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).
If
we cannot continue to satisfy the continued listing requirements and other rules of the Nasdaq Stock Market, our securities may be delisted,
which could negatively impact the price of our securities and your ability to sell them.
On
May 6, 2025, we was notified by the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“ Nasdaq ”) that the
Staff granted the Company’s request to transfer the listing of its common stock, par value $0.0005 per share, from The Nasdaq Global
Select Market tier to The Nasdaq Capital Market tier, and that the Staff granted the Company’s request for a second 180-calendar
day period, or until November 3, 2025, to regain compliance with the $1.00 bid price requirement, as set forth in Nasdaq Listing Rule
5550(a)(2).
On
November 4, 2025, the Company received a delist determination letter from the staff (the “Staff”) of the Listing Qualifications
Department of The Nasdaq Stock Market, LLC advising the Company that the Staff had determined that the Company did not regain compliance
with Minimum Bid Price Requirement by the November 3, 2025, deadline. The Staff had determined that the Company’s securities will
be scheduled for delisting from The Nasdaq Capital Market on November 11, 2025.
The
Company effected a one-for-ten reverse stock split of the Company’s outstanding shares of common stock (the “Reverse Stock
Split”). The Company effected the Reverse Stock Split in the market on October 27, 2025, and its common stock began trading on The
Nasdaq Capital Market on a split-adjusted basis at the market open on such date. On November 7, 2025, the Company appealed to the Staff’s
delisting determination by submitting a hearing request to the Nasdaq Hearings Panel.
On December 1, 2025, Gulf Resources, Inc. (the “Company”)
received a letter from The Nasdaq Stock Market, LLC stating that the Company had regained compliance with the minimum bid price requirement
for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2). Consequently, the hearing before the
Hearings Panel scheduled to take place on December 9, 2025, has been cancelled. The Company’s securities have continued listing
and trading on The Nasdaq Stock Market. On April 23, 2026, the Company received a notice (the “Initial Notice”) from
the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) 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, 2025 (the “Form 10-K”), with
the SEC, the Company was not in compliance with Nasdaq’s continued listing requirements under Nasdaq Listing Rule 5250(c)(1) (the
“Listing Rule 5250(c)(1) 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 26, 2026 due to the Company’s non-compliance with
the Listing Rule 5250(c)(1) 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, 2026 (the “First Quarter Form 10-Q”, together with the Form 10-K, the “Delinquent Reports”).
The May Notice states that the Company had until June 22, 2026, to submit to Nasdaq a plan to regain compliance with the Rule.
On
June 25, 2026, 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 17, 2026, Nasdaq determined to grant an exception to enable the Company to regain compliance with the Listing Rule
5250(c)(1) Rule. The terms of the exception were as follows: on or before August 31, 2026, the Company must file the Delinquent Reports,
as required by the Listing Rule 5250(c)(1) 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.
We
cannot assure you that we will be able to maintain compliance with Nasdaq listing standards. Our failure to continue to meet these requirements
would result in our common stock being delisted from Nasdaq. 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,
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● Results 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.
The Chinese government exerts
substantial influence over the manner in which we must conduct our business activities. We are currently not required to obtain
approval from Chinese authorities to list on U.S exchanges, however, if our holding company or subsidiaries were required to obtain
approval or filing in the future and were denied permission from Chinese authorities to list on U.S. exchanges, we will not be able
to continue listing on U.S. exchange, which would materially affect the interest of the investors.
The Chinese government has exercised and can continue to exercise substantial
control to intervene on virtually every sector of the Chinese economy through regulation and state ownership, and as a result, it can
influence the manner in which we must conduct our business activities and effect material changes in our operations or the value of the
common stock we are registering in this resale. Under the current government leadership, the government of the PRC has been pursuing reform
policies which have adversely affected China-based operating companies whose securities are listed in the U.S., with significant policies
changes being made from time to time without notice. There are substantial uncertainties regarding the interpretation and application
of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance
of our contractual arrangements with borrowers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings.
Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, environmental
regulations, land use rights, property and other matters. The central or local governments of these jurisdictions may impose new, stricter
regulations or interpretations of existing regulations that would require additional expenditure 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.
Given recent
statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas
and/or foreign investment in China-based issuers, any 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 become worthless.
Recently,
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 was 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. Effective measures, such as promoting the construction
of relevant regulatory systems, will be taken to deal with the risks and incidents of China-concept overseas listed companies. As of the
date hereof, we have not received any inquiry, notice, warning, or sanctions from PRC government authorities in connection with the Opinions.
On June
10, 2021, the Standing Committee of the National People’s Congress of China, or the SCNPC, promulgated the PRC Data Security Law,
which took effect in September 2021. The PRC Data Security Law imposes data security and privacy obligations on entities and individuals
carrying out data activities, and introduces a data classification and hierarchical protection system based on the importance of data
in economic and social development, and the degree of harm it will cause to national security, public interests, or legitimate rights
and interests of individuals or organizations when such data is tampered with, destroyed, leaked, illegally acquired or used. The PRC
Data Security Law also provides for a national security review procedure for data activities that may affect national security and impose
export restrictions on certain data information.
In early
July 2021, regulatory authorities in China launched cybersecurity investigations with regard to several China- based companies that are
listed in the United States. The Chinese cybersecurity regulator announced on July 2 that it had begun an investigation of Didi Global
Inc. (NYSE: DIDI) and two days later ordered that the company’s app be removed from smartphone app stores. On July 5, 2021, the
Chinese cybersecurity regulator launched the same investigation on two other Internet platforms, China’s Full Truck Alliance of
Full Truck Alliance Co. Ltd. (NYSE: YMM) and Boss of KANZHUN LIMITED (Nasdaq: BZ). On July 24, 2021, the General Office of the Communist
Party of China Central Committee and the General Office of the State Council jointly released the Guidelines for Further Easing the Burden
of Excessive Homework and Off-campus Tutoring for Students at the Stage of Compulsory Education, pursuant to which foreign investment
in such firms via mergers and acquisitions, franchise development, and variable interest entities are banned from this sector.
On August
17, 2021, the State Council promulgated the Regulations on the Protection of the Security of Critical Information Infrastructure, or the
Regulations, which took effect on September 1, 2021. The Regulations supplement and specify the provisions on the security of critical
information infrastructure as stated in the Cybersecurity Review Measures. The Regulations provide, among others, that protection department
of certain industry or sector shall notify the operator of the critical information infrastructure in time after the identification of
certain critical information infrastructure.
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On August
20, 2021, the SCNPC promulgated the Personal Information Protection Law of the PRC, or the Personal Information Protection Law, which
took effect in November 2021. As the first systematic and comprehensive law specifically for the protection of personal information in
the PRC, the Personal Information Protection Law provides, among others, that (i) an individual’s consent shall be obtained to use
sensitive personal information, such as biometric characteristics and individual location tracking, (ii) personal information operators
using sensitive personal information shall notify individuals of the necessity of such use and impact on the individual’s rights,
and (iii) where personal information operators reject an individual’s request to exercise his or her rights, the individual may
file a lawsuit with a People’s Court.
As such,
the Company’s business segments may be subject to various government and regulatory interference in the provinces in which they
operate. The Company could be subject to regulation by various political and regulatory entities, including various local and municipal
agencies and government sub-divisions. The Company may incur increased costs necessary to comply with existing and newly adopted laws
and regulations or penalties for any failure to comply. Additionally, the governmental and regulatory interference 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.
Furthermore,
it is uncertain when and whether the Company 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. Although the Company is currently not required
to obtain permission from any of the PRC federal or local government to obtain such permission and has not received any denial to list
on the U.S. exchange, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating
to its business or industry.
On February
17, 2023, the CSRC promulgated Trial Administrative Measures of the Overseas Securities Offering and Listing by Domestic Companies (the
“Overseas Listing Trial Measures”) and five relevant guidelines, which became effective on March 31, 2023. According to the
Overseas Listing Trial Measures, PRC domestic companies that seek to offer and list securities in overseas markets, either in direct or
indirect means, are required to fulfill the filing procedure with the CSRC and report relevant information. The Overseas Listing Trial
Measures provides that an overseas listing or offering is explicitly prohibited, if any of the following: (1) such securities offering
and listing is explicitly prohibited by provisions in laws, administrative regulations and relevant state rules; (2) the intended securities
offering and listing may endanger national security as reviewed and determined by competent authorities under the State Council in accordance
with law; (3) the domestic company intending to make the securities offering and listing, or its controlling shareholder(s) and the actual
controller, have committed relevant crimes such as corruption, bribery, embezzlement, misappropriation of property or undermining the
order of the socialist market economy during the latest three years; (4) the domestic company intending to make the securities offering
and listing is currently under investigations for suspicion of criminal offenses or major violations of laws and regulations, and no conclusion
has yet been made thereof; or (5) there are material ownership disputes over equity held by the domestic company’s controlling shareholder(s)
or by other shareholder(s) that are controlled by the controlling shareholder(s) and/or actual controller.
The Overseas
Listing Trial Measures also provides that if the issuer meets both the following criteria, the overseas securities offering and listing
conducted by such issuer will be deemed as indirect overseas offering by PRC domestic companies: (1) 50% or more of any of the issuer’s
operating revenue, total profit, total assets or net assets as documented in its audited consolidated financial statements for the most
recent fiscal year is accounted for by domestic companies; and (2) the issuer’s main business activities are conducted in China,
or its main place(s) of business are located in China, or the majority of senior management staff in charge of its business operations
and management are PRC citizens or have their usual place(s) of residence located in China. Where an issuer submits an application for
initial public offering to competent overseas regulators, such issuer must file with the CSRC within three business days after such application
is submitted. In addition, the Overseas Listing Trial Measures provide that the direct or indirect overseas listings of the assets of
domestic companies through one or more acquisitions, share swaps, transfers or other transaction arrangements shall be subject to filing
procedures in accordance with the Overseas Listing Trial Measures. The Overseas Listing Trial Measures also requires subsequent reports
to be filed with the CSRC on material events, such as change of control or voluntary or forced delisting of the issuer(s) who have completed
overseas offerings and listings.
At a press
conference held for these new regulations (“Press Conference”), officials from the CSRC clarified that the domestic companies
that have already been listed overseas on or before March 31, 2023, shall be deemed as existing issuers (the “Existing Issuers”).
Existing Issuers are not required to complete the filling procedures immediately, and they shall be required to file with the CSRC upon
occurrences of certain subsequent matters such as follow-on offerings of securities. According to the Overseas Listing Trial Measures
and the Press Conference, the existing domestic companies that have completed overseas offering and listing before March 31, 2023, such
as us, shall not be required to perform filing procedures for the completed overseas securities issuance and listing. However, from the
effective date of the regulation, any of our subsequent securities offering in the same overseas market or subsequent securities offering
and listing in other overseas markets shall be subject to the filing requirement with the CSRC within three working days after the offering
is completed or after the relevant application is submitted to the relevant overseas authorities, respectively. If it is determined that
any approval, filing or other administrative procedures from other PRC governmental authorities is required for any future offering or
listing, we cannot assure you that we can obtain the required approval or accomplish the required filings or other regulatory procedures
in a timely manner, or at all. If we fail to fulfill filing procedure as stipulated by the Trial Measures or offer and list securities
in an overseas market in violation of the Trial Measures, the CSRC may order rectification, issue warnings to us, and impose a fine of
between RMB1,000,000 and RMB10,000,000. Persons-in-charge and other persons that are directly liable for such failure shall be warned
and each imposed a fine from RMB500,000 to RMB5,000,000. Controlling shareholders and actual controlling persons of us that organize or
instruct such violations shall be imposed a fine from RMB1,000,000 and RMB10,000,000.
On February 24, 2023, the
CSRC published the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities Offering
and Listing by Domestic Enterprises (the “Provisions on Confidentiality and Archives Administration”), which came into effect
on March 31, 2023. The Provisions on Confidentiality and Archives Administration require that, in the process of overseas issuance and
listing of securities by domestic entities, the domestic entities, and securities companies and securities service institutions that
provide relevant securities service shall strictly implement the provisions of relevant laws and regulations and the requirements of
these provisions, establish and improve rules on confidentiality and archives administration. Where the domestic entities provide with
or publicly disclose documents, materials or other items related to the state secrets and government work secrets to the relevant securities
companies, securities service institutions, overseas regulatory authorities, or other entities or individuals, the companies shall apply
for approval of competent departments with the authority of examination and approval in accordance with law and report the matter to
the secrecy administrative departments at the same level for record filing. Where there is unclear or controversial whether or not the
concerned materials are related to state secrets, the materials shall be reported to the relevant secrecy administrative departments
for determination. However, there remain uncertainties regarding the further interpretation and implementation of the Provisions on Confidentiality
and Archives Administration.
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As of
the date of this annual report, we and our PRC subsidiaries have obtained the requisite licenses and permits from the PRC government authorities
that are material for the business operations of our PRC subsidiaries. In addition, as of the date of this annual report, we and our PRC
subsidiaries are not required to obtain approval or permission from the CSRC or the CAC or any other entity that is required to approve
our PRC subsidiaries’ operations or required for us to offer securities to foreign investors under any currently effective PRC laws,
regulations, and regulatory rules. If it is determined that we are subject to filing requirements imposed by the CSRC under the
Overseas Listing Regulations or approvals from other PRC regulatory authorities or other procedures, including the cybersecurity review
under the revised Cybersecurity Review Measures, for our future offshore offerings, it would be uncertain whether we can or how long it
will take us to complete such procedures or obtain such approval and any such approval could be rescinded. Any failure to obtain or delay
in completing such procedures or obtaining such approval for our offshore offerings, or a rescission of any such approval if obtained
by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to file with the CSRC or failure to seek
approval from other government authorization for our offshore offerings. These regulatory authorities may impose fines and penalties on
our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict
the repatriation of the proceeds from our offshore offerings into China or take other actions that could materially and adversely affect
our business, financial condition, results of operations, and prospects, as well as the trading price of our common stock. The CSRC or
other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our offshore offerings before
settlement and delivery of the securities offered. Consequently, if investors engage in market trading or other activities in anticipation
of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or
other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or accomplish the required
filing or other regulatory procedures for our prior offshore offerings, we may be unable to obtain a waiver of such approval requirements,
if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding such approval requirement
could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of our common stock.
In
addition, on December 28, 2021, the CAC, the National Development and Reform Commission (“NDRC”), and several other
administrations jointly issued the revised Measures for Cybersecurity Review, or the Revised Review Measures, which became effective
and has replaced the existing Measures for Cybersecurity Review on February 15, 2022. According to the Revised Review Measures, if
an “online platform operator” that is in possession of personal data of more than one million users intends to list in a
foreign country, it must apply for a cybersecurity review. Based on a set of Q&A published on the official website of the State
Cipher Code Administration in connection with the issuance of the Revised Review Measures, an official of the said administration
indicated that an online platform operator should apply for a cybersecurity review prior to the submission of its listing
application with non-PRC securities regulators. Given the recency of the issuance of the Revised Review Measures and their pending
effectiveness, there is a general lack of guidance and substantial uncertainties exist with respect to their interpretation and
implementation. For example, it is unclear whether the requirement of cybersecurity review applies to follow-on offerings by an
“online platform operator” that is in possession of personal data of more than one million users where the offshore
holding company of such operator is already listed overseas. Furthermore, the CAC released the draft of the Regulations on Network
Data Security Management in November 2021 for public consultation, which among other things, stipulates that a data processor listed
overseas must conduct an annual data security review by itself or by engaging a data security service provider and submit the annual
data security review report for a given year to the municipal cybersecurity department before January 31 of the following year. If
the draft Regulations on Network Data Security Management are enacted in the current form, we, as an overseas listed company, will
be required to carry out an annual data security review and comply with the relevant reporting obligations.
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 some
time 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.
We face
various legal and operational risks and uncertainties associated with having our operations in China and the complex and evolving PRC
laws and regulations. The PRC government has significant authority in regulating our operations and may intervene or influence our operations
at any time, which could result in a material adverse change in our operations and the value of our securities. The PRC government has
recently indicated its intent to exert more oversight and control over offerings that are conducted overseas and foreign investment in
China-based issuers. Such actions 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. 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. For more details,
see “Item 1A. Risk Factors - Risks Related to Doing Business in China”
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. Currently, we and our PRC subsidiaries
are not required to file for a cybersecurity review by the Cyberspace Administration of China, or the CAC, for our past issuance of securities
to investors and maintaining our listing status on the Nasdaq, since our company already listed on Nasdaq before promulgation of the
Trial Measures is not required to file for a cybersecurity review by the CAC to maintain our listing status on the Nasdaq Stock Market
LLC, or the Nasdaq on which our securities have been listed. Even though we are not required to complete the filing procedures
with the CSRC for our historical issuance of securities, we may be required by the Trial Measures to file with the CSRC in connection
with future securities offerings and listings outside of mainland China, including follow-on offerings, issuance of convertible bonds,
offshore relisting after going-private transactions, and other equivalent offering activities. There remain substantial uncertainties
about the interpretation, application and implementation of the laws and regulations relating to the CSRC filing and CAC cybersecurity
review. If we fail to obtain any requisite approvals with respect to future offerings of our equity securities to foreign investors,
or if we inadvertently conclude that such permissions or approvals are not required, or if the applicable laws, regulations or interpretations
thereof change and we become subject to the requirement of additional permissions or approvals in the future, our ability to execute
our financing and equity offering plans may be significantly limited or completely hindered. Any lack of or failure to maintain requisite
approvals, licenses or permits applicable to us or our PRC subsidiaries may have a material adverse impact on our business, results of
operations, financial condition and prospects, significantly limit or completely hinder our ability to offer or continue to offer securities
to investors, and cause the value of our securities to significantly decline or become worthless.
25
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 Holding
Foreign Companies Accountable Act, or HFCAA, was enacted on December 18, 2020, as amended by the Consolidated Appropriations Act, 2023.
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. 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 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 mainland China and
Hong Kong.
As of the
date of this annual report, the PCAOB has not issued any new determination that it is unable to inspect or investigate completely registered
public accounting firms headquartered in any jurisdiction. As a result, we do not expect to be identified as a “Commission-Identified
Issuer” under the HFCAA for the fiscal year ended December 31, 2025, after we file our annual report on Form 10-K for such fiscal
year. On December 29, 2022, the Consolidated Appropriations Act, 2023, was signed into law, which amended the HFCAA (i) to reduce the
number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two, and (ii)
so that any foreign jurisdiction could be the reason why the PCAOB does not have complete access to inspect or investigate a company’s
auditors. As it was originally enacted, the HFCAA applied only if the PCAOB’s inability to inspect or investigate because of a position
taken by an authority in the foreign jurisdiction where the relevant public accounting firm is located. As a result of the Consolidated
Appropriations Act 2023, the HFCAA now also applies if the PCAOB’s inability to inspect or investigate the relevant accounting firm
is due to a position taken by an authority in any foreign jurisdiction. The denying jurisdiction does not need to be where the accounting
firm is located. However, whether the PCAOB will be able to continue to conduct inspections and investigations completely to its satisfaction
of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong are subject to uncertainty and depends on a
number of factors out of our, and our auditor’s, control, including positions taken by authorities of the PRC. Each year, the PCAOB
will determine whether it can inspect and investigate completely audit firms in mainland China and Hong Kong, among other jurisdictions.
If PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms in mainland
China and Hong Kong and we continue to use an accounting firm headquartered in one of these jurisdictions to issue an audit report on
our financial statements filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing of the annual
report on Form 10-K for the relevant fiscal year. There can be no assurance that we would not be identified as a Commission-Identified
Issuer for any future fiscal year, and if we were identified for two consecutive years, we would become subject to the prohibition on
trading under the HFCAA.
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 a 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.
Because the majority
of our operations are in mainland China and our auditor has been located in mainland China, a jurisdiction where the U.S. Public Company
Accounting Oversight Board (“PCAOB”) is currently unable to conduct inspections without the approval of Chinese authorities,
there have been concerns regarding oversight of the audits of our financial statements filed with the SEC. If the PCAOB continues to be
unable to inspect our audit firm in the PRC for three consecutive years, the HFCAA requires the SEC to prohibit the trading of our securities
on a national securities exchange, including Nasdaq, or on over-the- counter markets in the United States.
In addition, the U.S. Senate
and U.S. House of Representatives have each passed bills, which, if enacted, would decrease the number of non-inspection years from three
consecutive years to two, thus reducing the time period before our securities may be prohibited from trading on a U.S. securities exchange
or delisted from Nasdaq. The foregoing could adversely affect the market price of our securities and our ability to raise capital effectively.
Auditors of companies that are
registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, are required
to be registered with the PCAOB and to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United
States and applicable professional standards. Because our current auditor is located in mainland China, a jurisdiction where the PCAOB
is currently unable to conduct inspections without the approval of Chinese authorities, our auditor is not currently inspected by the
PCAOB.
PCAOB inspections of auditors located outside of mainland China and
Hong Kong have at times identified deficiencies in those auditors’ audit procedures and quality control procedures, which may be
addressed as part of the PCAOB’s inspection process to improve future audit quality. The lack of PCAOB inspections of audit work
undertaken in mainland China and Hong Kong prevent the PCAOB from regularly evaluating our auditor’s audits and its quality control
procedures. As a result, investors are deprived of the benefits of PCAOB inspections, which could result in limitations or restrictions
on our access to the U.S. capital markets.
Furthermore, in recent years,
the U.S. Congress and regulatory authorities have continued to express concerns about challenges in their oversight of financial statement
audits of U.S.-listed companies with significant operations in China. As part of this continued focus on access to audit and other information
currently protected by national law, in particular under Chinese law, the United States enacted the HFCAA in December 2020. The HFCAA
requires the SEC to identify issuers that have 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 has determined it is unable to inspect or investigate completely because
of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction (a “Commission-Identified Issuer”).
Under the HFCAA, if the SEC conclusively identifies an issuer as a Commission-Identified Issuer for three consecutive years, the SEC is
required to prohibit the trading of the issuer’s securities on a national securities exchange or through any other method that is
within the jurisdiction of the SEC to regulate, including over-the counter markets in the United States. Our securities may be prohibited
from trading on the Nasdaq or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years, and
this ultimately could result in our securities being delisted.
Furthermore, in June 2021, the
U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”), which, if enacted, would amend the
HFCAA and require 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 (as opposed to the three years under the HFCAA). In February 2022, the U.S. House of Representatives
passed the America Creating Opportunities for Manufacturing Pre- Eminence in Technology and Economic Strength (COMPETES) Act of 2022 (the
“America COMPETES Act”), which similarly would amend the HFCAA to shorten the number of non-inspection years from three years
to two years. The America COMPETES Act, however, includes a broader range of legislation than the AHFCA Act in response to the U.S. Innovation
and Competition Act passed by the U.S. Senate in 2021. The U.S. House of Representatives and the U.S. Senate will need to agree on amendments
to these respective bills to allow the legislature to pass their amended bills before the President can sign the bill into law. It is
unclear if or when either of these bills will be signed into law.
In September 2021, the PCAOB
adopted PCAOB Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act, which provides a framework for the
PCAOB to use when determining whether the PCAOB is unable to inspect or investigate completely a registered public accounting firm located
in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction for the purposes of the HFCAA. PCAOB
Rule 6100 establishes the manner of the PCAOB’s determinations; the factors the PCAOB will evaluate and the documents and information
it will consider when assessing whether a determination is warranted; the form, public availability, effective date, and duration of such
determinations; and the process by which the PCAOB will reaffirm, modify or vacate any such determinations. In November 2021, the SEC
announced that it had approved Rule 6100. In December 2021, the SEC adopted amendments to finalize rules implementing the submission and
disclosure requirements in the HFCAA for Commission-Identified Issuers, which became effective on January 10, 2022. In addition, the PCAOB
issued a Determination Report, pursuant to PCAOB Rule 6100, which found that the PCAOB is unable to inspect or investigate completely
registered public accounting firms headquartered in mainland China and Hong Kong because of positions taken by Chinese authorities in
those jurisdictions. The SEC began to identify Commission- Identified Issuers for fiscal years beginning after December 18, 2020. A Commission-Identified
Issuer will be required to comply with the submission and disclosure requirements in the annual report for each year in which it was so
identified. If an issuer is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended December
31, 2021, the issuer will be required to comply with the submission or disclosure requirements in its annual report for the fiscal year
ended December 31, 2022. If we are identified as a Commission-Identified Issuer that uses an auditor not subject to PCAOB inspection for
three consecutive years, or, if the AHFCAA or the America COMPETES Act is passed, two consecutive years, our securities may be delisted
from Nasdaq as a result. Delisting of our securities would force holders of our securities to sell their securities. Further, we may be
prohibited from listing our securities on another U.S. securities exchange, making our shares harder to trade for the investors, potentially
reducing demand and lowering our share price. The market price of our securities could be adversely affected as a result of anticipated
negative impacts of such legislative or executive actions upon, as well as negative investor sentiment toward, companies with significant
operations in mainland China and Hong Kong that are listed in the United States, regardless of whether such actions are implemented and
regardless of our actual operating performance.
Our auditor, GGF CPA LTD., Certified
Public Accountants, is a China-based accounting firm registered with the PCAOB, and 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 headquartered
in the China and is subject to inspection by the PCAOB on a regular basis. 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
in the future may determine that it is unable to inspect or investigate completely registered public accounting firms in mainland China
and Hong Kong. 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.
For a detailed description of
risks related to our doing business in China, see “Item 1A. Risk Factors - Risks Related To Doing Business In China”
26
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.
27
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.
If the Company becomes
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 matters. Any unfavorable results from the investigations could harm our business
operations and our reputation.
Recently,
U.S. public companies that have substantially all of their operations in China have been subjects 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, lack of effective internal control over financial reporting, inadequate
corporate governance and ineffective implementation thereof and, in many cases, allegations of fraud. As a result of enhanced scrutiny,
criticism and negative publicity, the publicly traded stocks of many U.S.-listed Chinese companies have sharply decreased in value and,
in some cases, have become virtually worthless or illiquid. Many of these companies are now subject to shareholder lawsuits and SEC enforcement
actions and are conducting internal and external investigations into the allegations. It is not clear what effects the sector-wide investigations
will have on the Company. If the Company becomes the subject of any unfavorable allegations, whether such allegations are proven to be
true or untrue, the Company will have to expend significant resources to investigate such allegations and defend the Company. If such
allegations were not proven to be baseless, the Company would be severely hampered and the price of the stock of the Company could decline
substantially. If such allegations were proven to be groundless, the investigation might have significantly distracted the attention of
the Company’s management.
It may be difficult to
serve the Company with legal process or enforce judgments against the Company or its management.
Most of
the Company’s assets are located in China, all of its directors and officers are non-residents of the United States and located
in China, and all or substantial portions of the assets of such non-residents are located outside the United States. As a result, it may
not be possible to effect service of process within the United States upon such persons to originate an action in the United States. Moreover,
there is uncertainty that the courts of China would enforce judgments of U.S. courts against the Company, its directors or officers based
on the civil liability provisions of the securities laws of the United States or any state, or an original action brought in China based
upon the securities laws of the United States or any state.
The recognition and enforcement of foreign judgments are provided under
the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil
Procedure Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between
jurisdictions. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition
and enforcement of foreign judgments. In addition, according to the PRC Civil Procedure Law, the PRC courts will not enforce a foreign
judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national
sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment
rendered by a court in the United States.
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.
28
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.
29
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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.