Item 1A. Risk Factors
Item 1A. Risk Factors.
Pursuant to Item 301(c) of Regulation S-K (§
229.301(c)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,”
as defined by Rule 229.10(f)(1).
We
are currently not in compliance with the Nasdaq continued listing requirements. If we are unable to regain compliance with Nasdaq’s
listing requirements, our securities could be delisted, which could affect our common stock’s market price and liquidity and reduce
our ability to raise capital.
The
Company received a notice (the “Initial Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC
(“Nasdaq”) on April 18, 2024 notifying the Company that due to the Company’s failure to timely file its Annual Report
on Form 10-K for the fiscal year ended December 31, 2023 (the “Form 10-K”), with the SEC, the Company is not in compliance
with Nasdaq’s continued listing requirements under Nasdaq Listing Rule 5250(c)(1) (the “Rule”), which requires the timely
filing of all required periodic reports with the SEC, and the Company subsequently received a notice (the “May Notice”) from
Nasdaq on May 21, 2024 due to the Company’s non-compliance with the Rule as a result of the Company’s failure to timely file
its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024 (the “Form 10-Q”, together with the Form 10-K,
the “Delinquent Reports”). The May Notice states that the Company has until June 17, 2024 to submit to Nasdaq a plan to regain
compliance with the Rule.
On
June 26, 2024, the Company received a letter from Nasdaq indicating that, based on its further review and the plan of compliance submitted
by the Company on June 14, 2024, Nasdaq has determined to grant an exception to enable the Company to regain compliance with the Rule.
The terms of the exception are as follows: on or before October 14, 2024, the Company must file the Delinquent Reports, as required by
the Rule. In the event the Company does not satisfy the terms, Nasdaq will provide written notification that its securities will be delisted.
At that time, the Company may appeal Nasdaq’s determination to a hearings panel.
Subsequently,
on August 20, 2024, the Company received a notice (the “August Notice”) from Nasdaq indicating that, because the Company is
delinquent in filing its quarterly report on Form 10-Q for the period ended June 30, 2024, the Company is not in compliance with the Rule.
The Notice also indicates that as a result of this additional delinquency, the Company must submit an update to its original plan to regain
compliance with respect to the filing requirements. The Company has until September 4, 2024 to submit such update to Nasdaq.
The
August Notice has no immediate effect on the listing or trading of the Company’s common stock on the Nasdaq Global Select Market.
While the Company can provide no assurance to the timing, the Company has submitted a letter to Nasdaq confirming that there has been
no change to its original plan to regain compliance with respect to the filing requirements, and will continue to work diligently to complete
and file its delayed SEC reports.
On
or before October 14, 2024, we must evidence compliance with the Rule, which requires the timely filing of all required periodic reports
with the SEC. If we fail to regain compliance with the Rule, or fail to evidence compliance with the Rule by October 14, 2024, we may
be subject to delisting. In that event, we would have the right to a hearing before a Nasdaq hearings panel, which would stay any suspension
or delisting action pending the conclusion of the hearing process and the expiration of any additional extension period granted by the
panel following the hearing.
We
cannot assure you that we will be able to regain compliance with Nasdaq listing standards. Our failure to continue to meet these requirements
would result in our common stock being delisted from Nasdaq, and if our common stock is delisted, our warrants will also be delisted.
We and holders of our securities could be materially adversely impacted if our securities are delisted from Nasdaq. In particular:
·
we may be unable to raise equity capital on acceptable terms or at all;
·
we may lose the confidence of our customers, which would jeopardize our ability to continue our business as currently conducted;
·
the price of our common stock will likely decrease as a result of the loss of market efficiencies associated with Nasdaq and the loss of federal preemption of state securities laws;
·
holders may be unable to sell or purchase our securities when they wish to do so;
·
we may become subject to stockholder litigation;
·
we may lose the interest of institutional investors in our common stock;
·
we may lose media and analyst coverage;
·
our common stock could be considered a “penny stock,” which would likely limit the level of trading activity in the secondary market for our common stock; and
·
we would likely lose any active trading market for our common stock, as it may only be traded on one of the over-the-counter markets, if at all.
As a China-based issuer, the Company provides
the following material risk factors related to doing business in China:
Risks Related to Doing Business in China
Because all of our operations are in China,
our business is subject to the complex and rapidly evolving laws and regulations there. The Chinese government may exercise significant
oversight and discretion over the conduct of our business and may intervene in or influence our operations at any time, which could result
in a material change in our operations and/or the value of our common stock.
As a business operating in
China, we are subject to the laws and regulations of the PRC, which can be complex and evolve rapidly. The PRC government has the power
to exercise significant oversight and discretion over the conduct of our business, and the regulations to which we are subject may change
rapidly and with little notice to us or our shareholders. As a result, the application, interpretation, and enforcement of new and existing
laws and regulations in the PRC are often uncertain. In addition, these laws and regulations may be interpreted and applied inconsistently
by different agencies or authorities, and inconsistently with our current policies and practices. New laws, regulations, and other government
directives in the PRC may also be costly to comply with, and such compliance or any associated inquiries or investigations or any other
government actions may:
●
Delay or impede our development,
●
Result in negative publicity or increase our operating costs,
●
Require significant management time and attention, and
●
Subject us to remedies, administrative penalties and even criminal liabilities that may harm our business, including fines assessed for our current or historical operations, or demands or orders that we modify or even cease our business practices.
The promulgation of new laws
or regulations, or the new interpretation of existing laws and regulations, in each case that restrict or otherwise unfavorably impact
the ability or manner in which we conduct our business and could require us to change certain aspects of our business to ensure compliance,
which could decrease demand for our products, reduce revenues, increase costs, require us to obtain more licenses, permits, approvals
or certificates, or subject us to additional liabilities. To the extent any new or more stringent measures are required to be implemented,
our business, financial condition and results of operations could be adversely affected as well as materially decrease the value of our
Common Stock.
If the Chinese government chooses to exert
more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, such action could
significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such
securities to significantly decline or be worthless.
Recent statements by the
Chinese government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign
investments in China based issuers. PRC has recently proposed new rules that would require companies collecting or holding large amounts
of data to undergo a cybersecurity review prior to listing in foreign countries, a move that would significantly tighten oversight over
China-based internet giants. On January 4, 2022, the Cyberspace Administration of China, or CAC, issued the revised Measures on Cyberspace
Security Review (the “Revised Measures”), which came into effect on February 15, 2022. Under the Revised Measures, any “network
platform operator” controlling personal information of no less than one million users which seeks to list in a foreign stock exchange
should also be subject to cybersecurity review. Pursuant to the Revised Measures, companies holding data on more than 1 million users
must now apply for cybersecurity approval when seeking listings in other nations due to the risk that such data and personal information
could be “affected, controlled, and maliciously exploited by foreign governments.”
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Our business belongs to the
chemical industry in China, which does not involve the collection of user data, implicate cybersecurity, or involve any other type of
restricted industry. Based on the advice of PRC counsel and our understanding of currently applicable PRC laws and regulations, listing
of our common stock in the U.S. is not subject to the review or prior approval of the Cyberspace Administration of China (the “CAC”)
or the China Securities Regulatory Commission (the “CRSC”). Uncertainties still exist, however, due to the possibility that
laws, regulations, or policies in the PRC could change rapidly in the future. Any future action by the PRC government expanding the categories
of industries and companies whose foreign securities offerings are subject to review by the CRSC or the CAC could significantly limit
or completely hinder our ability to offer or continue to offer securities to investors and could cause the value of such securities to
significantly decline or be worthless.
The occurrence of security breaches and
cyber-attacks could negatively impact our business.
Information technology systems
are important to our business and operations. We are subject to attempts to compromise our security and information systems, including
denial of service attacks, viruses, malicious software or ransomware, and exploitations of system flaws or weaknesses. Error or malfeasance
or other irregularities may also result in the failure of our or our third-party service providers' cybersecurity measures and may give
rise to a cybersecurity incident. The techniques used to conduct security breaches and cyber-attacks, as well as the sources and targets
of these attacks, change frequently and may not be recognized until launched against us or our third-party service providers. We or our
third-party service providers may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of
cyber-attacks. The primary risks that could directly result from the occurrence of security breaches and cyber-attacks include operational
interruption, financial losses, personal information leakage and non-compliance. The occurrence of such incidents could negatively impact
our business operations and our relationships with customers and employees, and damage our reputation. If we or our third-party service
providers are unable to avert security breaches and cyber-attacks, we could incur significantly higher costs, including remediation costs
to repair damage caused by the breach, costs to deploy additional personnel and network protection technologies, train employees and engage
third-party experts and consultants, as well as litigation costs resulting from the incident. These costs, which could be material, could
adversely impact our results of operations in the period in which they are incurred and may not meaningfully limit the success of future
attempts to breach our information technology systems.
Uncertainties with respect to the PRC legal
system could adversely affect us.
The PRC legal system is a
civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited
for reference but have limited precedential value.
In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations governing economic matters generally. The overall effect of legislation
over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in the PRC. However,
the PRC has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects
of economic activities in the PRC. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties.
Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual
terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy.
These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or
tort claims. In addition, these regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts
to extract payments or benefits from us.
Furthermore, the PRC legal
system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may
have a retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the
violation. In addition, any administrative and court proceedings in the PRC may be protracted, resulting in substantial costs and diversion
of resources and management attention.
If the Chinese government were to impose
new requirements for approval from the PRC Authorities to issue our common stock to foreign investors or list on a foreign exchange, such
action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the
value of such securities to significantly decline or be worthless.
As of the date of this annual
report, we and our PRC subsidiaries, (1) are not required to obtain permissions from any PRC authorities to operate or issue our common
stock to foreign investors, (2) are not subject to permission requirements from the CSRC, CAC or any other entity that is required to
approve of our PRC subsidiaries’ operations, and (3) have not received or were denied such permissions by any PRC authorities. Nevertheless,
the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued
the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the Opinions, which were made
available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities,
and the need to strengthen the supervision over overseas listings by Chinese companies. Given the current PRC regulatory environment,
it is uncertain when and whether we or our PRC subsidiaries, will be required to obtain permission from the PRC government to list on
U.S. exchanges in the future, and even when such permission is obtained, whether it will be denied or rescinded. We have been closely
monitoring regulatory developments in China regarding any necessary approvals from the CSRC or other PRC governmental authorities required
for overseas listings. As of the date of this annual report, we have not received any inquiry, notice, warning, sanctions or regulatory
objection to listing on U.S. exchange from the CSRC or other PRC governmental authorities. However, there remains significant uncertainty
as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital
markets activities.
On February 17, 2023, the
CSRC released the Trial Administrative Measures for Administration of Overseas Securities Offerings and Listings by Domestic Companies
(the “Trial Measures”) and five supporting guidelines, which came into effect on March 31, 2023. Pursuant to the Trial Measures,
domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedures
and report relevant information to the CSRC. If a domestic company fails to complete the filing procedures or conceals any material fact
or falsifies any major content in its filing documents, such domestic company may be subject to administrative penalties by the CSRC,
such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly in charge and other
directly liable persons may also be subject to administrative penalties, such as warnings and fines. As a listed company, we believe that
we and all of our PRC subsidiaries are not required to fulfill filing procedures and obtain approvals from the CSRC to continue to offer
our securities or operate our business as of the date of this annual report. In addition, to date, none of us and our PRC subsidiaries
has received any filing or compliance requirements from CSRC for the listing of the Company at Nasdaq and all of its overseas offerings.
Furthermore, based on our understanding of the current PRC laws, we believe that the CSRC’s approval is not required to be obtained
for the Company’s listing on Nasdaq; however, there are substantial uncertainties regarding the interpretation and application of
the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors (“M&A Rules”), other PRC Laws and
future PRC laws and regulations, and there can be no assurance that any governmental agency will not take a view that is contrary to or
otherwise different from our belief stated herein.
If it is determined in the
future that the approval of the CSRC, the CAC or any other regulatory authority is required for our listing on U.S. exchange, we may face
sanctions by the CSRC, the CAC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations
in China, limit our ability to pay dividends outside of China, limit our operations in China or take other actions that could have a material
adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of our securities.
17
Our common stock may be delisted from the Nasdaq under the Holding
Foreign Companies Accountable Act if the PCAOB is unable to adequately inspect audit documentation located in China. The delisting of
our common stock, or the threat of their being delisted, may materially and adversely affect the value of your investment.
The HFCAA, was enacted on December 18, 2020. The
HFCAA states if the SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been
subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such ordinary shares from being
traded on a national securities exchange or in the over the counter trading market in the U.S.
On March 24, 2021, the SEC adopted interim
final rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA. A company will be
required to comply with these rules if the SEC identifies it as having a “non inspection” year under a process to be
subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCAA, including the listing
and trading prohibition requirements described above. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding
Foreign Companies Accountable Act, which was signed into law on December 29, 2022, amends the HFCAA and requires the SEC to prohibit
an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two
consecutive years instead of three. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which provides a
framework for the PCAOB to use when determining, as contemplated under the HFCAA Act, whether the PCAOB is unable to inspect or
investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or
more authorities in that jurisdiction. On December 2, 2021, the SEC issued amendments to finalize the interim final rules previously
adopted in March 2021 to implement the submission and disclosure requirements in the HFCAA. The rules apply to registrants that the
SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located
in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate completely because of a position taken by an
authority in a foreign jurisdiction. On December 16, 2021, the PCAOB issued a Determination Report which found that the PCAOB is
unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the PRC,
because of a position taken by one or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and
dependency of the PRC, because of a position taken by one or more authorities in Hong Kong. The PCAOB has made such designations as
mandated under the HFCAA. Pursuant to each annual determination by the PCAOB, the SEC will, on an annual basis, identify issuers
that have used non-inspected audit firms and thus are at risk of such suspensions in the future. On August 26, 2022, the PCAOB
signed the Protocol with the CSRC and the MOF of the People’s Republic of China, governing inspections and investigations of
audit firms based in mainland China and Hong Kong. The Protocol remains unpublished and is subject to further explanation and
implementation. Pursuant to the fact sheet with respect to the Protocol disclosed by the SEC, the PCAOB shall have independent
discretion to select any issuer audits for inspection or investigation and the unfettered ability to transfer information to the
SEC. On December 15, 2022, the PCAOB announced that it was able to secure complete access to inspect and investigate
PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong completely in 2022. The PCAOB Board vacated
its previous 2021 determinations that the PCAOB was unable to inspect or investigate completely registered public accounting firms
headquartered in China mainland and Hong Kong. However, whether the PCAOB will continue to be able to satisfactorily conduct
inspections of PCAOB-registered public accounting firms headquartered in China mainland and Hong Kong is subject to uncertainty and
depends on a number of factors out of our, and our auditor’s, control. The PCAOB is continuing to demand complete access in
China mainland and Hong Kong moving forward and was already making plans to resume regular inspections in early 2023 and beyond, as
well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB has indicated that it will
act immediately to consider the need to issue new determinations with the HFCAA if needed. Therefore, the PCAOB may in the future
determine that it is unable to inspect or investigate completely registered public accounting firms in mainland China and Hong
Kong.
Our auditor, GGF CPA LTD, Certified
Public Accountants, the independent registered public accounting firm that issued the audit report included in our annual report, an auditor
of companies that are traded publicly in the United States and an China-based accounting firm registered with the PCAOB, is subject to
laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional
standards. Our auditor is based in the China and is subject to inspection by the PCAOB on a regular basis.
However, our auditor’s working papers related
to us and our subsidiaries are located in China. If our auditor is not permitted to provide requested audit work papers located in China
to the PCAOB, investors would be deprived of the benefits of PCAOB’s oversight of our auditor through such inspections which could
result in limitation or restriction to our access to the U.S. capital markets, and trading of our securities may be prohibited under the
HFCAA, which would result in the delisting of our securities from the Nasdaq.
Changes in China’s economic, political
or social conditions or government policies could have a material adverse effect on our business and operations.
Substantially all of our
assets and operations are located in the PRC. Accordingly, our business, financial condition, results of operations and prospects may
be influenced to a significant degree by political, economic and social conditions in the PRC generally. The Chinese economy differs from
the economies of most developed countries in many respects, including the level of government involvement, development, growth rate, control
of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization
of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate
governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the government. In addition,
the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese
government also exercises significant control over the PRC’s economic growth through allocating resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
While the Chinese economy
has experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy.
Any adverse changes in economic conditions in the PRC, in the policies of the Chinese government or in the laws and regulations in the
PRC could have a material adverse effect on the overall economic growth of the PRC. Such developments could adversely affect our business
and operating results, lead to a reduction in demand for our services and adversely affect our competitive position. The Chinese government
has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit
the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may
be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese
government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures
may cause decreased economic activity in the PRC, which may adversely affect our business and operating results.
18
China’s economic, political and social
conditions, as well as changes in any government policies, laws and regulations, could have a material adverse effect on our business.
All of our operations are
located in China and substantially of our net revenues are derived from customers located in China. Accordingly, our business, financial
condition, results of operations, prospects and certain transactions we may undertake may be subject, to a significant extent, to economic,
political and legal developments in China.
China’s economy differs
from the economies of most developed countries in many respects, including the amount of government involvement, level of development,
growth rate, control of foreign exchange and allocation of resources. Although China’s economy has been transitioning from a planned
economy to a more market-oriented economy since the late 1970s, the PRC government continues to play a significant role in regulating
industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic
growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary
policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations
could adversely affect the economy in China and could have a material adverse effect on our business.
The PRC government has implemented
various measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources.
However, we cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will have
a negative effect on us. China’s social and political conditions may change and become unstable. Any sudden changes to China’s
political system or the occurrence of widespread social unrest could have a material adverse effect on our business and results of operations.
You may experience difficulties in effecting
service of legal process, enforcing foreign judgments or bringing actions in China against us or our management based on foreign laws.
We conduct substantially
all of our operations in China, and substantially all of our assets are located in China. In addition, our current officers reside within
China and are PRC nationals. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons
inside the PRC. In addition, the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts
with the U.S. and many other countries and regions. Therefore, recognition and enforcement in the PRC of judgments of a court in any of
these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.
We may rely on dividends and other distributions
on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our
PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.
We rely principally on dividends
and other distributions on equity from our PRC subsidiaries for our cash requirements, including for services of any debt we may incur.
Our PRC
subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our
PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries, as a Foreign Invested
Enterprise, or FIE, are required to draw 10% of its after-tax profits each year, if any, to fund a common reserve, which may stop
drawing its after tax profits if the aggregate balance of the common reserve has already accounted for over 50 percent of its
registered capital. These reserves are not distributable as cash dividends. If our PRC subsidiaries incur debt on their own behalf
in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any
limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to their respective shareholders could
materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay
dividends or otherwise fund and conduct our business.
In addition, the Enterprise
Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by
Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the
PRC central government and governments of other countries or regions where the non-PRC resident enterprises are incorporated.
19
PRC regulation of loans to and direct investment
in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from making loans or additional
capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand
our business.
Any funds we transfer to
our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration
with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in
China, capital contributions to our PRC subsidiaries are subject to the approval of or filing with the Ministry of Commerce, or MOFCOM
or its local branches and registration with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition,
(i) a foreign loan of less one year duration procured by our PRC subsidiaries is required to be registered with SAFE or its local branches
and (ii) a foreign loan of one year duration or more procured by our PRC subsidiaries is required to be applied to the National Development
and Reform Commission, or NDRC, in advance for undergoing recordation registration formalities. Any medium or long-term loan to be provided
by us to our PRC operating subsidiaries, must be registered with the NDRC and the SAFE or its local branches. We may not be able to complete
such registrations on a timely basis, with respect to future capital contributions or foreign loans by us to our PRC Subsidiary. If we
fail to complete such registrations, our ability to capitalize our PRC operations may be negatively affected, which could adversely affect
our liquidity and our ability to fund and expand our business.
On March 30, 2015, the SAFE
promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises,
or SAFE Circular 19, which took effect as of June 1, 2015. SAFE Circular 19 launched a nationwide reform of the administration of the
settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but
continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capital for expenditure beyond their business
scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. The SAFE issued the Circular on Reforming and Regulating
Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective in June 2016. Pursuant to
SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to Renminbi on a self-discretionary
basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but
not limited to foreign currency capital and foreign debts) on a self-discretionary basis which applies to all enterprises registered in
China. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not
be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted Renminbi
shall not be provided as loans to its non-affiliated entities. As this circular is relatively new, there remains uncertainty as to its
interpretation and application and any other future foreign exchange related rules. Violations of these Circulars could result in severe
monetary or other penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted from
the net proceeds of this offering to fund our PRC operating subsidiary, to invest in or acquire any other PRC companies through our PRC
Subsidiary, which may adversely affect our business, financial condition and results of operations.
Fluctuations in exchange rates could have
a material and adverse effect on our results of operations and the value of your investment.
The value of the Renminbi
against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions
and the foreign exchange policy adopted by the PRC government. It is difficult to predict how long such appreciation of RMB against the
U.S. dollar may last and when and how the relationship between the RMB and the U.S. dollar may change again. All of our revenues
and substantially all of our costs are denominated in Renminbi. We rely on dividends paid by our operating subsidiaries in China for our
cash needs. Any significant revaluation of Renminbi may materially and adversely affect our results of operations and financial position
reported in Renminbi when translated into U.S. dollars, and the value of, and any dividends payable on, the common stock in U.S. dollars.
To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar
would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars
for the purpose of making payments for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against
the Renminbi would have a negative effect on the U.S. dollar amount.
20
Governmental control of currency conversion
may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes
controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China.
We receive substantially all of our revenues in Renminbi. Under our current corporate structure, we primarily rely on dividend payments
from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments
of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions,
can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under
the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China
may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required,
in principle, where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment
of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of
our PRC subsidiaries to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other
capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access
to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining
sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our
shareholders, including holders of the Common stock.
U.S. regulatory bodies may be limited in
their ability to conduct investigations or inspections of our operations in China.
Any disclosure of documents
or information located in China by foreign agencies may be subject to jurisdiction constraints and must comply with China’s state
secrecy laws, which broadly define the scope of “state secrets” to include matters involving economic interests and technologies.
There is no guarantee that requests from U.S. federal or state regulators or agencies to investigate or inspect our operations will be
honored by us, by entities who provide services to us or with whom we associate, without violating PRC legal requirements, especially
as those entities are located in China. Furthermore, under the current PRC laws, an on-site inspection of our facilities by any of these
regulators may be limited or prohibited.