the on-going required contributions under the Scheme mentioned above. Contributions under the Scheme are
charged to the profit or loss as incurred. There are no provisions under the Scheme whereby forfeited contributions may be used
to reduce future contributions. These plans are considered defined contribution plans. The Group has no legal or constructive obligations
to pay further contributions after its payment of the fixed contributions into the national pension schemes. Contributions to national
pension schemes are recognized as an expense in the period in which the related service is performed.



Taxation



Income tax expense represents
the sum of the tax currently payable and deferred tax.



The tax currently payable is
based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated statements of comprehensive
income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or
deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted
by the end of the reporting period.



Deferred tax is recognized
on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the
corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable
temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that
it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such
deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition
(other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit
nor the accounting profit.



Deferred tax liabilities are
recognized for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control
the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets arising from deductible temporary differences associated with such investments are only recognized to the extent
that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences
and they are expected to reverse in the foreseeable future.



The carrying amount of deferred
tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be recovered.



Deferred tax assets and liabilities
are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized,
based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement
of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects,
at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.



F-13







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 4. | SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | -------------------------------------------



Taxation-continued



Current and deferred tax are
recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in
equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively.
Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in
the accounting for the business combination.



Store pre-opening cost



Store pre-opening cost was
the start-up activity costs incurred prior to opening a new store, mainly including leasing, leasehold improvements, payroll and
supplies. The accounting policies for leasing and leasehold improvements were as below. Other store pre-opening costs were directly
charged to expenses when occurred.



Leasing



Leases are classified as finance leases whenever
the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified
as operating leases.



Leasehold improvements



Leasehold improvements, principally
comprising costs of office buildings and shops renovation, are held for administrative and selling purposes. Leasehold improvements
are initially measured at cost and amortized systematically over its useful life.



Property, plant and equipment



Property, plant and equipment
("PPE") including buildings held for use in the production or supply of goods or services, or for administrative purposes
other than construction in progress are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.



Depreciation is provided to
write off the cost of items of property, plant and equipment other than construction in progress over their estimated useful lives
and after taking into account of their estimated residual value, using the straight-line method.



Construction in progress includes
property, plant and equipment in the course of construction for production or for its own use purposes. Construction in progress
is carried at cost less any recognized impairment loss. Construction in progress is classified to the appropriate category of property,
plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property
assets, commences when the assets are ready for their intended use.



An item of property, plant and
equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the
asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and
the carrying amount of the item) is included in profit or loss in the period in which the item is derecognized.



The Group as lessor



Rental income from operating
leases is recognized in profit or loss on a straight-line basis over the term of the relevant lease.



F-14







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 4. | SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | -------------------------------------------



Leasehold land



When a lease includes both
land and building elements, the Group assesses the classification of each element as a finance or an operating lease separately
based on the assessment as to whether substantially all the risks and rewards incidental to ownership of each element have been
transferred to the Group. Specifically, the minimum lease payments (including any lump-sum upfront payments) are allocated between
the land and the building elements in proportion to the relative fair values of the leasehold interests in the land element and
building element of the lease at the inception of the lease.



To the extent the allocation
of the lease payments can be made reliably, interest in leasehold land that is accounted for as an operating lease is presented
as "prepaid lease payments" in the consolidated statement of financial position and is amortized over the lease term
on a straight-line basis.



Inventories



Inventories are stated at the
lower of cost and net realizable value. Costs of inventories are determined using the weighted average method. Net realizable value
represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.



Financial instruments



Financial assets and financial
liabilities are recognized on the consolidated statements of financial position when a group entity becomes a party to the contractual
provisions of the instrument.



Financial assets and financial
liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue
of financial assets and financial liabilities are added to or deducted from the fair value of the financial assets or financial
liabilities, as appropriate, on initial recognition.



Financial assets



The Group's financial assets
are classified as receivables.



Effective interest method



The effective interest method
is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid
or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through
the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.



Interest income is recognized on an effective interest
basis for debt instruments.



Receivables



Receivables are non-derivative
financial assets with fixed or determinable payments that are not quoted in an active market. Receivables (including trade and
other receivables, related parties receivables, and cash and cash equivalents) are measured at amortized cost using the effective
interest method, less any impairment (see accounting policy on impairment loss on receivables below).



F-15







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 4. | SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | -------------------------------------------



Financial instruments-continued



Financial assets-continued



Impairments of receivables



Receivables are assessed for
indicators of impairment at the end of the reporting period. Receivables are impaired where there is objective evidence that, as
a result of one or more events that occurred after the initial recognition of the receivables, the estimated future cash flows
of the receivables have been affected.



Objective evidence of impairment
could include:



| | l | significant
financial difficulty of the issuer or counterparty;
| | - | ---------------------------------------------------------------



| | l | default
or delinquency in interest or principal payments;
| | - | ---------------------------------------------------------



| | l | it
becoming probable that the borrower will enter bankruptcy or financial reorganization.
| | - | -----------------------------------------------------------------------------------------



For certain categories of financial
asset, such as trade and other receivables, assets that are assessed not to be impaired individually are subsequently assessed
for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group's
past experience of collecting payments, and increase in the number of delayed payments in the portfolio past the average credit
period, observable changes in national or local economic conditions that correlate with default on receivables.



An impairment loss is recognized in profit or loss
when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying
amount and the present value of the estimated future cash flows discounted at the original effective interest rate.



The carrying amount of the
receivables is reduced by the impairment loss directly for all financial assets with exception of trade and other receivables,
where the carrying amount is reduced through the use of an allowance account. Changes in carrying amount of the allowance account
are recognized in profit or loss. When a trade and other receivable are considered uncollectible, it is written off against the
allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.



If, in a subsequent period,
the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment
losses was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying
amount of the asset at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment
not been recognized.



Cash and cash equivalents



Cash and cash equivalents comprise
cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments
that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having
been within three months of maturity at acquisition



F-16







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 4. | SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | -------------------------------------------



Financial instruments-continued



Financial liabilities and equity



Financial liabilities
and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered
into and the definitions of a financial liability and an equity instrument.



An equity instrument is
any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.



Effective interest method



The effective interest
method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant
period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points
paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts)
through the expected life of the financial liability, or, where appropriate, a shorter period to the net carrying amount on initial
recognition.



Interest expense is recognized on an effective
interest basis.



Financial liabilities



Financial liabilities
including trade and other payables, related parties payables and short-term loans are subsequently measured at amortized cost,
using the effective interest method.



Equity instruments



Equity instruments issued
by the group entities are recorded at the proceeds received, net of direct issue costs.



Derecognition



Financial assets are derecognized
when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Group has transferred
substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference
between the asset's carrying amount and the sum of the consideration received and receivable is recognized in profit or loss.



Financial liabilities
are derecognized when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between
the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.



Subsidies prepaid to distributors



Subsidies were paid to major distributors for compensating their
rental expenses. Such subsidies would vest to distributors when they met the sales targets predetermined by the Company. Subsidies
prepaid to distributors were recognized when payments were made and amortized over the agreement term on a straight-line basis
in selling expenses.



F-17







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 4. | SIGNIFICANT ACCOUNTING POLICIES - continued
| | -- | -------------------------------------------



Capital and Reserves



Share capital represents
the nominal value of shares that have been issued by the Group. Share capital is determined using the nominal value of shares that
have been issued.



Retained profits include
all current and prior period results as determined in the combined statement of comprehensive income.



Foreign currency translation
reserve arising on the translation are included in the currency translation reserve.



In accordance with the
relevant laws and regulations of PRC, the subsidiaries of the Group established in PRC are required to transfer 10% of its annual
statutory net profit (after offsetting any prior years’ losses) to the statutory reserve. When the balance of such reserve
reaches 50% of the subsidiary’s share capital, any further transfer of its annual statutory net profit is optional. Such
reserve may be used to offset accumulated losses or to increase the registered capital of the subsidiary subject to the approval
of the relevant authorities. However, except for offsetting prior years’ losses, such statutory reserve must be maintained
at a minimum of 25% of the share capital after such usage. The statutory reserves are not available for dividend distribution to
the shareholders.



All transactions with
owners of the Group are recorded separately within equity.



Earnings per share



Basic earnings per share
(“EPS”) are computed by dividing income attributable to holders of common shares by the weighted average number of
common shares outstanding during the year. Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common shares were exercised or converted into common shares. Potential dilutive securities are excluded from
the calculation of diluted EPS in loss periods as their effect would be anti-dilutive.



The preparation of financial statements in conformity with IFRS
requires management to exercise judgment in the process of applying the Group’s accounting policies and requires the use
of accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of financial statements and reported amount of revenue and expenses during the reporting period.
The following estimates that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities
within the next financial year are disclosed below:



F-18







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 5. | SIGNIFICANT MANAGEMENT JUDGMENT IN APPLYING ACCOUNTING
POLICIES
| | -- | ---------------------------------------------------------------



Allowance for Bad and Doubtful
debts



Allowances for bad and
doubtful debts are based on an assessment of the recoverability of trade and other receivables. Allowances are applied to trade
and other receivables where events or changes in circumstances indicate that the balances may not be collectible. The identification
of bad and doubtful debts requires the use of judgment and estimates, where the expected outcome is different from the original
estimate, such difference will impact carrying value of trade and other receivables and doubtful debt expenses in the period in
which such estimate has been charged.



Income Tax



The Group has exposure
to income taxes in numerous jurisdictions. Significant judgment is involved in determining the Group’s provision for income
taxes. There are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary
course of business. The Group recognizes liabilities for expected tax issues based on estimates of whether additional taxes will
be due. Where the final tax outcome of these matters is different from the amounts that were initially recognized, such differences
will impact the income tax and differed tax provisions in the period in which such determination is made. The carrying amount of
the Group’s income tax payable as at December 31, 2014 and 2013 amounted to USD 2,763,296 and USD 3,974,838 respectively.



| | 6. | KEY SOURCES OF ESTIMATION UNCERTAINTY
| | -- | -------------------------------------



In the application of
the Group's accounting policies, which are described in Note 4, management is required to make estimates and assumptions about
the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions
are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.



The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate
is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects
both current and future periods.



The following are the
key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that
have a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial year.



Depreciation of building,
machinery and equipment



As described in Note
4, the Group reviews the estimated useful lives and residual values of property, plant and equipment at the end of each reporting
period. The cost of building, machinery and equipment is depreciated on a straight-line basis over the assets' estimated useful
lives. Management estimates the useful lives of these buildings, machinery and equipment to be within 5 to 20 years. These are
the common life expectancies applied in the same industry. Changes in the expected level of usage and technological developments
could impact the economic useful lives and the residual values of these assets, therefore future depreciation charges could be
revised.



F-19







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 6. | KEY SOURCES OF ESTIMATION UNCERTAINTY-continued
| | -- | -----------------------------------------------



Fair value of warrants



The fair value of warrants
was determined using a binomial-lattice model. This model requires the input of highly subjective assumptions, including price
volatility of the underlying stock. Changes in the subjective input assumptions can materially affect the estimate of fair value
of the warrants and the Company’s results of operations could be impacted. This model is dependent upon several variables
such as the instrument's expected term, expected strike price, expected risk-free interest rate over the expected instrument term,
the expected dividend yield rate over the expected instrument term and the expected volatility of the Company’s stock
price over the expected term. The expected term represents the period of time that the instruments granted are expected to be outstanding.
The expected strike price is based upon a weighted average probability analysis of the strike price changes expected during the
term as a result of the down round protection.  The risk-free rates are based on U.S. Treasury securities with similar
maturities as the expected terms of the options at the date of valuation.  Expected dividend yield is based on historical
trends.  The Company measures volatility using the volatility rates of market index.



Impairment of non-financial
assets



Property, plant and equipment
are tested for impairment whenever there is any objective evidence or indication that these assets may be impaired.



For the purpose of impairment
testing, the recoverable amount (i.e. the higher of the fair value less cost to sell and the value-in-use) is determined on an
individual asset basis unless the asset does not generate cash flows that are largely independent of those from other assets. If
this is the case, the recoverable amount is determined for the cash-generating-unit (“CGU”) to which the asset belongs.



If the recoverable amount
of the asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to
its recoverable amount.



The difference between
the carrying amount and recoverable amount is recognized as an impairment loss in the income statement, unless the asset is carried
at revalued amount, in which case, such impairment loss is treated as a revaluation decrease.



An impairment loss for
an asset other than goodwill is reversed if, and only if, there has been a change in the estimates used to determine the asset’s
recoverable amount since the last impairment loss was recognized. The carrying amount of this asset is in-creased to its revised
recoverable amount, provided that this amount does not exceed the carrying amount that would have been determined (net of any accumulated
amortization or depreciation) had no impairment loss been recognized for the asset in prior years.



A reversal of impairment
loss for an asset other than goodwill is recognized in the income statement, unless the asset is carried at revalued amount, in
which case, such reversal is treated as a revaluation increase.



F-20







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 7. | SEGMENT REPORTING
| | -- | -----------------



Management currently identifies
the Group’s three sales models as operating segments, which are wholesale, retail and subcontracting. The segment presentation
is in accordance with management’s expectation of future business developments. These operating segments are monitored and
strategic decisions are made on the basis of segmental gross margins.



|By business                 |  | Wholesale                  |            |  | Retail                     |  |            | Subcontracting             |  |  | Consolidated               | 
|--------------------------- |  | -------------------------- | ---------- |  | -------------------------- |  | ---------- | -------------------------- |  |  | -------------------------- | 
|                            |  | Year endedDecember31, 2014 |            |  | Year endedDecember31, 2013 |  |            | Year endedDecember31, 2014 |  |  | Year endedDecember31, 2013 | 
|Sales to external customers |  |                            | 40,654,657 |  |                            |  | 78,111,563 |                            |  |  | 16,134,537                 | 
|Segment revenue             |  |                            | 40,654,657 |  |                            |  | 78,111,563 |                            |  |  | 16,134,537                 | 
|Segment gross margins       |  |                            | 12,382,562 |  |                            |  | 28,162,776 |                            |  |  | 6,327,728                  | 
|Reconciling items           |  |                            |            |  |                            |  |            |                            |  |  |                            | 
|Profit before tax           |  |                            |            |  |                            |  |            |                            |  |  |                            | 
|Income tax expense          |  |                            |            |  |                            |  |            |                            |  |  |                            | 
|Profit for the year         |  |                            |            |  |                            |  |            |                            |  |  |                            | 



The Group does not allocate the assets because they
are shared by the three segments and can not be split.



Geographical information



The Group’s operations are located in the
PRC and all of the Group’s revenue is derived from sales to customers in the PRC. Hence, no analysis by geographical area
of operations is provided.



F-21







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 7. | SEGMENT REPORTING - continued
| | -- | -----------------------------



Information about major
customers



Major distributors that
make up 10% or more of wholesale revenue are as below:



|                   |  | Year ended December 31, |           
|------------------ |  | ----------------------- | ----------
|                   |  | 2014                    |           
|Distributor A      |  |                         | 8,384,369 
|Distributor B      |  |                         | 4,698,008 
|Distributor C      |  |                         | 3,144,781 
|Other distributors |  |                         | 24,427,499
|                   |  |                         | 40,654,657



| | 8. | REVENUE
| | -- | -------



|               |  | Year ended December 31, |           
|-------------- |  | ----------------------- | ----------
|               |  | 2014                    |           
|               |  |                         |           
|Apparel        |  |                         |           
|-Wholesale     |  |                         | 40,654,657
|-Retail        |  |                         | 16,134,537
|Subtotal       |  |                         | 56,789,194
|Subcontracting |  |                         | 2,043,287 
|               |  |                         | 58,832,481



Revenue is denominated only in USD.



| | 9. | COST OF SALES
| | -- | -------------



Cost of sales comprises
of purchasing materials, labor costs for personnel employed in production, depreciation of non-current assets used for production
purpose, outsourced manufacturing cost, taxes and surcharges and water and electricity. The following table shows a breakdown of
cost of sales for the period under review for each category:



|                                                              |  | Year ended December 31, |           
|------------------------------------------------------------- |  | ----------------------- | ----------
|                                                              |  | 2014                    |           
|Changes in inventories of finished goods and work in progress |  |                         | 126,523   
|Materials consumed in production                              |  |                         | 107,349   
|Purchases of finished goods                                   |  |                         | 37,757,707
|Labor                                                         |  |                         | 581,849   
|Depreciation                                                  |  |                         | 250,042   
|Rental                                                        |  |                         | 141,258   
|Outsourced manufacturing cost                                 |  |                         | 60,630    
|Taxes and surcharges *                                        |  |                         | 353,522   
|Water and electricity                                         |  |                         | 57,963    
|Inventory provision                                           |  |                         | (1,848    
|Others                                                        |  |                         | 97,496    
|Foreign currency translation difference                       |  |                         | (115,518  
|                                                              |  |                         | 39,416,973



* Tax and surcharges are mainly Urban Maintenance and Construction
Tax (7% of Valued Added Tax payment amount), Extra Charges of Education Fund (3% of Valued Added Tax payment amount) and Local
Surcharge for Education Fund (2% of Valued Added Tax payment amount).



F-22







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 10. | OTHER INCOME
| | --- | ------------



|                                 |  | Year ended December 31, |        
|-------------------------------- |  | ----------------------- | -------
|                                 |  | 2014                    |        
|                                 |  |                         |        
|Sales of raw material            |  |                         | 1,819  
|Government grant                 |  |                         | 114,018
|Interest income on bank deposits |  |                         | 136,911
|                                 |  |                         | 252,748



| | 11. | OTHER GAINS AND LOSSES
| | --- | ----------------------



|                                                   |  | Year ended December 31, |           
|-------------------------------------------------- |  | ----------------------- | ----------
|                                                   |  | 2014                    |           
|                                                   |  |                         |           
|Gain on disposals of property, plant and equipment |  |                         | -         
|Foreign exchange gain                              |  |                         | (64,820   
|Provision / reversal of inventory obsolescence     |  |                         | 1,848     
|Bad debt provision of trade receivables            |  |                         | (1,973,459
|Others                                             |  |                         | (77       
|                                                   |  |                         | (2,036,508



| | 12. | DISTRIBUTION AND SELLING EXPENSES
| | --- | ---------------------------------



|                        |  | Year ended December 31, |          
|----------------------- |  | ----------------------- | ---------
|                        |  | 2014                    |          
|                        |  |                         |          
|Rental                  |  |                         | 583,737  
|Depreciation            |  |                         | 1,605,955
|Labor                   |  |                         | 926,504  
|Subsidy to distributors |  |                         | 1,163,913
|Promotion               |  |                         | 1,126,349
|Advertisement           |  |                         | 1,628,127
|Others                  |  |                         | 157,021  
|                        |  |                         | 7,191,606



| | 13. | ADMINISTRATIVE EXPENSES
| | --- | -----------------------



|                                      |  | Year ended December 31, |          
|------------------------------------- |  | ----------------------- | ---------
|                                      |  | 2014                    |          
|                                      |  |                         |          
|Labor                                 |  |                         | 1,071,820
|Audit fee                             |  |                         | 189,673  
|Professional fee                      |  |                         | 725,359  
|Design fee                            |  |                         | 488,218  
|Depreciation and amortization charges |  |                         | 501,411  
|Bank charges                          |  |                         | 44,571   
|Rental                                |  |                         | 293,444  
|Travelling and entertainment          |  |                         | 175,539  
|Others                                |  |                         | 1,159,194
|                                      |  |                         | 4,649,229



F-23







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 14. | FINANCE COSTS
| | --- | -------------



|                                                                      |  | Year ended December 31, |       
|--------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                      |  | 2014                    |       
|                                                                      |  |                         |       
|Interest expenses on bank borrowings wholly repayable within one year |  |                         | 23,630



Bank borrowings interests are charged on
interest rates of 6.60% per annum during the years ended December 31, 2013 respectively.



December 31, 2014



Nil



December 31, 2013



|           |  | Amount |           |  |        |  |           |               |  |  |           |  |  |  |     
|---------- |  | ------ | --------- |  | ------ |  | --------- | ------------- |  |  | --------- |  |  |  | ----
|Bank loans |  | USD    |           |  | Period |  |           | Interest rate |  |  | Interest  | 
|#1         |  |        | 1,968,213 |  |        |  | 2013-2-26 |               |  |  | 2014-2-25 |  |  |  | 6.60



The detailed information of the short -
term loans is set out in Note 32.



| | 15. | INCOME TAX EXPENSE
| | --- | ------------------



|                           |  | Year ended December 31, |          
|-------------------------- |  | ----------------------- | ---------
|                           |  | 2014                    |          
|                           |  |                         |          
|PRC enterprise income tax: |  |                         |          
|Current tax                |  |                         | 2,802,798
|Deferred tax               |  |                         | (495,444 
|                           |  |                         | 2,307,354



Hongri Fujian and Anhui Kai Xin subject to the applicable enterprise
income tax rate of 25%. As of December 31, 2014 and 2013, the Company had no unrecognized tax benefits.



France Cock and Vast Billion were incorporated in Hong Kong
and subject to Hong Kong profits tax at a tax rate of 16.5%. No provision for Hong Kong profits tax has been made as France Cock
and Vast Billion has no taxable income during the reporting period.



Hongri International Holding Limited and Roller Rome were incorporated
in the BVI and under the current laws of the BVI, are not subject to income taxes.



KBS Fashion Group Limited was incorporated in the Marshall Island,
and is not subject to income taxes.



F-24







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 15. | INCOME TAX EXPENSE-Continued
| | --- | ----------------------------



The tax charge for the year can be reconciled to the profit
per the consolidated statements of comprehensive income as follows:



|                                                                                       |  | Year ended December 31, |          
|-------------------------------------------------------------------------------------- |  | ----------------------- | ---------
|                                                                                       |  | 2014                    |          
|                                                                                       |  |                         |          
|Profit before tax                                                                      |  |                         | 9,184,336
|Tax calculated at domestic tax rates applicable to profits in PRC (2014 and 2013: 25%) |  |                         | 2,296,084
|Tax effect of expenses not deductible for tax purpose                                  |  |                         | 3,842    
|Tax effect of tax loss of tax empty entities                                           |  |                         | 7,428    
|Tax charge for the year                                                                |  |                         | 2,307,354



The following is the analysis of the deferred tax balances for
financial reporting purposes:



|Bad debt                              |  | 2014                 |           |  | 2013                | 
|------------------------------------- |  | -------------------- | --------- |  | ------------------- | 
|provision                             |  | Temporary difference |           |  | Deferred tax assets | 
|At 1 January                          |  |                      | -         |  |                     | 
|Charge to profit or loss for the year |  |                      | 1,981,777 |  |                     | 
|At 31 December                        |  |                      | 1,981,777 |  |                     | 



| | 16. | PROFIT FOR THE YEAR
| | --- | -------------------



Profit for the year has been arrived at after charging:



|                                                                |  | Year ended December 31, |           
|--------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                |  | 2014                    |           
|                                                                |  |                         |           
|Cost of inventories recognized as expenses                      |  |                         | 39,063,451
|Taxes and surcharges                                            |  |                         | 353,522   
|                                                                |  |                         | 39,416,973
|                                                                |  |                         |           
|Depreciation of property, plant and equipment                   |  |                         | 2,340,082 
|Amortization of prepaid lease payments                          |  |                         | 17,326    
|Amortization of subsidies prepaid to distributors               |  |                         | 1,163,913 
|Amortization of prepayments and premiums under operating leases |  |                         | 659,442   
|Provision (Reversal) of inventory obsolescence                  |  |                         | (1,848    
|Provision of bad debt allowance                                 |  |                         | 1,973,459 
|                                                                |  |                         | 6,152,374 



| | 17. | EMPLOYEES' EMOLUMENTS
| | --- | ---------------------



|                                                                  |  | Year ended December 31, |          
|----------------------------------------------------------------- |  | ----------------------- | ---------
|                                                                  |  | 2014                    |          
|                                                                  |  |                         |          
|Salaries and other short-term benefits                            |  |                         | 2,203,626
|Defined contribution benefit schemes                              |  |                         | 376,547  
|Total employee benefits expense (including directors’ emoluments) |  |                         | 2,580,173





F-25







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 17. | EMPLOYEES' EMOLUMENTS- Continued
| | --- | --------------------------------



The employees of the Group’s PRC subsidiaries are members
of state-managed retirement benefit schemes operated by the local government. The subsidiaries are required to contribute a specified
percentage of its payroll costs to the retirement benefit schemes to fund the benefits. The only obligation of the Group with respect
to the retirement benefit schemes is to make the specified contributions.



| | 18. | DIRECTORS' EMOLUMENTS
| | --- | ---------------------



The emoluments paid or payable to the directors of the Company
were as follows:



|                                   |  | Year ended December 31, |        
|---------------------------------- |  | ----------------------- | -------
|                                   |  | 2014                    |        
|                                   |  |                         |        
|Salaries                           |  |                         |        
|Yan Keyan                          |  |                         | 105,000
|Chen Bizhen                        |  |                         | -      
|Stanley Wong                       |  |                         | 126,000
|Stylianos Stergios Sougioultzoglou |  |                         | 100,000
|Yuyun Tristan Kuo                  |  |                         | 25,000 
|John Sano                          |  |                         | 20,000 
|Andrew Gaw                         |  |                         | 20,000 
|Zhou Meng                          |  |                         | 20,000 
|Chi Gaw                            |  |                         | 20,000 
|                                   |  |                         | 436,000
|Social Welfare                     |  |                         |        
|Yan Keyan                          |  |                         | 758    
|Chen Bizhen                        |  |                         | -      
|                                   |  |                         | 758    



| | 19. | EARNINGS PER SHARE
| | --- | ------------------



|                               |  | Year ended December 31, |     
|------------------------------ |  | ----------------------- | ----
|                               |  | 2014                    |     
|                               |  |                         |     
|Basic earnings per share       |  |                         |     
|                               |  |                         |     
|From continuing operations     |  |                         | 0.27
|Total basic earnings per share |  |                         | 0.27



The earnings and weighted average number of ordinary shares
used in the calculation of basic earnings per share are as follows:



|                                                          |  | Year ended December 31, |          
|--------------------------------------------------------- |  | ----------------------- | ---------
|                                                          |  | 2014                    |          
|                                                          |  |                         |          
|Profit for the year attributable to owners of the Company |  |                         | 6,876,982





|                                           |  | Year ended December 31, |           
|------------------------------------------ |  | ----------------------- | ----------
|                                           |  | 2014                    |           
|                                           |  |                         |           
|Weighted average number of ordinary shares |  |                         | 25,417,329



No diluted earnings per share have been
presented because no dilutive potential ordinary shares existed during the Periods.



F-26









KBS Fashion Group Limited

Notes to consolidated financial statements



| | 20. | PROPERTY, PLANT AND EQUIPMENT
| | --- | -----------------------------



|                                  |  | Plant |           |   | Machinery |  |           | Office equipment |  |  | Motor vehicles |   |  | Furniture and fixtures |          |   | Leasehold improvements -factories and offices |  |         | Leasehold improvements- shops |  |  | Distributor shops' furniture and fixtures |   |  | Construction in progress |            |   | Total | 
|--------------------------------- |  | ----- | --------- | - | --------- |  | --------- | ---------------- |  |  | -------------- | - |  | ---------------------- | -------- | - | --------------------------------------------- |  | ------- | ----------------------------- |  |  | ----------------------------------------- | - |  | ------------------------ | ---------- | - | ----- | 
|                                  |  |       |           |   |           |  |           |                  |  |  |                |   |  |                        |          |   |                                               |  |         |                               |  |  |                                           |   |  |                          |            |   |       | 
|COST                              |  |       |           |   |           |  |           |                  |  |  |                |   |  |                        |          |   |                                               |  |         |                               |  |  |                                           |   |  |                          |            |   |       | 
|At January 1, 2013                |  |       | 8,694,554 |   |           |  | 1,054,453 |                  |  |  | 177,453        |   |  |                        | 134,285  |   |                                               |  | 58,851  |                               |  |  | 268,430                                   |   |  |                          | 2,377,030  |   |       | 
|Additions                         |  |       | -         |   |           |  | 785       |                  |  |  | 39,149         |   |  |                        | 1,205    |   |                                               |  | 9,825   |                               |  |  | -                                         |   |  |                          | 210,648    |   |       | 
|Disposals                         |  |       | -         |   |           |  | (33,881   | )                |  |  | (55,749        | ) |  |                        | -        |   |                                               |  | (21,440 | )                             |  |  | -                                         |   |  |                          | -          |   |       | 
|Translation adjustment            |  |       | 268,956   |   |           |  | 32,618    |                  |  |  | 5,490          |   |  |                        | 4,153    |   |                                               |  | 1,820   |                               |  |  | 8,303                                     |   |  |                          | 73,530     |   |       | 
|At December 31, 2013              |  |       | 8,963,510 |   |           |  | 1,053,975 |                  |  |  | 166,343        |   |  |                        | 139,643  |   |                                               |  | 49,056  |                               |  |  | 276,733                                   |   |  |                          | 2,661,208  |   |       | 
|Additions                         |  |       | -         |   |           |  | -         |                  |  |  | 3,173          |   |  |                        | -        |   |                                               |  | 116,359 |                               |  |  | 518,488                                   |   |  |                          | 1,281,703  |   |       | 
|Disposals                         |  |       | -         |   |           |  | -         |                  |  |  | -              |   |  |                        | -        |   |                                               |  | -       |                               |  |  | -                                         |   |  |                          | -          |   |       | 
|Translation adjustment            |  |       | (32,374   | ) |           |  | (3,806    | )                |  |  | (587           | ) |  |                        | (504     | ) |                                               |  | 313     |                               |  |  | 1,186                                     |   |  |                          | (4,209     | ) |       | 
|At December 31, 2014              |  |       | 8,931,136 |   |           |  | 1,050,169 |                  |  |  | 168,929        |   |  |                        | 139,139  |   |                                               |  | 165,728 |                               |  |  | 796,407                                   |   |  |                          | 3,938,702  |   |       | 
|                                  |  |       |           |   |           |  |           |                  |  |  |                |   |  |                        |          |   |                                               |  |         |                               |  |  |                                           |   |  |                          |            |   |       | 
|DEPRECIATION                      |  |       |           |   |           |  |           |                  |  |  |                |   |  |                        |          |   |                                               |  |         |                               |  |  |                                           |   |  |                          |            |   |       | 
|At January 1, 2013                |  |       | (65,209   | ) |           |  | (285,635  | )                |  |  | (83,026        | ) |  |                        | (66,108  | ) |                                               |  | (27,947 | )                             |  |  | (223,549                                  | ) |  |                          | (1,867,538 | ) |       | 
|Provided for the year             |  |       | (400,005  | ) |           |  | (26,913   | )                |  |  | (24,639        | ) |  |                        | (16,776  | ) |                                               |  | (7,816  | )                             |  |  | (11,145                                   | ) |  |                          | (536,062   | ) |       | 
|Eliminated on disposals of assets |  |       | -         |   |           |  | -         |                  |  |  | 50,174         |   |  |                        | -        |   |                                               |  | 19,296  |                               |  |  | -                                         |   |  |                          | -          |   |       | 
|Translation adjustment            |  |       | (5,370    | ) |           |  | (8,836    | )                |  |  | (2,568         | ) |  |                        | (2,045   | ) |                                               |  | (864    | )                             |  |  | (6,915                                    | ) |  |                          | (57,728    | ) |       | 
|At December 31, 2013              |  |       | (470,584  | ) |           |  | (321,384  | )                |  |  | (60,059        | ) |  |                        | (84,929  | ) |                                               |  | (17,331 | )                             |  |  | (241,609                                  | ) |  |                          | (2,461,328 | ) |       | 
|Provided for the year             |  |       | (400,214  | ) |           |  | (241,904  | )                |  |  | (30,843        | ) |  |                        | (16,796  | ) |                                               |  | (41,083 | )                             |  |  | (46,280                                   | ) |  |                          | (711,246   | ) |       | 
|Eliminated on disposals of assets |  |       | -         |   |           |  | -         |                  |  |  | -              |   |  |                        | -        |   |                                               |  | -       |                               |  |  | -                                         |   |  |                          | -          |   |       | 
|Translation adjustment            |  |       | 13        |   |           |  | 141       |                  |  |  | 87             |   |  |                        | 236      |   |                                               |  | (111    | )                             |  |  | 678                                       |   |  |                          | 5,891      |   |       | 
|At December 31, 2014              |  |       | (870,785  | ) |           |  | (563,147  | )                |  |  | (90,815        | ) |  |                        | (101,489 | ) |                                               |  | (58,525 | )                             |  |  | (287,211                                  | ) |  |                          | (3,166,683 | ) |       | 
|                                  |  |       |           |   |           |  |           |                  |  |  |                |   |  |                        |          |   |                                               |  |         |                               |  |  |                                           |   |  |                          |            |   |       | 
|CARRYING AMOUNT                   |  |       |           |   |           |  |           |                  |  |  |                |   |  |                        |          |   |                                               |  |         |                               |  |  |                                           |   |  |                          |            |   |       | 
|At December 31, 2013              |  |       | 8,492,926 |   |           |  | 732,591   |                  |  |  | 106,284        |   |  |                        | 54,714   |   |                                               |  | 31,725  |                               |  |  | 35,124                                    |   |  |                          | 199,880    |   |       | 
|At December 31, 2014              |  |       | 8,060,351 |   |           |  | 487,022   |                  |  |  | 78,114         |   |  |                        | 37,650   |   |                                               |  | 107,203 |                               |  |  | 509,196                                   |   |  |                          | 772,019    |   |       | 



F-27







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 20. | PROPERTY, PLANT AND EQUIPMENT-continued
| | --- | ---------------------------------------



Depreciation is provided on straight-line basis
for all property, plant and equipment over their estimated useful lives of the assets as follows:



|                                             |  | Useful life                                                 |  | Residual value |    
|-------------------------------------------- |  | ----------------------------------------------------------- |  | -------------- | ---
|                                             |  |                                                             |  |                |    
|Plant                                        |  | 20 years                                                    |  |                | 10 
|Machinery                                    |  | 5 years                                                     |  |                | 10 
|Office equipment                             |  | 5 years                                                     |  |                | 10 
|Motor vehicles                               |  | 5 years                                                     |  |                | 10 
|Furniture and fixtures                       |  | 5 years                                                     |  |                | 10 
|Leasehold improvements-factories and offices |  | Shorter of estimated useful life of 5 years or lease term   |  |                | 10 
|                                             |  |                                                             |  |                |    
|Leasehold improvements-shops                 |  | Shorter of estimated useful life of 1.5 years or lease term |  |                | Nil
|                                             |  |                                                             |  |                |    
|Distributor shops' furniture and fixtures    |  | 1.5 years                                                   |  |                | Nil



All the plant mentioned above
were owned by Anhui Kaxin.



Buildings on leasehold land comprise:



|  |  | Location                                                       |  | Description |  | Gross area (m2) |      
|- |  | -------------------------------------------------------------- |  | ----------- |  | --------------- | -----
|  |  |                                                                |  |             |  |                 |      
|* |  | Jinxi Town, Longshan Road, Taihu City, Anhui Province, the PRC |  | Dormitory   |  |                 | 8,573



* Items pledged to secure bank
borrowings



The Group pledged buildings
having a carrying amount of USD 8,492,926 as at December 31, 2013 (December 31, 2014: Nil) to secure general banking facilities
granted to the Group.



The gross carrying amount of the fully depreciated
property, plant and equipment that is still in use is USD 38,270 and USD 9,440 as at December 31, 2014 and 2013, respectively.



| | 21. | PREPAYMENTS AND PREMIUMS UNDER OPERATING LEASES
| | --- | -----------------------------------------------



|                         |  | Amount |           
|------------------------ |  | ------ | ----------
|                         |  |        |           
|At January 1, 2013       |  |        | 5,852,457 
|additions for the year   |  |        | 725,943   
|charge for the year      |  |        | (1,892,254
|withdraw during the year |  |        | (1,246,270
|translation adjustment   |  |        | 181,040   
|At December 31, 2013     |  |        | 3,620,916 
|additions for the year   |  |        | 515,038   
|charge for the year      |  |        | (659,442  
|translation adjustment   |  |        | (13,687   
|At December 31, 2014     |  |        | 3,462,825 



F-28







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 21. | PREPAYMENTS AND PREMIUMS UNDER OPERATING LEASES-continued
| | --- | ---------------------------------------------------------



Analyzed for reporting purposes as:



|                  |  | As at December 31, |          
|----------------- |  | ------------------ | ---------
|                  |  | 2014               |          
|                  |  |                    |          
|Current asset     |  |                    | 471,580  
|Non-current asset |  |                    | 2,991,245
|                  |  |                    | 3,462,825



| | 22. | PREPAYMENT FOR CONSTRUCTION OF NEW PLANT
| | --- | ----------------------------------------



On November 20, 2010,
Hongri Fujian entered into an agreement with a third party, Anqing Zhongfang Construction and Installation Co., Ltd., for the construction
of the new plant in Anhui at a consideration of USD 17,826,251. In 2012, Kaixin Anhui has made another prepayment of USD 6,363,853
for the second phase project. In 2013, Kaixin Anhui has made another prepayment of USD 9,747,897 for the second phase project and
USD 16,401,778 was recognized in Construction in progress.



In 2014, Kaixin Anhui
made another prepayment of USD 15,525,413 for the second and third phase project, and USD 6,537,016 was recognized in construction
in progress.



| | 23. | PREPAYMENT FOR ACQUISITION OF LAND USE RIGHT
| | --- | --------------------------------------------



On September 2, 2010, Hongri Fujian entered
into an agreement with a third party, Taihu Weiqi Sports Apparel Co., Ltd., to acquire a land use right in relation to the development
of factories of Anhui Kaixin, at a total consideration of USD 6,340,456.



| | 24. | PREPAID LEASE PAYMENTS
| | --- | ----------------------



|                       |  | Amount |        
|---------------------- |  | ------ | -------
|                       |  |        |        
|Cost                   |  |        |        
|At January 1, 2013     |  |        | 795,125
|additions for the year |  |        | -      
|translation adjustment |  |        | 24,596 
|At December 31, 2013   |  |        | 819,721
|additions for the year |  |        | -      
|translation adjustment |  |        | (2,961 
|At December 31, 2014   |  |        | 816,760
|                       |  |        |        
|AMORTISATION           |  |        |        
|At January 1, 2013     |  |        | (32,538
|charge for the year    |  |        | (15,585
|translation adjustment |  |        | (4,933 
|At December 31, 2013   |  |        | (53,056
|charge for the year    |  |        | (17,326
|translation adjustment |  |        | 119    
|At December 31, 2014   |  |        | (70,263
|                       |  |        |        
|CARRYING AMOUNTS       |  |        |        
|At December 31, 2013   |  |        | 766,665
|At December 31, 2014   |  |        | 746,497



F-29







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 24. | PREPAID LEASE PAYMENTS-continued
| | --- | --------------------------------



Analyzed for reporting purposes as:



|                  |  | As at December 31, |        
|----------------- |  | ------------------ | -------
|                  |  | 2014               |        
|                  |  |                    |        
|Current asset     |  |                    | 17,399 
|Non-current asset |  |                    | 729,098
|                  |  |                    | 746,497



The amounts represent the prepayment of rentals
for land use right (industrial use) situated in the PRC. The leasehold lands have the term of 50 years.



All the leasehold lands mentioned
above were owned by Anhui Kaixin.



The Group has pledged leasehold land having
a carrying amount of approximately USD 195,037 at December 31, 2013 (December 31, 2014: Nil) to secure general banking facilities
granted to the Group.



The leasehold land comprises:



|  |  | Location                                                   |  | Expiry date of tenure |  | Land area (m2) |      
|- |  | ---------------------------------------------------------- |  | --------------------- |  | -------------- | -----
|  |  |                                                            |  |                       |  |                |      
|* |  | Longshan Road, Economic development District, Taihu County |  | 2062-05-23            |  |                | 2,440



* Items pledged to secure bank
borrowings



| | 25. | INVENTORIES
| | --- | -----------



|                                   |  | As at December 31, |        
|---------------------------------- |  | ------------------ | -------
|                                   |  | 2014               |        
|                                   |  |                    |        
|Work in progress                   |  |                    | 57,459 
|Finished goods                     |  |                    | 736,141
|Provision for obsolete inventories |  |                    | (131   
|                                   |  |                    | 793,469



| | 26. | TRADE AND OTHER RECEIVABLES
| | --- | ---------------------------



|                                         |  | As at December 31, |           
|---------------------------------------- |  | ------------------ | ----------
|                                         |  | 2014               |           
|                                         |  |                    |           
|Trade receivables                        |  |                    | 37,537,401
|                                         |  |                    |           
|Bad debt provision for trade receivables |  |                    | (1,981,777
|Other receivables                        |  |                    | 26,169    
|Subtotal financial assets                |  |                    | 35,581,793
|Prepayments                              |  |                    | 3,934,710 
|                                         |  |                    | 39,516,503



The fair value of trade
and other receivables have not been disclosed as, due to their short duration, management considers the carrying amounts recognized
in the consolidated statements of financial position to be reasonable approximation of their fair values.



F-30







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 26. | TRADE AND OTHER RECEIVABLES-continued
| | --- | -------------------------------------



Before accepting any new
customer, the Group assesses the potential customer's credit quality and defined credit limits by customer. Limits attributed to
customers are reviewed once a year. The aging analysis of trade receivables is as follows:



|                                |  | As at December 31, |           
|------------------------------- |  | ------------------ | ----------
|                                |  | 2014               |           
|                                |  |                    |           
|Current                         |  |                    | 17,722,534
|Past due for less than 4 months |  |                    | 19,814,867
|                                |  |                    | 37,537,401



The Group allows an average
credit period of 90 days to its trade customers. For the overdue trade receivable, the Company provided a bad debt allowance amounting
USD 1,981,777 during the year ended December 31, 2014.



Among the amounts of trade
receivables, USD 5,454,152 and USD 4,417,265 Output VAT was included as of December 31, 2014 and 2013, respectively.



| | 27. | SUBSIDIES PREPAID TO DISTRIBUTORS
| | --- | ---------------------------------



|                       |  | Amount |           
|---------------------- |  | ------ | ----------
|                       |  |        |           
|At January 1, 2013     |  |        | 759,293   
|additions for the year |  |        | 1,253,461 
|charge for the year    |  |        | (1,397,789
|translation adjustment |  |        | 21,293    
|At December 31, 2013   |  |        | 636,258   
|additions for the year |  |        | 1,065,227 
|charge for the year    |  |        | (1,163,913
|translation adjustment |  |        | (2,713    
|At December 31, 2014   |  |        | 534,859   



Subsidies were paid to major
distributors for compensating their rental expenses. Such subsidies would vest to distributors when they met the sales targets
predetermined by the Company. Subsidies prepaid to distributors were recognized when payments were made and amortized over the
agreement term on a straight-line basis in selling expenses. The amortization for 2014 and 2013 were USD 1,163,913 and USD 1,397,789,
respectively.



F-31







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 28. | CASH AND CASH EQUIVALENTS
| | --- | -------------------------



|              |  | As at December 31, |           
|------------- |  | ------------------ | ----------
|              |  | 2014               |           
|              |  |                    |           
|Cash on hand  |  |                    | 20,648    
|Bank deposits |  |                    | 20,583,934
|              |  |                    | 20,604,582



|                      |  | As at December 31, |           
|--------------------- |  | ------------------ | ----------
|                      |  | 2014               |           
|                      |  |                    |           
|Renminbi              |  |                    | 20,582,709
|Hong Kong Dollars     |  |                    | 328       
|United States Dollars |  |                    | 21,545    
|                      |  |                    | 20,604,582



Cash and cash equivalents
comprise cash held by the Group and short-term deposits with an original maturity of three months or less. Bank deposits as at
December 31, 2014 carry interest at market rates which ranged from 0.35% to 0.50% (2013: 0.35%-0.50%) per annum.



| | 29. | TRADE AND OTHER PAYABLES
| | --- | ------------------------



|                               |  | As at December 31, |          
|------------------------------ |  | ------------------ | ---------
|                               |  | 2014               |          
|                               |  |                    |          
|Trade payables                 |  |                    | 37,385   
|Employee benefits payable      |  |                    | 275,542  
|Other payables                 |  |                    | 2,847,429
|Subtotal financial liabilities |  |                    | 3,160,356
|                               |  |                    |          
|Other taxes payable            |  |                    | 2,366,802
|                               |  |                    | 5,527,158



The fair value of trade
and other payables have not been disclosed as, due to their short duration, management considers the carrying amounts recognized
in the consolidated statements of financial position to be reasonable approximation of their fair values.



F-32







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 29. | TRADE AND OTHER PAYABLES-continued
| | --- | ----------------------------------



Trade payables comprise
amounts outstanding for trade purchase. The average credit period is 30 days from the time when the services are rendered by or
goods received from suppliers. The aging analysis of trade payables is as follows:



|                                |  | As at December 31, |       
|------------------------------- |  | ------------------ | ------
|                                |  | 2014               |       
|                                |  |                    |       
|Current                         |  |                    | 29,710
|Past due for less than 4 months |  |                    | 7,675 
|                                |  |                    | 37,385



The Company was granted
a credit term of 30 days. The balances past due were mainly for the Company's high bargaining power.



| | 30. | RELATED PARTIES PAYABLES
| | --- | ------------------------



(1) Nature of relationship with related parties:



|Name              |  | Relationship with the Group                   
|----------------- |  | ----------------------------------------------
|                  |  |                                               
|Yan Keyan         |  | Chairman, Director and Chief Executive Officer
|                  |  |                                               
|Chen Bizhen       |  | Wife of Yan Keyan                             
|                  |  |                                               
|KBS International |  | Ex-shareholder of Hongri                      



(2) Significant balances between the Group and the
above related parties:



|                  |  |                    |  | As at December 31, |        
|----------------- |  | ------------------ |  | ------------------ | -------
|Name              |  | Nature             |  | 2014               |        
|                  |  |                    |  |                    |        
|Yan Keyan         |  | Borrowing of funds |  |                    | 626,666
|Chen Bizhen       |  | Borrowing of funds |  |                    | 24,412 
|KBS International |  | Borrowing of funds |  |                    | -      
|                  |  |                    |  |                    | 651,078



Related parties payables were unsecured, non-interest
bearing and repayment on demand.



F-33







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 31. | SHORT-TERM LOANS
| | --- | ----------------



|                                        |  | As at December 31, |  
|--------------------------------------- |  | ------------------ | -
|                                        |  | 2014               |  
|                                        |  |                    |  
|Secured bank borrowings                 |  |                    | -
|Carrying amount repayable within 1 year |  |                    | -



The borrowings are fixed-rate and denominated
in RMB.



December 31, 2013

|Bankloans |  | AmountUSD |           |  | Period |           | Interestrate |           |  | Mortgage |      | Personalguarantee
|--------- |  | --------- | --------- |  | ------ | --------- | ------------ | --------- |  | -------- | ---- | -----------------
|#1        |  |           | 1,968,213 |  |        | 2013-2-26 |              | 2014-2-25 |  |          | 6.60 | %                
|          |  |           | 1,968,213 |  |        |           |              |           |  |          |      |                  



Assets with the following
carrying amounts have been pledged to secure bank borrowings:



|               |  | As at December 31, |  
|-------------- |  | ------------------ | -
|               |  | 2014               |  
|               |  |                    |  
|Land use right |  |                    | -
|Plant          |  |                    | -
|               |  |                    | -



A personal guarantee
was provided by director of the Company, Yan Keyan and Chen Bizhen for USD 1,968,213 among the balances at December 31, 2013 (December
31, 2013: Nil).



| | 32. | WARRANT LIABILITIES
| | --- | -------------------



On November 1, 2012,
the Company sold 5,000,000 Units at an offering price of $10.00 per Unit generating gross proceeds of $50,000,000 in the Public
Offering. Each Unit consists of one share of common stock of the Company and one warrant to purchase one share of common stock
of the Company (“Redeemable Warrants”). Each Redeemable Warrant entitles the holder to purchase one share of common
stock at a price of $11.50 commencing on the later of the completion of an initial Acquisition Transaction and October 24, 2013
and expiring five years from the completion of an initial Acquisition Transaction, provided that there is an effective registration
statement covering the shares of common stock underlying the Redeemable Warrants. The Company may redeem the Redeemable Warrants
at a price of $0.01 per Redeemable Warrant upon 30 days’ notice, only in the event that the last sale price of the common
stock is at least $17.50 per share for any 20 trading days within a 30-trading day period (“30-Day Trading Period”)
ending on the third day prior to the date on which notice of redemption is given, provided that there is a current registration
statement in effect with respect to the shares of common stock underlying such Redeemable Warrants commencing ten days prior to
the 30-Day Trading Period and continuing each day thereafter until the date of redemption. The Company is required to use its best
efforts to maintain the effectiveness of the registration statement covering the Redeemable Warrants. However, there are no contractual
penalties for failure to deliver securities if a registration statement is not effective at the time of exercise. Additionally,
in the event that a registration statement is not effective at the time of exercise, the holder of such Redeemable Warrant shall
not be entitled to exercise such Redeemable Warrant for cash and in no event (whether in the case of a registration statement not
being effective or otherwise) will the Company be required to net cash settle the Redeemable Warrant exercise.



F-34







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 32. | WARRANT LIABILITIES-continued
| | --- | -----------------------------



Simultaneously with the
consummation of the Public Offering, the Company consummated the Private Placement with the sale of 337,750 Placement Units to
its Founders at a price of $10.00 per share, generating total proceeds of $3,377,500. The Placement Units are identical to the
Units sold in the Public Offering except that the warrants included in the Placement Units (i) will not be redeemable by the Company
and (ii) may be exercised for cash or on a cashless basis, so long as they are held by the initial purchaser or any of its permitted
transferees. Additionally, the Placement Units have been placed in escrow and the purchasers have agreed not to transfer, assign
or sell any of the Placement Units, including the underlying securities (except to certain permitted transferees) until 30 days
following the completion of an initial Acquisition Transaction. The securities held in the escrow account will only be released
prior to the end of the escrow period if following the initial Acquisition Transaction, the Company consummates a subsequent transaction
that results in all stockholders having a right to exchange their shares for cash or other consideration.



The Company granted the
underwriter in the Public Offering a 45-day option to purchase up to an additional 750,000 Units solely to cover over-allotments,
if any. On November 7, 2012, the underwriters exercised a portion of their option and the Company sold an additional 550,000 Units
at a price of $10.00 per Unit generating gross proceeds of $5,500,000. In addition, the Company sold an additional 30,250 Private
Placement Units generating gross proceeds of $302,500.



The table below provides
a reconciliation of the beginning and ending balances for the liabilities measured using fair significant unobservable inputs:



|                                                          |  | Amount |           
|--------------------------------------------------------- |  | ------ | ----------
|Balance – January 26, 2012 (inception)                    |  |        | -         
|Correction of an error                                    |  |        | 3,200,223 
|Issuance of warrants as part of Units on November 7, 2012 |  |        | 322,884   
|Change in fair value                                      |  |        | (45,225   
|Balance – December 31, 2012                               |  |        | 3,477,882 
|Change in fair value                                      |  |        | (45,442   
|Balance – December 31, 2013                               |  |        | 3,432,440 
|Change in fair value                                      |  |        | (3,417,053
|Balance – December 31, 2014                               |  |        | 15,387    



The fair value of warrants
was determined using a binomial-lattice model. This model requires the input of highly subjective assumptions, including price
volatility of the underlying stock. Changes in the subjective input assumptions can materially affect the estimate of fair value
of the warrants and the Company’s results of operations could be impacted. This model is dependent upon several variables
such as the instrument's expected term, expected strike price, expected risk-free interest rate over the expected instrument term,
the expected dividend yield rate over the expected instrument term and the expected volatility of the Company’s stock
price over the expected term. The expected term represents the period of time that the instruments granted are expected to be outstanding.
The expected strike price is based upon a weighted average probability analysis of the strike price changes expected during the
term as a result of the down round protection.  The risk-free rates are based on U.S. Treasury securities with similar
maturities as the expected terms of the options at the date of valuation.  Expected dividend yield is based on historical
trends.  The Company measures volatility using the volatility rates of market index.



F-35







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 32. | WARRANT LIABILITIES-continued
| | --- | -----------------------------



The inputs to the model
were as follows:



|                         |  | As at December 31, |     
|------------------------ |  | ------------------ | ----
|                         |  | 2014               |     
|                         |  |                    |     
|Stock price              |  |                    | 4.25
|Dividend yield           |  |                    | N/A 
|Risk-free rate           |  |                    | 1.54
|Expected term (in years) |  |                    | 4.58
|Expected volatility      |  |                    | 16.5



| | 33. | SHARE CAPITAL AND SHARE PREMIUM
| | --- | -------------------------------



The details of the Group's share capital are as follows:



|                                                                        |  | Number of shares |             |   | Share capital US$ |   |        | Share premium US$ | 
|----------------------------------------------------------------------- |  | ---------------- | ----------- | - | ----------------- | - | ------ | ----------------- | 
|Issue of shares at December 31, 2013                                    |  |                  | 7,305,500   |   |                   | $ | 731    |                   | 
|Adjustments during merger                                               |  |                  |             |   |                   |   |        |                   | 
|Redemption                                                              |  |                  | (4,981,736  | ) |                   |   |        |                   | 
|Issue to advisor                                                        |  |                  | 178,110     |   |                   |   |        |                   | 
|Shares cancelled                                                        |  |                  | (42,000     | ) |                   |   |        |                   | 
|New issue to acquiree                                                   |  |                  | 22,957,455  |   |                   |   |        |                   | 
|                                                                        |  |                  | 18,111,829  |   |                   |   | 1,811  |                   | 
|Shares outstanding after adjustments of merger                          |  |                  | 25,417,329  |   |                   | $ | 2,542  |                   | 
|Reverse acquisition                                                     |  |                  |             |   |                   |   |        |                   | 
|Waiver of payable to ex-shareholder                                     |  |                  |             |   |                   |   |        |                   | 
|Shares outstanding as December 31, 2014                                 |  |                  | 25,417,329  |   |                   | $ | 2,542  |                   | 
|                                                                        |  |                  |             |   |                   |   |        |                   | 
|Authorized Common shares of US$0.0001 as at December 31, 2014           |  |                  | 150,000,000 |   |                   | $ | 15,000 |                   | 
|Issue and fully paid common shares of US$0.0001 as at December 31, 2014 |  |                  | 25,417,329  |   |                   | $ | 2,542  |                   | 



F-36







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 33. | SHARE CAPITAL AND SHARE PREMIUM-continued
| | --- | -----------------------------------------



Preferred Stock



The Company is authorized
to issue 5,000,000 preferred shares with a par value of $0.0001 per share with such designation, rights and preferences as may
be determined by the Company’s board of directors. No preferred shares are currently issued or outstanding.



Common Stock



The Company is authorized
to issue 150,000,000 shares of common stock with a par value of $0.0001 per share.



On August 1, 2014, the
Company issued 22,957,455 of common stock in exchange of 100% equity interest of Hongri International Holding Limited.



| | 34. | RESERVES
| | --- | --------



Statutory surplus reserve



As stipulated by the relevant
laws and regulations applicable to China’s foreign investment enterprises, the Company’s PRC subsidiaries are required
to maintain a statutory surplus reserve which is non-distributable. Appropriations to such reserve are made out of net profit after
tax of the statutory financial statements of the PRC subsidiaries at the amounts determined by their respective boards of directors
annually up to 50% of authorized capital, but must not be less than 10% of the net profit after tax.



| |  | The statutory surplus reserve can be used for making up losses of the group
entities in Mainland China, if any. The statutory surplus reserve may also be used to increase capital or to meet unexpected or
future losses. The statutory surplus reserve is non-distributable other than upon liquidation.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The statutory surplus
reserve of the Group amounts to USD 5,815,493 and USD 5,063,906 at December 31, 2014 and 2013, respectively. The statutory surplus
reserve of the Group is related to Hongri Fujian and Anhui Kaixin.



Retained profits



The retained profits comprise
the cumulative net gains and losses recognized in the Company's income statement.



Foreign currency translation
reserve (other comprehensive income)



Foreign currency translation
reserve represents the foreign currency translation difference arising from the translation of the financial statements of companies
within the Group from their functional currency to the Group's presentation currency.



F-37







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 35. | RISK MANAGEMENT
| | --- | ---------------



| | 1. | Capital risk
| | -- | ------------



The Group manages its
capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to owners
through the optimisation of the debt and equity balance. The Group's overall strategy remains unchanged during the year.



The capital structure
of the Group consisted of borrowings net of bank balances and cash, and equity attributable to owners of the Company comprising
issued share capital and various reserves.



The directors of the Company
review the capital structure regularly. As part of this review, the Group considers the cost of capital and the risks associated
with each class of capital, and will balance its overall capital through the payment of dividends, new share issues as well as
the issue of new debt or the redemption of existing debt.



The Group monitors capital
using the Gearing Ratio, which is net debt divided by total equity. Net debt represents borrowings less cash and cash equivalents.



The Company and its subsidiaries
are not subject to externally imposed capital requirements.



|                                |  | December 31, 2014 |             |    | December 31, 2013 | 
|------------------------------- |  | ----------------- | ----------- | -- | ----------------- | 
|Total borrowing                 |  |                   | -           |    |                   | 
|Less: cash and cash equivalents |  |                   | (20,604,582 | )  |                   | 
|Net debt                        |  |                   | (20,604,582 | )  |                   | 
|Total equity                    |  |                   | 105,618,076 |    |                   | 
|Total capital                   |  |                   | 85,013,494  |    |                   | 
|Gearing ratio                   |  |                   | (20         | )% |                   | 



| | 2. | Financial risk
| | -- | --------------



Financial risk management
objectives and policies



The Group's major financial
instruments include trade and other receivables, related parties receivables, cash and cash equivalents, trade and other payables,
related parties payables and short-term loans. Details of these financial instruments are disclosed in the respective notes. The
risks associated with these financial instruments include credit risk, market risk (interest rate risk and currency risk) and liquidity
risk. The policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure
appropriate measures are implemented on a timely and effective manner.



F-38







KBS Fashion Group Limited

Notes to consolidated financial statements



Market risk



(i) Foreign currency risk



While our reporting currency
is the U.S. dollar, substantially all of our consolidated revenues and consolidated costs and expenses are denominated in RMB.
Substantially all of our assets are denominated in RMB. As a result, we are exposed to foreign exchange risk as our revenues and
results of operations may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB. If the RMB depreciates
against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements
will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are translated
at the average exchange rates and equity is translated at historical exchange rates. Any resulting translation adjustments are
not included in determining net income but are included in determining other comprehensive income, a component of equity. An average
appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $3.0
million based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of December 31, 2014.
As of December 31, 2014, our accumulated other comprehensive income was $4.3 million. We have not entered into any hedging transactions
in an effort to reduce our exposure to foreign exchange risk.



(ii) Interest rate risk



We deposit surplus funds
with Chinese banks earning daily interest. We do not invest in any instruments for trading purposes. Most of our outstanding debt
instruments carry fixed rates of interest. Our operations generally are not directly sensitive to fluctuations in interest rates
and we currently do not have any long-term debt outstanding. Management monitors the banks’ prime rates in conjunction with
our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered
into any hedging transactions in an effort to reduce our exposure to interest rate risk.



Credit risk



As at December 31, 2014,
the Group's maximum exposure to credit risk which will cause a financial loss to the Group due to failure to perform an obligation
by the counterparties is arising from the carrying amount of the respective recognised financial assets as stated in the consolidated
statement of financial position.



In order to minimise the
credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals
and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews
the recoverable amount of each individual trade debt at the end of each reporting period to ensure that adequate impairment losses
are made for irrecoverable amounts. In this regard, the directors of the Group consider that the Group’s credit risk is significantly
reduced.



The Group has concentration
of credit risk on the Group’s trade receivables. The outstanding balance of the five largest customers represented approximately
68% of the trade receivables of the Group at December 31, 2014 (31 December 2013: 66%). In order to minimise the credit risk, management
continuously monitors the level of exposure to ensure that follow-up actions and/or corrective actions are taken promptly to lower
the risk exposure or to recover overdue balances.



F-39







KBS Fashion Group Limited

Notes to consolidated financial statements



Liquidity risk



In the management of the
liquidity risk, the Group monitors and maintains a level of cash and bank balances deemed adequate by the management to finance
the Group’s operations and mitigate the effects of fluctuations in cash flows. The management monitors the utilisation of
bank borrowings and ensures compliance with loan covenants.



Liquidity tables



The following tables detail
the Group’s remaining contractual maturity for its non-derivative financial liabilities as at December 31, 2014 based on
agreed repayment terms. The tables have been drawn up based on undiscounted cash flows of financial liabilities based on the earliest
date on which the Group can be required to pay. The tables include both interest and principal cash flows.



As at December 31, 2014



|                         |  | Within 1 year |           |  | Over 1 year |  |   | Total | 
|------------------------ |  | ------------- | --------- |  | ----------- |  | - | ----- | 
|Trade and other payables |  |               | 3,160,356 |  |             |  | - |       | 
|Related parties payables |  |               | 651,078   |  |             |  | - |       | 
|Total                    |  |               | 3,811,434 |  |             |  | - |       | 



At 31 December 2013



|                         |  | Within 1 year |            |  | Over 1 year |  |   | Total | 
|------------------------ |  | ------------- | ---------- |  | ----------- |  | - | ----- | 
|Trade and other payables |  |               | 2,415,060  |  |             |  | - |       | 
|Related parties payables |  |               | 5,789,042  |  |             |  | - |       | 
|Short-term loans         |  |               | 1,968,213  |  |             |  | - |       | 
|Total                    |  |               | 10,172,315 |  |             |  | - |       | 



Fair value



The fair value of financial
assets and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow
analysis.



The directors of the Company
consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost approximate their fair
values.



F-40







KBS Fashion Group Limited

Notes to consolidated financial statements



| | 36. | COMMITMENTS AND CONTINGENCIES
| | --- | -----------------------------



| | (1) | The Company had the following capital commitments in respect
of the construction of plant and equipment which were contracted but not provided for in the financial statements:
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                          |  | As at December 31, |           
|------------------------- |  | ------------------ | ----------
|                          |  | 2014               |           
|                          |  |                    |           
|Contracted and authorized |  |                    | 71,798,392



| | (2) | As at December 31, 2014, the Company had lease commitment as follows:
| | --- | ---------------------------------------------------------------------



|              |  | As at December 31, |        
|------------- |  | ------------------ | -------
|              |  | 2014               |        
|              |  |                    |        
|Within 1 year |  |                    | 509,206
|2-5 years     |  |                    | 307,294
|              |  |                    | 816,500



* * * * *



F-41







EXHIBIT INDEX



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                          
|1.1         |  | Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.3 to the Amendment No. 4 to the registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)).                                                                      
|            |  |                                                                                                                                                                                                                                                                                                          
|1.2*        |  | Articles of Amendment, filed with the Office of the Registrar of Corporations of Republic of the Marshall Islands on October 31, 2014                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                          
|1.3*        |  | By-laws as amended on September 22, 2014                                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                          
|2.1*        |  | Specimen of Unit Certificate                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                          
|2.2*        |  | Specimen of Common Stock Certificate                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                          
|2.3*        |  | Specimen of Public Redeemable Warrant Certificate                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                          
|2.4         |  | Specimen Placement Unit Certificate (incorporated by reference to Exhibit 4.4 to the Amendment No. 3 to the registrant’s Registration Statement on Form F-1 filed on October 15, 2012 (Commission File No. 333-180571)).                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                          
|2.5         |  | Specimen Placement Warrant Certificate (incorporated by reference to Exhibit 4.5 to the Amendment No. 1 to the registrant’s Registration Statement on Form F-1 filed on June 5, 2012 (Commission File No. 333-180571)).                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                          
|2.6         |  | Form of Warrant Agreement (incorporated by reference to Exhibit 4.6 to the Amendment No. 4 to the registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)).                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                          
|2.7         |  | Form of Unit Purchase Option (incorporated by reference to Exhibit 4.7 to the Amendment No. 3 to the registrant’s Registration Statement on Form F-1 filed on October 15, 2012 (Commission File No. 333-180571)).                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                          
|4.1         |  | Form of Letter Agreement by and among the registrant, Lazard Capital Markets LLC and the founders (incorporated by reference to Exhibit 10.1 to the Amendment No. 4 to the registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)). (1)              
|            |  |                                                                                                                                                                                                                                                                                                          
|4.2         |  | Form of Investment Management Trust Agreement between American Stock Transfer & Trust Company and the registrant (incorporated by reference to Exhibit 10.2 to the Amendment No. 4 to the registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)).   
|            |  |                                                                                                                                                                                                                                                                                                          
|4.3         |  | Form of Securities Escrow Agreement between the registrant, American Stock Transfer & Trust Company and the Founders (incorporated by reference to Exhibit 10.2 to the Amendment No. 2 to the registrant’s Registration Statement on Form F-1 filed on August 31, 2012 (Commission File No. 333-180571)).
|            |  |                                                                                                                                                                                                                                                                                                          
|4.4         |  | Form of Services Agreement between the registrant and Seacrest Shipping Co. Ltd. (incorporated by reference to Exhibit 10.4 to the Amendment No. 1 to the registrant’s Registration Statement on Form F-1 filed on June 5, 2012 (Commission File No. 333-180571)).                                       
|            |  |                                                                                                                                                                                                                                                                                                          
|4.5         |  | Form of Registration Rights Agreement among the Registrant and the founders (incorporated by reference to Exhibit 10.5 to the Amendment No. 1 to the registrant’s Registration Statement on Form F-1 filed on June 5, 2012 (Commission File No. 333-180571)).                                            











|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|4.6         |  | Form of Placement Unit Purchase Agreement between the registrant and the founders (incorporated by reference to Exhibit 10.6 to the Amendment No. 4 to the Registrant’s Registration Statement on Form F-1 filed on October 24, 2012 (Commission File No. 333-180571)).                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|4.7         |  | Share Exchange Agreement and Plan of Liquidation, dated March 24, 2014, by and among Aquasition Corp., KBS International Holdings, Inc., Hongri International Holdings Limited, Cheung So Wa and Chan Sun Keung (incorporated by reference to Exhibit 10.1 to the Registration Report on Form 6-K filed by the registrant on April 4, 2014)                
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|4.8         |  | Frist Amendment to Share Exchange Agreement and Plan of Liquidation, dated June 21, 2014 by and among Aquasition Corp., KBS International Holdings, Inc., Hongri International Holdings Limited, Cheung So Wa and Chan Sun Keung (incorporated by reference to Exhibit (D)(3) to Amendment No.4 to the Schedule TO filed by the registrant on July 9, 2014)
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|4.9         |  | Voting Agreement , dated August 1, 2014, by and among Aquasition Corp., Aquasition Investments Corp., Cheung So Wa and Chan Sun Keung (incorporated by reference to Exhibit 4.11 to Shell Company Report on Form 20-F filed by the registrant on August 7, 2014)                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|4.10        |  | Form of Resale Lock-Up Agreement, dated August 1, 2014, by and among Aquasition Corp., Aquasition Investments Corp., Cheung So Wa, Chan Sun Keung and other named parties(incorporated by reference to Exhibit 4.12 to Shell Company Report on Form 20-F filed by the registrant on August 7, 2014)                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|4.11        |  | Employee Agreement with Keyan Yan, dated August 1, 2014 (incorporated by reference to Exhibit 4.13 to Shell Company Report on Form 20-F filed by the registrant on August 7, 2014)                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|4.12*       |  | Employee Agreement with Lixia Tu, dated June 25, 2015.                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|8.1         |  | List of the registrant’s subsidiaries (incorporated by reference to Exhibit 8.1 to Shell Company Report on Form 20-F filed by the registrant on August 7, 2014)                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|11.1*       |  | Code of Ethics, adopted on October 25, 2014                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|12.1*       |  | Certifications of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-1(a)                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|12.2*       |  | Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-1(a)                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|13.1*       |  | Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                            
|13.2*       |  | Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                        

______________________



*Filed herewith.