In this annual report
on Form 20-F, unless otherwise indicated, “we,” “us,” “our,” the “Company” and
“Golden Bull” refer to Golden Bull Limited, a company organized in the Cayman Islands, its predecessor entities and
its subsidiaries.
Unless the context
indicates otherwise, all references to “China” and the “PRC” refer to the People’s Republic of China,
all references to “Renminbi” or “RMB” are to the legal currency of the People’s Republic of China,
all references to “U.S. dollars,” “dollars” and “$” are to the legal currency of the United
States. This annual report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience
of the reader. We make no representation that the Renminbi or U.S. dollar amounts referred to in this report could have been or
could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On July 28, 2020, the cash
buying rate announced by the People’s Bank of China was RMB 6.9895 to $1.00.
This report contains
“forward-looking statements” for purposes of the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995 that represent our beliefs, projections and predictions about future events. All statements other than statements of
historical fact are “forward-looking statements,” including any projections of earnings, revenue or other financial
items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed
new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s
beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words
such as “may”, “will”, “should”, “could”, “would”, “predicts”,
“potential”, “continue”, “expects”, “anticipates”, “future”, “intends”,
“plans”, “believes”, “estimates” and similar expressions, as well as statements in the future
tense, identify forward-looking statements.
These statements are
necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual
results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements
described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking
statements, including with respect to correct measurement and identification of factors affecting our business or the extent of
their likely impact, and the accuracy and completeness of the publicly available information with respect to the factors upon which
our business strategy is based or the success of our business.
Forward-looking statements
should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether,
or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available
at the time those statements are made and management’s belief as of that time with respect to future events and are subject
to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested
by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors
discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” and elsewhere
in this report.
ITEM 3. KEY INFORMATION
3.A. Selected Financial Data
The following table
presents the selected consolidated financial information of our company. The selected consolidated statements of operations data
for the years ended December 31, 2019, 2018 and 2017 and the selected consolidated balance sheets data as of December 31, 2019
and 2018 have been derived from our audited consolidated financial statements, which are included in this annual report beginning
on page F-1. Our audited consolidated financial statements are prepared and presented in accordance with accounting principles
generally accepted in the United States, or U.S. GAAP. Our historical results do not necessarily indicate results expected for
any future period. You should read the following selected financial data in conjunction with the consolidated financial statements
and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this report.
Summary Consolidated Statements of Operations:
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues, net
|
|
$
|
4,572,153
|
|
|
$
|
7,889,201
|
|
|
$
|
6,953,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
(8,196,151
|
)
|
|
|
(4,940,784
|
)
|
|
|
(3,910,646
|
)
|
General and administrative
|
|
|
(5,788,918
|
)
|
|
|
(6,685,377
|
)
|
|
|
(3,916,736
|
)
|
Research and development
|
|
|
(137,423
|
)
|
|
|
(447,884
|
)
|
|
|
(485,852
|
)
|
Total operating expenses
|
|
|
(14,122,492
|
)
|
|
|
(12,074,045
|
)
|
|
|
(8,313,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
680,951
|
|
|
|
186,548
|
|
|
|
91,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(8,869,388
|
)
|
|
|
(3,998,297
|
)
|
|
|
(1,268,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expenses) benefits
|
|
|
(806,803
|
)
|
|
|
461,171
|
|
|
|
271,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,676,191
|
)
|
|
|
(3,537,126
|
)
|
|
|
(996,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net loss attributable to non-controlling interest
|
|
|
(205,941
|
)
|
|
|
(111,145
|
)
|
|
|
(54,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Golden Bull Limited
|
|
$
|
(9,470,250
|
)
|
|
$
|
(3,425,981
|
)
|
|
$
|
(942,368
|
)
|
Summary Consolidated Balance Sheet Data:
The following table
presents our summary consolidated balance sheet data as of December 31, 2019 and 2018.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,650
|
|
|
$
|
2,334,425
|
|
Other assets
|
|
|
4,485,883
|
|
|
|
10,147,045
|
|
Total assets
|
|
|
4,516,533
|
|
|
|
12,481,470
|
|
Total liabilities
|
|
|
(429,593
|
)
|
|
|
(403,219
|
)
|
Total shareholders’ equity
|
|
$
|
4,086,940
|
|
|
$
|
12,078,251
|
|
3.B. Capitalization and Indebtedness
Not Applicable.
3.C. Reasons for The Offer and Use of Proceeds
Not Applicable.
3.D. Risk Factors
An investment in
our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together
with all other information contained in this annual report, including the matters discussed under the headings “Forward-Looking
Statements” and “Operating and Financial Review and Prospects” before you decide to invest in our ordinary
shares. We are a holding company with substantial operations in China and are subject to a legal and regulatory environment
that in many respects differs from the United States. If any of the following risks, or any other risks and uncertainties that
are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our
future growth prospects could be materially and adversely affected.
General Risks
If we are unable
to successfully execute our bitcoin mining and car rental business plan, it would adversely affect our financial and business condition
and results of operations.
As a result of a policy
change of the Chinese government, the Company temporarily suspended its peer to peer (“P2P”) lending business during
the fourth quarter of 2019. Our previously announced growth strategy included the expansion of our operations to our upstream and
downstream industries. In fiscal 2018, we set new financial targets to grow operating income, accelerate earnings per share growth
faster than operating income growth and improve return on invested capital. Our ability to meet these financial targets partially
depends on our successful execution of our car leasing business plan, including various related initiatives which commenced in
April 2018. In October 2019, we decided to enter the bitcoin mining business. There are various risks related to these efforts,
including the risk that these efforts may not provide the expected benefits in our anticipated time frame, if at all, and may prove
costlier than expected; and the risk of adverse effects to our business, results of operations and liquidity if past and future
undertakings, and the associated changes to our business, do not prove to be cost effective or do not result in the cost savings
and other benefits at the levels that we anticipate. Our intentions and expectations with regard to the execution of our business
plan, and the timing of any related initiatives, are subject to change at any time based on management’s subjective evaluation
of our overall business needs. If we are unable to successfully execute our business plan, whether due to failure to realize the
anticipated benefits from our various business initiatives in the anticipated time frame or otherwise, we may be unable to achieve
our financial targets.
Failure to manage our liquidity and
cash flows may materially and adversely affect our financial conditions and results of operations. As a result, we may need additional
capital, and financing may not be available on terms acceptable to us, or at all.
In March 2018, we raised
net proceeds of approximately US$5.2 million in an initial public offering, after deducting its fees and expenses. In May 2020,
we obtained gross proceeds of $2.6 million in a private placement. In July 2020, we obtained gross proceeds of $17.2 million in
a private place to enable us to implement our new business strategy. However, we have generated negative cash flows from operating
activities and net losses of approximately $9.7 million, $3.5 million and $1.0 million during the years ended December 31, 2019,
2018 and 2017. We cannot assure you our business model will allow us to generate positive cash, given our substantial expenses
in relation to our revenue at this stage of our Company’s development. Our continued inability to offset our expenses with
adequate revenue, will adversely affect our liquidity, financial condition and results of operations. Although we believe that
our cash on hand and anticipated cash flows from operating activities will be sufficient to meet our anticipated working capital
requirements and capital expenditures in the ordinary course of business for the next 12 months, we cannot assure you this will
be the case. We expect to need additional cash resources in the future as we wish to pursue opportunities for investment, acquisition,
capital expenditure or similar actions in order to implement our business plan. In this regard, we are seeking to issue equity
and/or debt securities and may obtain credit facilities. The issuance and sale of additional equity would result in further dilution
to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants
that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to
us, if at all.
We may be subject to penalties as a result of the Chinese
government temporary suspension of our P2P lending business
On October 31, 2019, the
Pudong Branch of the Shanghai Public Security Bureau (the “Bureau”) announced that it had completed its investigation
against Shanghai Dianniu Internet Finance Information Service Co. Ltd, the Company’s variable interest entity (VIE) for
suspected illegal collection of public deposits. The Bureau took criminal enforcement measures against 17 suspects in the case
and detained at least six suspects. While the Company has not been subject to any enforcement actions, the Company’s current
management believes that its former Chief Financial Officer and a Director, as well as members of the VIE’s management may
have been the subject of these proceedings. The Public Security Bureau also initiated online hunting for the Company’s former
Chief Executive Officer. As of the date of this report, the final outcome of investigation was still not published and the impact
on our financial statements could not be estimated.
The PRC laws and
regulations relating to online peer-to-peer lending did not set out the liabilities that will be imposed on the service
providers who fail to comply with the principles and requirements contained thereunder, nor do other applicable rules, laws
and regulations contain specific liability provisions specially as to the peer-to-peer lending platform or similar online
marketplace. As a result of the temporary suspension, if our practice is deemed to have violated any rules, laws or
regulations, we may face penalties as determined by the relevant government authorities. In addition, although the Company is
not responsible for customers' claimed losses, the filing of any such claims and/or government investigations or proceedings
against the Company or any of its affiliates, even if not justified, may create negative publicity and have a material
adverse effect on the Company. If such situations occur, our business, financial condition and results of operations may be materially and adversely affected even though our VIE is not currently in the P2P lending business.
We have a history of operating losses,
and we may not be able to achieve or sustain profitability; we have recently shifted our bitcoin mining business, and we may not
be successful in this business.
We are not profitable
and have incurred losses since our inception. We expect to continue to incur losses for the foreseeable future, and these losses
could increase as we continue to work to develop our business. We were previously engaged in peer to peer (“P2P”)
online lending business in China prior to temporarily suspending that business in the fourth quarter of 2019. Starting in or about
April 2018, we had made a decision to diversify into the bitcoin mining business, as well as car rental business. Currently, our
primary operations are focused on our bitcoin mining business located at our bitcoin mining facilities in Wuhai, Zhundong, Xilinhot
and Sichuan China. Our current strategy is new and unproven, is in an industry that is itself new and evolving and is subject
to the risks discussed below. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent
periods.
Our results of operation may fluctuate
significantly and may not fully reflect the underlying performance of our business.
Our results of operations,
including the levels of our net revenues, expenses, net loss and other key metrics, may vary significantly in the future due to
a variety of factors, some of which are outside of our control, and period-to-period comparisons of our operating results may not
be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter are not necessarily
an indication of future performance. Fluctuations in quarterly results may adversely affect the market price of our ordinary shares.
Factors that may cause fluctuations in our quarterly financial results include:
|
●
|
the amount and
timing of operating expenses related to our new business operations and infrastructure;
|
|
●
|
fluctuations in the price of bitcoin; and
|
|
●
|
general economic, industry and market conditions.
|
We may acquire other businesses,
form joint ventures or acquire other companies or businesses that could negatively affect our operating results, dilute our stockholders’
ownership, increase our debt or cause us to incur significant expense; notwithstanding the foregoing, our growth may depend on
our success in uncovering and completing such transactions.
We are actively seeking
to enter the car rental business in the United States, however, we cannot offer any assurance that acquisitions of businesses,
assets and/or entering into strategic alliances or joint ventures will be successful. We may not be able to find suitable partners
or acquisition candidates and may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions,
we may not be able to integrate these acquisitions successfully into our existing infrastructure. In addition, in the event we
acquire any existing businesses we could assume unknown or contingent liabilities.
Any future acquisitions
also could result in the issuance of stock, incurrence of debt, contingent liabilities or future write-offs of intangible assets
or goodwill, any of which could have a negative impact on our cash flows, financial condition and results of operations. Integration
of an acquired company may also disrupt ongoing operations and require management resources that otherwise would be focused on
developing and expanding our existing business. We may experience losses related to potential investments in other companies, which
could harm our financial condition and results of operations. Further, we may not realize the anticipated benefits of any acquisition,
strategic alliance or joint venture if such investments do not materialize.
To finance any acquisitions
or joint ventures, we may choose to issue shares of common stock, preferred stock or a combination of debt and equity as consideration,
which could significantly dilute the ownership of our existing stockholders or provide rights to such preferred stock holders in
priority over our common stock holders. Additional funds may not be available on terms that are favorable to us, or at all. If
the price of our common stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project
using stock as consideration.
From time to time we may evaluate
and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt
our business and adversely affect our financial results.
We may evaluate and
consider strategic investments, combinations, acquisitions or alliances in both the bitcoin mining business and car rental business.
These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify
an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate
such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.
Strategic investments
or acquisitions will involve risks commonly encountered in business relationships, including:
|
●
|
difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business;
|
|
●
|
inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;
|
|
●
|
difficulties in retaining, training, motivating and integrating key personnel;
|
|
●
|
diversion of management’s time and resources from our normal daily operations;
|
|
●
|
difficulties in successfully incorporating licensed or acquired technology and rights into our businesses;
|
|
●
|
difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;
|
|
●
|
difficulties in retaining relationships with customers, employees and suppliers of the acquired business;
|
|
●
|
risks of entering markets, including the U.S., in which we have limited or no prior experience;
|
|
●
|
regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business; assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;
|
|
●
|
failure to successfully further develop the acquired technology;
|
|
●
|
liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;
|
|
●
|
potential disruptions to our ongoing businesses; and
|
|
●
|
unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.
|
We may not make any
investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy,
may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits.
In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the
successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if
developed, will achieve market acceptance or prove to be profitable.
Our loss of any of our management
team, our inability to execute an effective succession plan, or our inability to attract and retain qualified personnel, could
adversely affect our business.
Our success and future
growth will depend to a significant degree on the skills and services of our management, including our Chief Executive Officer
and Chief Financial Officer. Both of these persons joined the Company concurrent with the temporary suspension of the P2P lending
business. We will need to continue to grow our management in order to alleviate pressure on our existing team and in order to continue
to develop our business. If our management, including any new hires that we may make, fails to work together effectively and to
execute our plans and strategies on a timely basis, our business could be harmed. Furthermore, if we fail to execute an effective
contingency or succession plan with the loss of any member of management, the loss of such management personnel may significantly
disrupt our business.
The loss of key members
of management could inhibit our growth prospects. Our future success also depends in large part on our ability to attract, retain
and motivate key management and operating personnel. As we continue to develop and expand our operations, we may require personnel
with different skills and experiences, and who have a sound understanding of our business and the bitcoin industry. The market
for highly qualified personnel in this industry is very competitive and we may be unable to attract such personnel. If we are unable
to attract such personnel, our business could be harmed.
We incur significant costs and demands
upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies;
if we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements
could be impaired, which could harm our operating results, our ability to operate our business and our reputation.
As a public reporting
company, we are required to, among other things, maintain a system of effective internal control over financial reporting. Ensuring
that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial
statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Substantial work will
continue to be required to further implement, document, assess, test and remediate our system of internal controls.
If our internal control
over financial reporting is not effective, we may be unable to issue our financial statements in a timely manner, we may be unable
to obtain the required audit or review of our financial statements by our independent registered public accounting firm in a timely
manner or we may be otherwise unable to comply with the periodic reporting requirements of the SEC, our common stock listing on
Nasdaq could be suspended or terminated and our stock price could materially suffer. In addition, we or members of our management
could be subject to investigation and sanction by the SEC and other regulatory authorities and to stockholder lawsuits, which could
impose significant additional costs on us and divert management attention.
Because cryptocurrencies may be determined
to be investment securities, we may inadvertently violate the Investment Company Act and incur large losses as a result and potentially
be required to register as an investment company or terminate operations and we may incur third party liabilities.
We are engaged in the
mining of bitcoins which the SEC said is currency and not securities. We therefore believe that we are not engaged in the business
of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being engaged in those activities. However,
under the Investment Company Act a company may be deemed an investment company under section 3(a)(1)(C) thereof if the value of
its investment securities is more than 40% of its total assets (exclusive of government securities and cash items) on an unconsolidated
basis.
As a result of our
investments and our mining activities, including investments in which we do not have a controlling interest, the investment securities
we hold could exceed 40% of our total assets, exclusive of cash items and, accordingly, we could determine that we have become
an inadvertent investment company. The bitcoins we own, acquire or mine may be deemed an investment security by the SEC, although
we do not believe any of the cryptocurrencies we own, acquire or mine are securities. An inadvertent investment company can avoid
being classified as an investment company if it can rely on one of the exclusions under the Investment Company Act. One such exclusion,
Rule 3a-2 under the Investment Company Act, allows an inadvertent investment company a grace period of one year from the earlier
of (a) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the issuer’s total assets
on either a consolidated or unconsolidated basis and (b) the date on which an issuer owns or proposes to acquire investment securities
having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government securities and cash items)
on an unconsolidated basis. We may take actions to cause the investment securities held by us to be less than 40% of our total
assets, which may include acquiring assets with our cash and bitcoin on hand or liquidating our investment securities or bitcoin
or seeking a no-action letter from the SEC if we are unable to acquire sufficient assets or liquidate sufficient investment securities
in a timely manner.
As the Rule 3a-2 exception
is available to a company no more than once every three years, and assuming no other exclusion were available to us, we would have
to keep within the 40% limit for at least three years after we cease being an inadvertent investment company. This may limit our
ability to make certain investments or enter into joint ventures that could otherwise have a positive impact on our earnings. In
any event, we do not intend to become an investment company engaged in the business of investing and trading securities.
Classification as an
investment company under the Investment Company Act requires registration with the SEC. If an investment company fails to register,
it would have to stop doing almost all business, and its contracts would become voidable. Registration is time consuming and restrictive
and would require a restructuring of our operations, and we would be very constrained in the kind of business we could do as a
registered investment company. Further, we would become subject to substantial regulation concerning management, operations, transactions
with affiliated persons and portfolio composition, and would need to file reports under the Investment Company Act regime. The
cost of such compliance would result in the Company incurring substantial additional expenses, and the failure to register if required
would have a materially adverse impact to conduct our operations.
We face risks related to the novel Coronavirus (COVID-19)
outbreak, which could significantly disrupt our operations and financial results.
We believe that our
results of operations, business and financial condition has been adversely impacted by the effects of the novel Coronavirus (COVID-19).
Currently, substantially all of our employees and operations are in China. In addition to global macroeconomic effects, the novel
Coronavirus (COVID-19) outbreak and any other related adverse public health developments may cause disruption to our mining activities.
The novel Coronavirus
(COVID-19) or other disease outbreak will in the short-term, and may over the longer term, adversely affect the economies and financial
markets of many countries, resulting in an economic downturn that may adversely affect demand for bitcoin and impact our operating
results. Although the magnitude of the impact of the novel Coronavirus (COVID-19) outbreak on our business and operations remains
uncertain, the continued spread of the novel Coronavirus (COVID-19) or the occurrence of other epidemics and the imposition of
related public health measures and travel and business restrictions will adversely impact our business, financial condition, operating
results and cash flows. In addition, we have experienced and will experience disruptions to our business operations resulting from
quarantines, self-isolations, or other movement and restrictions on the ability of our employees to perform their jobs. If we are
unable to effectively service our miners, our ability to mine bitcoin will be adversely affected as miners go offline, which would
have an adverse effect on our business and the results of our operations.
China has also limited
the shipment of products in and out of its borders, which could negatively impact our ability to receive mining equipment from
our China-based suppliers. Our third-party manufacturers, suppliers, sub-contractors and customers have been and will continue
to be disrupted by worker absenteeism, quarantines, restrictions on employees’ ability to work, office and factory closures,
disruptions to ports and other shipping infrastructure, border closures, or other travel or health-related restrictions. Depending
on the magnitude of such effects on our supply chain, shipments of parts for our existing miners, as well as any new miners we
purchase, may be delayed. As our miners require repair or become obsolete and require replacement, our ability to obtain adequate
replacements or repair parts from their manufacturer may therefore be hampered. Supply chain disruptions could therefore negatively
impact our operations. If not resolved quickly, the impact of the novel Coronavirus (COVID-19) global pandemic could have a material
adverse effect on our business.
The coronavirus pandemic is an emerging
serious threat to health and economic wellbeing affecting our employees, investors and our sources of supply.
On March 11, 2020,
the World Health Organization announced that infections of the novel Coronavirus (COVID-19) had become pandemic, and on March 13,
the U.S. President announced a National Emergency relating to the disease. There has been and continues to be widespread infection
in the United States with a second wave now appearing in China, with the potential for catastrophic impact. Mandatory business
closures have had catastrophic impacts on domestic and foreign economies of uncertain duration.
The sweeping nature
of the novel Coronavirus (COVID-19) pandemic makes it extremely difficult to predict how the company’s business and operations
will be affected in the longer run. However, the likely overall economic impact of the pandemic is viewed as highly negative to
the general economy.
Increases in labor costs in the PRC
may adversely affect our business and results of operations.
The economy in China
has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue
to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension,
housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government
agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments
to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees,
fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase.
Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our
services, our financial condition and results of operations may be adversely affected.
If we cannot maintain our corporate
culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.
We believe that a critical
component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity.
As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable
aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our
ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
We do not have any business insurance
coverage.
Insurance companies
in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies.
Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs
of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make
it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs
and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.
Bitcoin-Related Risks
Our results of operations are expected
to continue to be negatively impacted by sharp Bitcoin price decreases
The price of Bitcoin has experienced significant
fluctuations over its relatively short existence and may continue to fluctuate significantly in the future. Bitcoin prices ranged
from approximately US$14,166 per coin as of December 31, 2017, US$3,792 per coin as of December 31, 2018 to US$7,220 per coin as
of December 31, 2019, according to Blockchain.info. According to the same source, from January 1, 2019 to December 31, 2019, the
highest Bitcoin price was approximately US$12,933 per coin and the lowest was US$3,395 per coin.
We expect our results of operations to
continue to be affected by the Bitcoin price as most of the revenue is from bitcoin mining production as of the filing date. Any
future significant reductions in the price of Bitcoin will likely have a material and adverse effect on our results of operations
and financial condition. We cannot assure you that the Bitcoin price will remain high enough to sustain our operation or that the
Bitcoin price will not decline significantly in the future. Furthermore, fluctuations in the Bitcoin price can have an immediate
impact on the trading price of the ADSs even before our financial performance is affected, if at all.
Various factors, mostly beyond our control,
could impact the Bitcoin price. For example, the usage of Bitcoins in the retail and commercial marketplace is relatively low in
comparison with the usage for speculation, which contributes to Bitcoin price volatility. Additionally, the reward for Bitcoin
mining will decline over time, with the most recent halving event occurred in May 2020 and next one four years later, which
may further contribute to Bitcoin price volatility.
Our mining operating costs outpace
our mining revenues, which could seriously harm our business or increase our losses.
Our mining operations
are costly and our expenses may increase in the future. We intend to use funds on hand from our private placement to continue to
purchase bitcoin mining machines. This expense increase may not be offset by a corresponding increase in revenue. Our expenses
may be greater than we anticipate, and our investments to make our business more efficient may not succeed and may outpace monetization
efforts. Increases in our costs without a corresponding increase in our revenue would increase our losses and could seriously harm
our business and financial perform
We have an evolving business model which is subject to
various uncertainties.
As bitcoin assets may
become more widely available, we expect the services and products associated with them to evolve. In order to stay current with
the industry, our business model may need to evolve as well. From time to time, we may modify aspects of our business model relating
to our strategy. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm
to our business. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively
affect our operating results. Further, we cannot provide any assurance that we will successfully identify all emerging trends and
growth opportunities in this business sector and we may lose out on those opportunities. Such circumstances could have a material
adverse effect on our business, prospects or operations.
The properties included in our mining
network may experience damages, including damages that are not covered by insurance.
Our current mining
operation in Wuhai, Zhundong, Xilinhot, Sichuan China is, and any future mining site we establish will be, subject to a variety
of risks relating to physical condition and operation, including:
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the presence of construction or repair defects or other structural or building damage;
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any noncompliance with or liabilities under applicable environmental, health or safety regulations or requirements or building permit requirements;
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any damage resulting from natural disasters, such as hurricanes, earthquakes, fires, floods and windstorms; and
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claims by employees and others for injuries sustained at our properties.
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For example, our mine
could be rendered inoperable, temporarily or permanently, as a result of a fire or other natural disaster, the coronavirus, or
by a terrorist or other attack on the mine. The security and other measures we take to protect against these risks may not be sufficient.
Additionally, our mine could be materially adversely affected by a power outage or loss of access to the electrical grid or loss
by the grid of cost-effective sources of electrical power generating capacity. Given the power requirement, it would not be feasible
to run miners on back-up power generators in the event of a power outage. Our insurance covers the replacement cost of any lost
or damaged miners, but does not cover any interruption of our mining activities; our insurance therefore may not be adequate to
cover the losses we suffer as a result of any of these events. In the event of an uninsured loss, including a loss in excess of
insured limits, at any of the mines in our network, such mines may not be adequately repaired in a timely manner or at all and
we may lose some or all of the future revenues anticipated to be derived from such mines. The potential impact on our business
is currently magnified because we are only operating a single mine.
Regulatory changes or actions may
alter the nature of an investment in us or restrict the use of cryptocurrencies in a manner that adversely affects our business,
prospects or operations.
As cryptocurrencies
have grown in both popularity and market size, governments around the world have reacted differently to cryptocurrencies; certain
governments have deemed them illegal, and others have allowed their use and trade without restriction, while in some jurisdictions,
such as in the U.S., subject to extensive, and in some cases overlapping, unclear and evolving regulatory requirements. Ongoing
and future regulatory actions may impact our ability to continue to operate, and such actions could affect our ability to continue
as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects
or operations.
The development and acceptance of
cryptographic and algorithmic protocols governing the issuance of and transactions in cryptocurrencies is subject to a variety
of factors that are difficult to evaluate.
The use of cryptocurrencies
to, among other things, buy and sell goods and services and complete transactions, is part of a new and rapidly evolving industry
that employs bitcoin assets based upon a computer-generated mathematical and/or cryptographic protocol. Large-scale acceptance
of cryptocurrencies as a means of payment has not, and may never, occur. The growth of this industry in general, and the use of
bitcoin, in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance
of developing protocols may occur unpredictably. The factors include, but are not limited to:
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continued worldwide growth in the adoption and use of cryptocurrencies as a medium to exchange;
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governmental and quasi-governmental regulation of cryptocurrencies and their use, or restrictions on or regulation of access to and operation of the network or similar bitcoin systems;
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changes in consumer demographics and public tastes and preferences;
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the maintenance and development of the
open-source software protocol of the network;
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the increased consolidation of contributors to the bitcoin blockchain through mining pools;
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the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies;
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the use of the networks supporting cryptocurrencies for developing smart contracts and distributed applications;
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general economic conditions and the regulatory environment relating to cryptocurrencies; and
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negative consumer sentiment and perception of bitcoin specifically and cryptocurrencies generally.
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The outcome of these
factors could have negative effects on our ability to continue as a going concern or to pursue our business strategy at all, which
could have a material adverse effect on our business, prospects or operations as well as potentially negative effect on the value
of any bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account, which would harm investors in
our securities.
Banks and financial institutions
may not provide banking services, or may cut off services, to businesses that engage in bitcoin-related activities or that accept
cryptocurrencies as payment, including financial institutions of investors in our securities.
A number of companies
that engage in bitcoin and/or other bitcoin-related activities have been unable to find banks or financial institutions that are
willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated
with cryptocurrencies may have had and may continue to have their existing bank accounts closed or services discontinued with financial
institutions in response to government action, particularly in China, where regulatory response to cryptocurrencies has been to
exclude their use for ordinary consumer transactions within China. We also may be unable to obtain or maintain these services for
our business. The difficulty that many businesses that provide bitcoin and/or derivatives on other bitcoin-related activities have
and may continue to have in finding banks and financial institutions willing to provide them services may be decreasing the usefulness
of cryptocurrencies as a payment system and harming public perception of cryptocurrencies, and could decrease their usefulness
and harm their public perception in the future.
The usefulness of cryptocurrencies
as a payment system and the public perception of cryptocurrencies could be damaged if banks or financial institutions were to close
the accounts of businesses engaging in bitcoin and/or other bitcoin-related activities. This could occur as a result of compliance
risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national
stock and derivatives on commodities exchanges, the over-the-counter market, and the Depository Trust Company, which, if any of
such entities adopts or implements similar policies, rules or regulations, could negatively affect our relationships with financial
institutions and impede our ability to convert cryptocurrencies to fiat currencies. Such factors could have a material adverse
effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse
effect on our business, prospects or operations and harm investors.
We may face risks of Internet disruptions,
which could have an adverse effect on the price of cryptocurrencies.
A disruption of the
Internet may affect the use of cryptocurrencies and subsequently the value of our securities. Generally, cryptocurrencies and our
business of mining cryptocurrencies is dependent upon the Internet. A significant disruption in Internet connectivity could disrupt
a currency’s network operations until the disruption is resolved and have an adverse effect on the price of cryptocurrencies
and our ability to mine cryptocurrencies.
The impact of geopolitical and economic
events on the supply and demand for cryptocurrencies is uncertain.
Geopolitical crises
may motivate large-scale purchases of bitcoin and other cryptocurrencies, which could increase the price of bitcoin and other cryptocurrencies
rapidly. This may increase the likelihood of a subsequent price decrease as crisis-driven purchasing behavior dissipates, adversely
affecting the value of our inventory following such downward adjustment. Such risks are similar to the risks of purchasing commodities
in general uncertain times, such as the risk of purchasing, holding or selling gold. Alternatively, as an emerging asset class
with limited acceptance as a payment system or commodity, global crises and general economic downturn may discourage investment
in cryptocurrencies as investors focus their investment on less volatile asset classes as a means of hedging their investment risk.
As an alternative to
fiat currencies that are backed by central governments, cryptocurrencies, which are relatively new, are subject to supply and demand
forces. How such supply and demand will be impacted by geopolitical events is largely uncertain but could be harmful to us and
investors in our common stock. Political or economic crises may motivate large-scale acquisitions or sales of cryptocurrencies
either globally or locally. Such events could have a material adverse effect on our ability to continue as a going concern or to
pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially
the value of any bitcoin or any other cryptocurrencies we mine or otherwise acquire or hold for our own account.
Acceptance and/or widespread use
of bitcoin is uncertain.
Currently, there is
a relatively limited use of any bitcoin in the retail and commercial marketplace, thus contributing to price volatility that could
adversely affect an investment in our securities. Banks and other established financial institutions may refuse to process funds
for bitcoin transactions, process wire transfers to or from bitcoin exchanges, bitcoin-related companies or service providers,
or maintain accounts for persons or entities transacting in bitcoin. Conversely, a significant portion of bitcoin demand is generated
by investors seeking a long-term store of value or speculators seeking to profit from the short- or long-term holding of the asset.
Price volatility undermines any bitcoin’s role as a medium of exchange, as retailers are much less likely to accept it as
a form of payment. Market capitalization for a bitcoin as a medium of exchange and payment method may always be low.
The relative lack of
acceptance of bitcoins in the retail and commercial marketplace, or a reduction of such use, limits the ability of end users to
use them to pay for goods and services. Such lack of acceptance or decline in acceptances could have a material adverse effect
on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect
on our business, prospects or operations and potentially the value of bitcoins we mine or otherwise acquire or hold for our own
account.
Transactional fees may decrease demand
for bitcoin and prevent expansion.
As the number of bitcoins
currency rewards awarded for solving a block in a blockchain decreases, the incentive for miners to continue to contribute to the
bitcoin network may transition from a set reward to transaction fees. In order to incentivize miners to continue to contribute
to the bitcoin network, the bitcoin network may either formally or informally transition from a set reward to transaction fees
earned upon solving a block. This transition could be accomplished by miners independently electing to record in the blocks they
solve only those transactions that include payment of a transaction fee. If transaction fees paid for bitcoin transactions become
too high, the marketplace may be reluctant to accept bitcoin as a means of payment and existing users may be motivated to switch
from bitcoin to another bitcoin or to fiat currency. Either the requirement from miners of higher transaction fees in exchange
for recording transactions in a blockchain or a software upgrade that automatically charges fees for all transactions may decrease
demand for bitcoin and prevent the expansion of the bitcoin network to retail merchants and commercial businesses, resulting in
a reduction in the price of bitcoin that could adversely impact an investment in our securities. Decreased use and demand for bitcoin
may adversely affect its value and result in a reduction in the price of bitcoin and the value of our common stock.
The decentralized nature of bitcoin
systems may lead to slow or inadequate responses to crises, which may negatively affect our business.
The decentralized nature
of the governance of bitcoin systems may lead to ineffective decision making that slows development or prevents a network from
overcoming emergent obstacles. Governance of many bitcoin systems is by voluntary consensus and open competition with no clear
leadership structure or authority. To the extent lack of clarity in corporate governance of bitcoin systems leads to ineffective
decision making that slows development and growth of such cryptocurrencies, the value of our common stock may be adversely affected.
It may be illegal now, or in the
future, to acquire, own, hold, sell or use bitcoin, ether, or other cryptocurrencies, participate in blockchains or utilize similar
bitcoin assets in one or more countries, the ruling of which would adversely affect us.
Although currently
cryptocurrencies generally are not regulated or are lightly regulated in most countries, one or more countries such as China and
Russia, which have taken harsh regulatory action, may take regulatory actions in the future that could severely restrict the right
to acquire, own, hold, sell or use these bitcoin assets or to exchange for fiat currency. In many nations, particularly in China
and Russia, it is illegal to accept payment in bitcoin and other cryptocurrencies for consumer transactions and banking institutions
are barred from accepting deposits of cryptocurrencies. Such restrictions may adversely affect us as the large-scale use of cryptocurrencies
as a means of exchange is presently confined to certain regions globally. Such circumstances could have a material adverse effect
on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect
on our business, prospects or operations and potentially the value of any bitcoin or other cryptocurrencies we mine or otherwise
acquire or hold for our own account, and harm investors.
There is a lack of liquid markets, and possible manipulation
of blockchain/bitcoin-based assets.
Cryptocurrencies that
are represented and trade on a ledger-based platform may not necessarily benefit from viable trading markets. Stock exchanges have
listing requirements and vet issuers; requiring them to be subjected to rigorous listing standards and rules, and monitor investors
transacting on such platform for fraud and other improprieties. These conditions may not necessarily be replicated on a distributed
ledger platform, depending on the platform’s controls and other policies. The laxer a distributed ledger platform is about
vetting issuers of bitcoin assets or users that transact on the platform, the higher the potential risk for fraud or the manipulation
of the ledger due to a control event. These factors may decrease liquidity or volume or may otherwise increase volatility of investment
securities or other assets trading on a ledger-based system, which may adversely affect us. Such circumstances could have a material
adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material
adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other cryptocurrencies we mine
or otherwise acquire or hold for our own account, and harm investors.
Our operations, investment strategies
and profitability may be adversely affected by competition from other methods of investing in cryptocurrencies.
We compete with other
users and/or companies that are mining cryptocurrencies and other potential financial vehicles, including securities backed by
or linked to cryptocurrencies through entities similar to us. Market and financial conditions, and other conditions beyond our
control, may make it more attractive to invest in other financial vehicles, or to invest in cryptocurrencies directly, which could
limit the market for our shares and reduce their liquidity. The emergence of other financial vehicles and exchange-traded funds
have been scrutinized by regulators and such scrutiny and the negative impressions or conclusions resulting from such scrutiny
could be applicable to us and impact our ability to successfully pursue our new strategy or operate at all, or to establish or
maintain a public market for our securities. Such circumstances could have a material adverse effect on our ability to continue
as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects
or operations and potentially the value of any bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own
account, and harm investors.
The development and acceptance of
competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or other alternatives.
The development and
acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or an alternative
to distributed ledgers altogether. Our business utilizes presently existent digital ledgers and blockchains and we could face difficulty
adapting to emergent digital ledgers, blockchains, or alternatives thereto. This may adversely affect us and our exposure to various
blockchain technologies and prevent us from realizing the anticipated profits from our investments. Such circumstances could have
a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have
a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other cryptocurrencies
we mine or otherwise acquire or hold for our own account, and harm investors.
Our bitcoins may be subject to loss,
theft or restriction on access.
There is a risk that some
or all of our bitcoins could be lost or stolen. Cryptocurrencies are stored in bitcoin sites commonly referred to as “wallets”
by holders of bitcoins which may be accessed to exchange a holder’s bitcoin assets. Access to our bitcoin assets could also
be restricted by cybercrime (such as a denial of service attack) against a service at which we maintain a hosted hot wallet. A
hot wallet refers to any bitcoin wallet that is connected to the Internet. Generally, hot wallets are easier to set up and access
than wallets in cold storage, but they are also more susceptible to hackers and other technical vulnerabilities. Cold storage
refers to any bitcoin wallet that is not connected to the Internet. Cold storage is generally more secure than hot storage, but
is not ideal for quick or regular transactions and we may experience lag time in our ability to respond to market fluctuations
in the price of our bitcoin assets. We hold all of our cryptocurrencies in cold storage to reduce the risk of malfeasance, but
the risk of loss of our bitcoin assets cannot be wholly eliminated.
Hackers or malicious
actors may launch attacks to steal, compromise or secure cryptocurrencies, such as by attacking the bitcoin network source code,
exchange miners, third-party platforms, cold and hot storage locations or software, or by other means. We may be in control and
possession of one of the more substantial holdings of bitcoins. As we increase in size, we may become a more appealing target of
hackers, malware, cyber-attacks or other security threats. Any of these events may adversely affect our operations and, consequently,
our investments and profitability. The loss or destruction of a private key required to access our digital wallets may be irreversible
and we may be denied access for all time to our bitcoin holdings or the holdings of others held in those compromised wallets. Our
loss of access to our private keys or our experience of a data loss relating to our digital wallets could adversely affect our
investments and assets.
Cryptocurrencies are
controllable only by the possessor of both the unique public and private keys relating to the local or online digital wallet in
which they are held, which wallet’s public key or address is reflected in the network’s public blockchain. We will
publish the public key relating to digital wallets in use when we verify the receipt of transfers and disseminate such information
into the network, but we will need to safeguard the private keys relating to such digital wallets. To the extent such private keys
are lost, destroyed or otherwise compromised, we will be unable to access our bitcoin rewards and such private keys may not be
capable of being restored by any network. Any loss of private keys relating to digital wallets used to store our cryptocurrencies
could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which
could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin or other
cryptocurrencies we mine or otherwise acquire or hold for our own account.
Risks due to hacking or adverse software
event.
In order to minimize
risk, we have established processes to manage wallets that are associated with our bitcoin holdings. There can be no assurances
that any processes we have adopted or will adopt in the future are or will be secure or effective, and we would suffer significant
and immediate adverse effects if we suffered a loss of our bitcoin due to an adverse software or cybersecurity event. We utilize
several layers of threat reduction techniques, including: (i) the use of hardware wallets to store sensitive private key information;
(ii) performance of transactions offline; and (iii) offline generation storage and use of private keys.
At present, the Company
is evaluating several third-party custodial wallet alternatives, but there can be no assurance that such services will be more
secure than those the Company presently employs. Human error and the constantly evolving state of cybercrime and hacking techniques
may render present security protocols and procedures ineffective in ways which we cannot predict. If our security procedures and
protocols are ineffectual and our bitcoin assets are compromised by cybercriminals, we may not have adequate recourse to recover
our losses stemming from such compromise and we may lose much of the accumulated value of our bitcoin mining activities. This would
have a negative impact on our business and operations.
Incorrect or fraudulent bitcoin transactions
may be irreversible.
Bitcoin transactions
are irrevocable and stolen or incorrectly transferred cryptocurrencies may be irretrievable. As a result, any incorrectly executed
or fraudulent bitcoin transactions could adversely affect our investments and assets.
Bitcoin
transactions are not, from an administrative perspective, reversible without the consent and active participation of the
recipient of the cryptocurrencies from the transaction. In theory, bitcoin transactions may be reversible with the control or
consent of a majority of processing power on the network, however, we do not now, nor is it feasible that we could in the
future, possess sufficient processing power to effect this reversal. Once a transaction has been verified and recorded in a
block that is added to a blockchain, an incorrect transfer of a bitcoin or a theft thereof generally will not be reversible
and we may not have sufficient recourse to recover our losses from any such transfer or theft. It is possible that, through
computer or human error, or through theft or criminal action, our bitcoin rewards could be transferred in incorrect amounts
or to unauthorized third parties, or to uncontrolled accounts. Further, according to the SEC, at this time, there is no
specifically enumerated U.S. or foreign governmental, regulatory, investigative or prosecutorial authority or mechanism
through which to bring an action or complaint regarding missing or stolen bitcoin. We are, therefore, presently reliant on
existing private investigative entities, such as Chain analysis and Kroll to investigate any potential loss of our bitcoin
assets. These third-party service providers rely on data analysis and compliance of ISPs with traditional court orders to
reveal information such as the IP addresses of any attackers who may have target us. To the extent that we are unable to
recover our losses from such action, error or theft, such events could have a material adverse effect on our ability to
continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business,
prospects or operations of and potentially the value of any bitcoin or other cryptocurrencies we mine or otherwise acquire or
hold for our own account.
Our interactions with a blockchain
may expose us to SDN or blocked persons or cause us to violate provisions of law that did not contemplate distribute ledger technology.
The Office of Financial
Assets Control of the US Department of Treasury requires us to comply with its sanction program and not conduct business with persons
named on its specially designated nationals (“SDN”) list. However, because of the pseudonymous nature of blockchain
transactions we may inadvertently and without our knowledge engage in transactions with persons named on OFAC’s SDN list.
Our Company’s policy prohibits any transactions with such SDN individuals, but we may not be adequately capable of determining
the ultimate identity of the individual with whom we transact with respect to selling bitcoin assets. Moreover, federal law prohibits
any US person from knowingly or unknowingly possessing any visual depiction commonly known as child pornography. Recent media reports
have suggested that persons have imbedded such depictions on one or more blockchains. Because our business requires us to download
and retain one or more blockchains to effectuate our ongoing business, it is possible that such digital ledgers contain prohibited
depictions without our knowledge or consent. To the extent government enforcement authorities literally enforce these and other
laws and regulations that are impacted by decentralized distributed ledger technology, we may be subject to investigation, administrative
or court proceedings, and civil or criminal monetary fines and penalties, all of which could harm our reputation and affect the
value of our common stock.
Cryptocurrencies face significant scaling obstacles that
can lead to high fees or slow transaction settlement times.
Cryptocurrencies face
significant scaling obstacles that can lead to high fees or slow transaction settlement times, and attempts to increase the volume
of transactions may not be effective. Scaling cryptocurrencies is essential to the widespread acceptance of cryptocurrencies as
a means of payment, which widespread acceptance is necessary to the continued growth and development of our business. Many bitcoin
networks face significant scaling challenges. For example, cryptocurrencies are limited with respect to how many transactions can
occur per second. Participants in the bitcoin ecosystem debate potential approaches to increasing the average number of transactions
per second that the network can handle and have implemented mechanisms or are researching ways to increase scale, such as increasing
the allowable sizes of blocks, and therefore the number of transactions per block, and sharding (a horizontal partition of data
in a database or search engine), which would not require every single transaction to be included in every single miner’s
or validator’s block. However, there is no guarantee that any of the mechanisms in place or being explored for increasing
the scale of settlement of bitcoin transactions will be effective, or how long they will take to become effective, which could
adversely affect an investment in our securities.
The price of cryptocurrencies may
be affected by the sale of such cryptocurrencies by other vehicles investing in cryptocurrencies or tracking bitcoin markets.
The global market for
bitcoin is characterized by supply constraints that differ from those present in the markets for commodities or other assets such
as gold and silver. The mathematical protocols under which certain cryptocurrencies are mined permit the creation of a limited,
predetermined amount of currency, while others have no limit established on total supply. To the extent that other vehicles investing
in cryptocurrencies or tracking bitcoin markets form and come to represent a significant proportion of the demand for cryptocurrencies,
large redemptions of the securities of those vehicles and the subsequent sale of cryptocurrencies by such vehicles could negatively
affect bitcoin prices and therefore affect the value of the bitcoin inventory we hold. Such events could have a material adverse
effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse
effect on our business, prospects or operations and potentially the value of any bitcoin or other cryptocurrencies we mine or otherwise
acquire or hold for our own account.
Because there has been limited precedent
set for financial accounting of bitcoin and other bitcoin assets, the determination that we have made for how to account for bitcoin
assets transactions may be subject to change.
Because there has been
limited precedent set for the financial accounting of cryptocurrencies and related revenue recognition and no official guidance
has yet been provided by the Financial Accounting Standards Board or the SEC, it is unclear how companies may in the future be
required to account for bitcoin transactions and assets and related revenue recognition. A change in regulatory or financial accounting
standards could result in the necessity to change our accounting methods and restate our financial statements. Such a restatement
could adversely affect the accounting for our newly mined bitcoin rewards and more generally negatively impact our business, prospects,
financial condition and results of operation. Such circumstances would have a material adverse effect on our ability to continue
as a going concern or to pursue our new strategy at all, which would have a material adverse effect on our business, prospects
or operations as well as and potentially the value of any cryptocurrencies we hold or expects to acquire for our own account and
harm investors.
There are risks related to technological
obsolescence, the vulnerability of the global supply chain for bitcoin hardware disruption, and difficulty in obtaining new hardware
which may have a negative effect on our business.
Our mining operations
can only be successful and ultimately profitable if the costs, including hardware and electricity costs, associated with mining
cryptocurrencies are lower than the price of a bitcoin. As our mining facility operates, our miners experience ordinary wear and
tear, and may also face more significant malfunctions caused by a number of extraneous factors beyond our control. The degradation
of our miners will require us to, over time, replace those miners which are no longer functional. Additionally, as the technology
evolves, we may be required to acquire newer models of miners to remain competitive in the market. Reports have been released which
indicate that miner manufacturer or seller adjusts the prices of its miners according to bitcoin prices, so the cost of new machines
is unpredictable but could be extremely high. As a result, at times, we may obtain miners and other hardware from third parties
at premium prices, to the extent they are available. This upgrading process requires substantial capital investment, and we may
face challenges. Further, the global supply chain for bitcoin miners is presently heavily dependent on China, which has been severely
affected by the emergence of the COVID-19 coronavirus global pandemic. The global reliance on China as a main supplier of bitcoin
miners has been called into question in the wake of the COVID-19 pandemic. Should similar outbreaks or other disruptions to the
China-based global supply chain for bitcoin hardware occur, we may not be able to obtain adequate replacement parts for our existing
miners or to obtain additional miners from the manufacturer on a timely basis. Such events could have a material adverse effect
on our ability to pursue our new strategy, which could have a material adverse effect on our business and the value of our ordinary
shares.
Our reliance primarily on a single
model of miner may subject our operations to increased risk of mine failure.
The performance and reliability of our miners and our technology
is critical to our reputation and our operations. Because we currently only use MicroBT miners, if there are issues with those
machines, our entire system could be affected. Any system error or failure may significantly delay response times or even cause
our system to fail. Any disruption in our ability to continue mining could result in lower yields and harm our reputation and business.
Any exploitable weakness, flaw, or error common to MicroBT miners affects all our miners, if a defect other flaw is exploited,
our entire mine could go offline simultaneously. Any interruption, delay or system failure could result in financial losses, a
decrease in the trading price of our common stock and damage to our reputation.
The Company’s reliance on a
third-party mining pool service provider for our mining revenue payouts may have a negative impact on the Company operations.
We use third–party
mining pools to receive our mining rewards from the network. Mining pools allow miners to combine their processing power, increasing
their chances of solving a block and getting paid by the network. The rewards are distributed by the pool operator, proportionally
to our contribution to the pool’s overall mining power, used to generate each block. Should the pool operator’s system
suffer downtime due to a cyber-attack, software malfunction or other similar issues, it will negatively impact our ability to mine
and receive revenue. Furthermore, we are dependent on the accuracy of the mining pool operator’s record keeping to accurately
record the total processing power provided to the pool for a given bitcoin mining application in order to assess the proportion
of that total processing power we provided. While we have internal methods of tracking both our power provided and the total used
by the pool, the mining pool operator uses its own record-keeping to determine our proportion of a given reward. We have little
means of recourse against the mining pool operator if we determine the proportion of the reward paid out to us by the mining pool
operator is incorrect, other than leaving the pool. If we are unable to consistently obtain accurate proportionate rewards from
our mining pool operators, we may experience reduced reward for our efforts, which would have an adverse effect on our business
and operations.
The bitcoin for which we mine,
bitcoin, is subject to halving; the bitcoin reward for successfully uncovering a block will halve several times in the future
and their value may not adjust to compensate us for the reduction in the rewards we receive from our mining
efforts.
Halving is a process
designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm.
At a predetermined block, the mining reward is cut in half, hence the term “halving.” For bitcoin, the reward was initially
set at 50 bitcoin currency rewards per block and this was cut in half to 25 in November 28, 2012 at block 210,000 and again to
12.5 on July 9, 2016 at block 420,000. The next halving for bitcoin is expected in May 2020 at block 630,000 when the reward will
reduce to 6.25. This process will reoccur until the total amount of bitcoin currency rewards issued reaches 21 million, which is
expected around 2140. While bitcoin prices have had a history of price fluctuations around the halving of its bitcoin rewards,
there is no guarantee that the price change will be favorable or would compensate for the reduction in mining reward. If a corresponding
and proportionate increase in the trading price of bitcoin does not follow these anticipated halving events, the revenue we earn
from our mining operations would see a corresponding decrease, which would have a material adverse effect on our business and operations.
Our future success will depend in
large part upon the value of bitcoin; the value of bitcoin may be subject to pricing risk and has historically been subject to
wide swings.
Our operating results
will depend in large part upon the value of bitcoin because it’s the primary bitcoin we currently mine. Specifically, our
revenues from our bitcoin mining operations are based upon two factors: (1) the number of bitcoin rewards we successfully mine
and (2) the value of bitcoin. In addition, our operating results are directly impacted by changes in the value of bitcoin, because
under the value measurement model, both realized and unrealized changes will be reflected in our statement of operations (i.e.,
we will be marking bitcoin to fair value each quarter). This means that our operating results will be subject to swings based upon
increases or decreases in the value of bitcoin. Furthermore, our strategy focuses almost entirely on bitcoin (as opposed to other
cryptocurrencies). Further, our current application-specific integrated circuit (“ASIC”) machines (which we refer to
as “miners”) are principally utilized for mining bitcoin and bitcoin cash and cannot mine other cryptocurrencies, such
as ether, that are not mined utilizing the “SHA-256 algorithm.” If other cryptocurrencies were to achieve acceptance
at the expense of bitcoin or bitcoin cash causing the value of bitcoin or bitcoin cash to decline, or if bitcoin were to switch
its proof of work algorithm from SHA-256 to another algorithm for which our miners are not specialized, or the value of bitcoin
or bitcoin cash were to decline for other reasons, particularly if such decline were significant or over an extended period of
time, our operating results would be adversely affected, and there could be a material adverse effect on our ability to continue
as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects
or operations, and harm investors.
Bitcoin and other bitcoin
market prices, which have historically been volatile and are impacted by a variety of factors (including those discussed below),
are determined primarily using data from various exchanges, over-the-counter markets and derivative platforms. Furthermore, such
prices may be subject to factors such as those that impact commodities, more so than business activities, which could be subjected
to additional influence from fraudulent or illegitimate actors, real or perceived scarcity, and political, economic, regulatory
or other conditions. Pricing may be the result of, and may continue to result in, speculation regarding future appreciation in
the value of cryptocurrencies, or our share price, inflating and making their market prices more volatile or creating “bubble”
type risks for both bitcoin and shares of our ordinary shares.
We may not be able to realize the
benefits of forks.
To the extent that
a significant majority of users and miners on a bitcoin network install software that changes the bitcoin network or properties
of a bitcoin, including the irreversibility of transactions and limitations on the mining of new bitcoin, the bitcoin network would
be subject to new protocols and software. However, if less than a significant majority of users and miners on the bitcoin network
consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the consequence
would be what is known as a “fork” of the network, with one prong running the pre-modified software and the other running
the modified software. The effect of such a fork would be the existence of two versions of the bitcoin running in parallel, yet
lacking interchangeability and necessitating exchange-type transaction to convert currencies between the two forks. Additionally,
it may be unclear following a fork which fork represents the original asset and which is the new asset. Different metrics adopted
by industry participants to determine which is the original asset include: referring to the wishes of the core developers of a
bitcoin, blockchains with the greatest amount of hashing power contributed by miners or validators; or blockchains with the longest
chain. A fork in the network of a particular bitcoin could adversely affect an investment in our Company or our ability to operate.
We may not be able
to realize the economic benefit of a fork, either immediately or ever, which could adversely affect an investment in our securities.
If we hold a bitcoin at the time of a hard fork into two cryptocurrencies, industry standards would dictate that we would be expected
to hold an equivalent amount of the old and new assets following the fork. However, we may not be able, or it may not be practical,
to secure or realize the economic benefit of the new asset for various reasons. For instance, we may determine that there is no
safe or practical way to custody the new asset, that trying to do so may pose an unacceptable risk to our holdings in the old asset,
or that the costs of taking possession and/or maintaining ownership of the new bitcoin exceed the benefits of owning the new bitcoin.
Additionally, laws, regulation or other factors may prevent us from benefitting from the new asset even if there is a safe and
practical way to custody and secure the new asset.
There is a possibility of bitcoin
mining algorithms transitioning to proof of stake validation and other mining related risks, which could make us less competitive
and ultimately adversely affect our business and the value of our stock.
Proof of stake is an
alternative method in validating bitcoin transactions. Should the algorithm shift from a proof of work validation method to a proof
of stake method, mining would require less energy and may render any company that maintains advantages in the current climate (for
example, from lower priced electricity, processing, real estate, or hosting) less competitive. We, as a result of our efforts to
optimize and improve the efficiency of our bitcoin mining operations, may be exposed to the risk in the future of losing the benefit
of our capital investments and the competitive advantage we hope to gain form this as a result, and may be negatively impacted
if a switch to proof of stake validation were to occur. This may additionally have an impact on other various investments of ours.
Such events could have a material adverse effect on our ability to continue as a going concern or to pursue our business strategy
at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin
or other cryptocurrencies we mine or otherwise acquire or hold for our own account.
To the extent that the profit margins
of bitcoin mining operations are not high, operators of bitcoin mining operations are more likely to immediately sell bitcoin rewards
earned by mining in the market, thereby constraining growth of the price of bitcoin that could adversely impact us, and similar
actions could affect other cryptocurrencies.
Over the past two years,
bitcoin mining operations have evolved from individual users mining with computer processors, graphics processing units and first-generation
ASIC servers. Currently, new processing power is predominantly added by incorporated and unincorporated “professionalized”
mining operations. Professionalized mining operations may use proprietary hardware or sophisticated ASIC machines acquired from
ASIC manufacturers. They require the investment of significant capital for the acquisition of this hardware, the leasing of operating
space (often in data centers or warehousing facilities), incurring of electricity costs and the employment of technicians to operate
the mining farms. As a result, professionalized mining operations are of a greater scale than prior miners and have more defined
and regular expenses and liabilities. These regular expenses and liabilities require professionalized mining operations to maintain
profit margins on the sale of bitcoin. To the extent the price of bitcoin declines and such profit margin is constrained, professionalized
miners are incentivized to more immediately sell bitcoin earned from mining operations, whereas it is believed that individual
miners in past years were more likely to hold newly mined bitcoin for more extended periods. The immediate selling of newly mined
bitcoin greatly increases the trading volume of bitcoin, creating downward pressure on the market price of bitcoin rewards.
The extent to which
the value of bitcoin mined by a professionalized mining operation exceeds the allocable capital and operating costs determines
the profit margin of such operation. A professionalized mining operation may be more likely to sell a higher percentage of its
newly mined bitcoin rapidly if it is operating at a low profit margin and it may partially or completely cease operations if its
profit margin is negative. In a low profit margin environment, a higher percentage could be sold more rapidly, thereby potentially
depressing bitcoin prices. Lower bitcoin prices could result in further tightening of profit margins for professionalized mining
operations creating a network effect that may further reduce the price of bitcoin until mining operations with higher operating
costs become unprofitable forcing them to reduce mining power or cease mining operations temporarily.
If a malicious actor or botnet obtains
control of more than 50% of the processing power on a bitcoin network, such actor or botnet could manipulate blockchains to adversely
affect us, which would adversely affect an investment in us or our ability to operate.
If a malicious actor
or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers)
obtains a majority of the processing power dedicated to mining a bitcoin, it may be able to alter blockchains on which transactions
of bitcoin reside and rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner,
or at all. The malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate
new units or transactions using such control. The malicious actor could “double-spend” its own bitcoin (i.e., spend
the same bitcoin in more than one transaction) and prevent the confirmation of other users’ transactions for as long as it
maintained control. To the extent that such malicious actor or botnet does not yield its control of the processing power on the
network or the bitcoin community does not reject the fraudulent blocks as malicious, reversing any changes made to blockchains
may not be possible. The foregoing description is not the only means by which the entirety of blockchains or cryptocurrencies may
be compromised but is only an example.
Although there are
no known reports of malicious activity or control of blockchains achieved through controlling over 50% of the processing power
on the network, it is believed that certain mining pools may have exceeded the 50% threshold in bitcoin. The possible crossing
of the 50% threshold indicates a greater risk that a single mining pool could exert authority over the validation of bitcoin transactions.
To the extent that the bitcoin ecosystem, and the administrators of mining pools, do not act to ensure greater decentralization
of bitcoin mining processing power, the feasibility of a malicious actor obtaining control of the processing power will increase
because the botnet or malicious actor could compromise more than 50% mining pool and thereby gain control of blockchain, whereas
if the blockchain remains decentralized it is inherently more difficult for the botnet of malicious actor to aggregate enough processing
power to gain control of the blockchain, may adversely affect an investment in our common stock. Such lack of controls and responses
to such circumstances could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy
at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any bitcoin
or other cryptocurrencies we mine or otherwise acquire or hold for our own account, and harm investors.
Cryptocurrencies, including those
maintained by or for us, may be exposed to cybersecurity threats and hacks.
As with any computer
code generally, flaws in bitcoin codes may be exposed by malicious actors. Several errors and defects have been found previously,
including those that disabled some functionality for users and exposed users’ information. Exploitations of flaws in the
source code that allow malicious actors to take or create money have previously occurred. Despite our efforts and processes to
prevent breaches, our devices, as well as our miners, computer systems and those of third parties that we use in our operations,
are vulnerable to cyber security risks, including cyber-attacks such as viruses and worms, phishing attacks, denial-of-service
attacks, physical or electronic break-ins, employee theft or misuse, and similar disruptions from unauthorized tampering with our
miners and computer systems or those of third parties that we use in our operations. Such events could have a material adverse
effect on our ability to continue as a going concern or to pursue our business strategy at all, which could have a material adverse
effect on our business, prospects or operations and potentially the value of any bitcoin or other cryptocurrencies we mine or otherwise
acquire or hold for our own account.
We are subject to risks associated
with our need for significant electrical power. Government regulators may potentially restrict the ability of electricity suppliers
to provide electricity to mining operations, such as ours.
The operation of a
bitcoin or other bitcoin mine can require massive amounts of electrical power. Further, our mining operations can only be successful
and ultimately profitable if the costs, including electrical power costs, associated with mining a bitcoin are lower than the price
of a bitcoin. As a result, any mine we establish can only be successful if we can obtain sufficient electrical power for that mine
on a cost-effective basis, and our establishment of new mines requires us to find locations where that is the case. There may be
significant competition for suitable mine locations, and government regulators may potentially restrict the ability of electricity
suppliers to provide electricity to mining operations in times of electricity shortage, or may otherwise potentially restrict or
prohibit the provision or electricity to mining operations. Additionally, our mines could be materially adversely affected by a
power outage. Given the power requirement, it would not be feasible to run miners on back-up power generators in the event of a
government restriction on electricity or a power outage. If we are unable to receive adequate power supply and are forced to reduce
our operations due to the availability or cost of electrical power, our business would experience materially negative impacts.
If the award of bitcoin rewards,
for us primarily bitcoin for solving blocks and transaction fees are not sufficiently high, we may not have an adequate incentive
to continue mining and may cease mining operations, which will likely lead to our failure to achieve profitability.
As the number of bitcoin
rewards awarded for solving a block in a blockchain decreases, our ability to achieve profitability worsens. Decreased use and
demand for bitcoin rewards may adversely affect our incentive to expend processing power to solve blocks. If the award of bitcoin
rewards for solving blocks and transaction fees are not sufficiently high, we may not have an adequate incentive to continue mining
and may cease our mining operations. For instance, the current fixed reward for solving a new block on the bitcoin blockchain is
twelve and a half bitcoin currency rewards per block, which decreased from 25 bitcoin in July 2016. It is estimated that it will
halve again in about one year. This reduction may result in a reduction in the aggregate hash rate of the bitcoin network as the
incentive for miners decreases. Miners ceasing operations would reduce the collective processing power on the network, which would
adversely affect the confirmation process for transactions (i.e., temporarily decreasing the speed at which blocks are added to
a blockchain until the next scheduled adjustment in difficulty for block solutions) and make bitcoin networks more vulnerable to
a malicious actor or botnet obtaining control in excess of 50 percent of the processing power active on a blockchain, potentially
permitting such actor or botnet to manipulate a blockchain in a manner that adversely affects our activities. A reduction in confidence
in the confirmation process or processing power of the network could result and be irreversible. Such events could have a material
adverse effect on our ability to continue to pursue our new strategy at all, which could have a material adverse effect on our
business, prospects or operations and potentially the value of any bitcoin or other cryptocurrencies we mine or otherwise acquire
or hold for our own account.
We may not adequately respond to
price fluctuations and rapidly changing technology, which may negatively affect our business.
Competitive conditions
within the bitcoin industry require that we use sophisticated technology in the operation of our business. The industry for blockchain
technology is characterized by rapid technological changes, new product introductions, enhancements and evolving industry standards.
New technologies, techniques or products could emerge that might offer better performance than the software and other technologies
we currently utilize, and we may have to manage transitions to these new technologies to remain competitive. We may not be successful,
generally or relative to our competitors in the bitcoin industry, in timely implementing new technology into our systems, or doing
so in a cost-effective manner. During the course of implementing any such new technology into our operations, we may experience
system interruptions and failures during such implementation. Furthermore, there can be no assurances that we will recognize, in
a timely manner or at all, the benefits that we may expect as a result of our implementing new technology into our operations.
As a result, our business and operations may suffer, and there may be adverse effects on the price of our common stock.
Risk Related to The Car Rental Business
Our proposed
car rental business is particularly sensitive to reductions in the levels of airline passenger travel, and any lasting reductions
in air travel as a result of COVID-19 could materially adversely our business strategy.
The car rental industry
has been severely impacted by reductions in airline passenger traffic as a result of the coronavirus. While we believe that we
will be able to implement our business strategy at favorable purchase prices there can be no assurance that the industry will return
to anywhere normal conditions in the near future. Further reductions in levels of air travel, whether caused by general economic
conditions, airfare increases (such as due to capacity reductions or increases in fuel costs borne by commercial airlines) or other
events (such as work stoppages, military conflicts, terrorist incidents, natural disasters, epidemic diseases, or the response
of governments to any of these events) could materially adversely affect us in the future.
We will face intense competition
in the car rental business that may lead to downward pricing or an inability to increase prices.
The car rental market
in which we intend to operate is highly competitive. We believe that price is the primary competitive factor in the car rental
market and that the Internet has enabled cost-conscious customers, including business travelers, to more easily compare rates available
from rental companies. If we try to increase our pricing, our competitors, most of which are expected to have greater resources
and better access to capital than us, may seek to compete aggressively on the basis of pricing. In addition, our competitors may
reduce prices in order to attempt to gain a competitive advantage or to compensate for declines in rental activity. To the extent
we do not match or remain within a reasonable competitive margin of our competitors' pricing, our revenues and results of operations
could be materially adversely affected. If competitive pressures lead us to match any of our competitors' downward pricing and
we are not able to reduce our operating costs, then our margins, results of operations and cash flows could be materially adversely
impacted.
Our
car rental business is expected to be highly seasonal and any occurrence that disrupts rental activity during our peak
periods could materially adversely affect our liquidity, cash flows and results of operations.
Certain
significant components of our expenses are fixed in the short-term, including acquisition costs, real estate taxes, rent,
insurance, utilities, maintenance and other facility-related expenses, the costs of operating our information technology
systems and minimum staffing costs. Seasonal changes in our revenues do not alter those fixed expenses, typically resulting
in higher profitability in periods when our revenues are higher. We are seeking to enter the South Florida marketplace first.
The winter months of the year have historically been the strongest quarters due to their increased levels of vacation
traveling South Florida. If we are able to enter this marketplace, any occurrence that disrupts rental activity during the
winter months could have a disproportionately material adverse effect on our liquidity, cash flows and results of
operations.
If we are unable to purchase
adequate supplies of competitively priced cars or equipment and the cost of the cars or equipment we purchase increases, our financial
condition, results of operations, liquidity and cash flows may be materially adversely affected.
We do not expect to
be a party to any long-term car supply arrangements with manufacturers. The price and other terms at which we can acquire cars
thus varies based on market and other conditions. For example, certain car manufacturers have in the past, and may in the future,
utilize strategies to de-emphasize sales to the car rental industry, which can negatively impact our ability to obtain cars on
competitive terms and conditions. Consequently, there is no guarantee that we can purchase a sufficient number of vehicles at competitive
prices and on competitive terms and conditions. Reduced or limited supplies of equipment together with increased prices are risks
that we also face in our equipment rental business. If we are unable to obtain an adequate supply of cars or equipment, or if we
obtain less favorable pricing and other terms when we acquire cars or equipment and are unable to pass on any increased costs to
our customers, then our financial condition, results of operations, liquidity and cash flows may be materially adversely affected.
Significant increases in fuel
prices or reduced supplies of fuel could harm our business.
Although fuel
prices are currently at low prices, significant increases in fuel prices, reduced fuel supplies or the imposition of
mandatory allocations or rationing of fuel could negatively impact our car rental business by discouraging consumers from
renting cars, changing the types of cars our customers rent from us or the other services they purchase from us or disrupting
air travel, any of which could have a material adverse effect on our financial condition and results of operations.
Manufacturer safety recalls could
create risks to our business.
Our cars may be subject
to safety recalls by their manufacturers. A recall may cause us to retrieve cars from renters and decline to rent recalled cars
until we can arrange for the steps described in the recall to be taken. We could also face liability claims if a recall affects
cars that we have sold. If a large number of cars are the subject of a recall or if needed replacement parts are not in adequate
supply, we may not be able to rent recalled cars for a significant period of time. Those types of disruptions could jeopardize
our ability to fulfill existing contractual commitments or satisfy demand for our vehicles, and could also result in the loss of
business to our competitors. Depending on the severity of any recall, it could materially adversely affect our revenues, create
customer service problems, reduce the residual value of the recalled cars and harm our general reputation.
We face risks related to liabilities
and insurance.
Our proposed business
will expose us to claims for personal injury, death and property damage resulting from the use of the cars rented or sold by us,
and for employment-related claims by our employees. We cannot assure you that we will not be exposed to uninsured liability at
levels in excess of historical levels resulting from multiple payouts or otherwise, that liabilities in respect of existing or
future claims will not exceed the level of our insurance, that we will have sufficient capital available to pay any uninsured claims
or that insurance with unaffiliated carriers will continue to be available to us on economically reasonable terms or at all.
Environmental laws and regulations
and the costs of complying with them, or any liability or obligation imposed under them, could materially adversely affect our
financial position, results of operations or cash flows.
We will be subject
to federal, state, local and foreign environmental laws and regulations in connection with our car rental operations, including
with respect to the ownership and operation of tanks for the storage of petroleum products, such as gasoline, diesel fuel and motor
and waste oils. We cannot assure you that our tanks will at all times remain free from leaks or that the use of these tanks will
not result in significant spills or leakage. If leakage or a spill occurs, it is possible that the resulting costs of cleanup,
investigation and remediation, as well as any resulting fines, could be significant. We cannot assure you that compliance with
existing or future environmental laws and regulations will not require material expenditures by us or otherwise have a material
adverse effect on our consolidated financial position, results of operations or cash flows
The U.S. Congress and
other legislative and regulatory authorities in the United States have considered, and will likely continue to consider, numerous
measures related to climate change and greenhouse gas emissions. Should rules establishing limitations on greenhouse gas emissions
or rules imposing fees on entities deemed to be responsible for greenhouse gas emissions become effective, demand for our services
could be affected, our fleet and/or other costs could increase, and our business could be adversely affected.
Changes
in the U.S. legal and regulatory environment that affect our operations, including laws and regulations relating to taxes, automobile-related
liability, insurance rates, insurance products, consumer privacy, data security, employment matters, cost and fee recovery and
the banking and financing industry could disrupt our proposed businesss, increase our expenses or otherwise have a material adverse
effect on our results of operations.
We expect to be subject
to a wide variety of U.S. laws and regulations and changes in the level of government regulation of our business have the potential
to materially alter our business practices and materially adversely affect our financial position and results of operations, including
our profitability. Those changes may come about through new laws and regulations or changes in the interpretation of existing
laws and regulations.
The car rental industry
in China is in an early stage of development and legislation concerning the industry continues to evolve. Local government authorities
in China have imposed different requirements and regulatory enforcement in not always clear.
Risks Involving
Intellectual Property
Bitcoin and bitcoin mining is software
related
We actively use specific hardware and software
for our bitcoin mining operation. In certain cases, source code and other software assets may be subject to an open source license,
as much technology development underway in this sector is open source. For these works, the company intends to adhere to the terms
of any license agreements that may be in place.
We do not currently own, and do not have
any current plans to seek, any patents in connection with our existing and planned blockchain and cryptocurrency related operations.
We do expect to rely upon trade secrets, trademarks, service marks, trade names, copyrights and other intellectual property rights
and expect to license the use of intellectual property rights owned and controlled by others. In addition, we have developed and
may further develop certain proprietary software applications for purposes of our cryptocurrency mining operation.
Our platform may be subject to damage,
interruptions or delays that may adversely affect our business, financial conditions and results of operations.
In the event of a
platform outage and physical data loss, our ability to perform our bitcoin mining operations would be materially and adversely
affected. The satisfactory performance, reliability and availability of our platform are critical to our operations. Much of our
system hardware is hosted in leased facilities located in Wuhai, Zhundong, Xilinhot and Sichuan China that is operated by our
IT staff. We also maintain a real-time backup system at a separate facility also located in Wuhai, China. Our operations depend
on our ability to protect our systems against damage or interruption from natural disasters, power or telecommunications failures,
air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events.
If there is a lapse in service or damage to our leased Shanghai facilities, we could experience interruptions in our service as
well as delays and additional expense in arranging new facilities.
Any interruptions or
delays in our service, whether as a result of third-party errors, our errors, natural disasters or security breaches, whether accidental
or willful, could harm our operations and/or reputation. Additionally, in the event of damage or interruption, our insurance policies
may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual
disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage. These
factors could prevent us from mining bitcoins, damage our brand and reputation, divert our employees’ attention, subject
us to liability, any of which could adversely affect our business, financial condition and results of operations.
Our platform and internal systems
rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.
Our platform and internal
systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability
of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and
may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released
for external or internal use. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our
reputation, or liability for damages, any of which could adversely affect our business, results of operations and financial conditions.
We may not be able to prevent others
from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks,
domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a
combination of intellectual property laws and contractual arrangements, including confidentiality and non-compete agreements with
our employees and others to protect our proprietary rights. See “Item 4. Information of the Company —Intellectual Property”
and “Regulation—Regulation on Intellectual Property Rights.” Thus, we cannot assure you that any of our intellectual
property rights would not be challenged, invalidated, circumvented or misappropriated, or such intellectual property will be sufficient
to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industry, parts
of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain
licenses and technologies from these third parties on reasonable terms, or at all.
It is often difficult
to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial
interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation.
Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate
remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property
rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult
and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that
we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion
of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our
trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent
that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the
rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a
material adverse effect on our business, financial condition and results of operations.
We may be subject to intellectual
property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain
that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights,
know-how or other intellectual property rights held by third parties. We may be from time to time in the future subject to legal
proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks,
patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects
of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property
rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against
us, we may be forced to divert management’s time and other resources from our business and operations to defend against these
claims, regardless of their merits.
Additionally, the application
and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks,
patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot
assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual
property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such
intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business
and results of operations may be materially and adversely affected.
Risks Related to Our Corporate Structure
If the PRC government deems that
the contractual arrangements in relation to our consolidated variable interest entities do not comply with PRC regulatory restrictions
on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change
in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Foreign ownership of
internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations.
For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication
service provider (except e-commerce) and any such foreign investor must have experience in providing value-added telecommunications
services overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment
promulgated in 2007, as amended in 2011, 2015 and 2017, respectively, and other applicable laws and regulations.
We are a Cayman Islands
exempted company and our PRC subsidiary is considered a foreign invested enterprise. To comply with PRC laws and regulations, we
conduct our operations in China through a series of contractual arrangements entered into among WFOE, our VIEs and the shareholders
of our VIEs. As a result of these contractual arrangements, we exert control over our VIEs and consolidate their operating results
in our financial statements under U.S. GAAP. For a detailed description of these contractual arrangements, see “Corporate
History and Structure.”
Our current ownership
structure, the ownership structure of our PRC subsidiary and our consolidated VIEs, and the contractual arrangements among WFOE,
our VIEs and the shareholders of our VIEs are not in violation of existing PRC laws, rules and regulations; and these contractual
arrangements are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently
in effect. However, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws
and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion
of the Company.
It is uncertain whether
any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they
would provide. In particular, in January 2015, the Ministry of Commerce, or MOFCOM, published a discussion draft of the proposed
Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands the definition
of foreign investment and introduces the principle of “actual control” in determining whether a company is considered
a foreign-invested enterprise, or an FIE. Under the draft Foreign Investment Law, variable interest entities would also be deemed
as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments.
In December 2018, the Standing Committee of the National People’s Congress published a discussion draft of a new proposed
Foreign Investment Law, aiming to replace the major existing laws governing foreign direct investment in China. On January 29,
2019, the discussion draft with slight revisions, or the New Draft Foreign Investment Law, was submitted for review. Pursuant to
the New Draft Foreign Investment Law, foreign investments shall be subject to the negative list management system. However, the
New Draft Foreign Investment Law does not mention “actual control” as regulated in the previous draft and the position
to be taken with respect to the existing or future companies with the “variable interest entity” structure. On March
15, 2019, the Foreign Investment Law of the People’s Republic of China, or the Final Foreign Investment Law, with slight
revision, is finally issued and became effective on January 1, 2020. See “Regulation—Regulations Relating to Foreign
Investment—The Draft PRC Foreign Investment Law”.
Although variable interest
entity structures are not included in the Final Foreign Investment Law, it is uncertain whether any interpretation and implementation
of the Final Foreign Investment Law or new PRC laws, rules or regulations relating to variable interest entity structures will
be adopted or if adopted, what they would provide. If the ownership structure, contractual arrangements and business of our company,
our PRC subsidiary or our consolidated variable interest entities are found to be in violation of any existing or future PRC laws
or regulations, or we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities
would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of our
PRC subsidiaries or consolidated variable interest entity, revoking the business licenses or operating licenses of our PRC subsidiaries
or consolidated variable interest entity, shutting down our servers or blocking our online platform, discontinuing or placing restrictions
or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting
our use of proceeds from offerings in the U.S. to finance our business and operations in China, and taking other regulatory or
enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business
operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition
and results of operations. If any of these occurrences results in our inability to direct the activities of our consolidated variable
interest entities, and/or our failure to receive economic benefits from our consolidated variable interest entities, we may not
be able to consolidate its results into our consolidated financial statements in accordance with U.S. GAAP.
We rely on contractual arrangements
with our VIEs and the shareholders of our VIEs for our business operations, which may not be as effective as direct ownership in
providing operational control.
We
relied on contractual arrangements with Shanghai Dianniu Internet Finance Information Service Co. Ltd. (“Dianniu”)
and Dianniu Participating shareholders to operate our platform. We have similar contractual arrangements with our VIE, Shanghai
Baoxun Advertisement Design Co., Ltd. (“Baoxun”) which did not have any meaningful operations in 2019. For
a description of these contractual arrangements, see “Corporate History and Structure.” These contractual arrangements
may not be as effective as direct ownership in providing us with control over our consolidated variable interest entities. For
example, our consolidated VIEs and their shareholders could breach their contractual arrangements with us by, among other things,
failing to conduct their operations, including maintaining our website and using the domain names and trademarks, in an acceptable
manner or taking other actions that are detrimental to our interests.
If we had direct ownership
of our VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIEs,
which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level.
However, under the current contractual arrangements, we rely on the performance by our consolidated variable interest entities
and their shareholders of their obligations under the contracts to exercise control over our consolidated variable interest entities.
The shareholders of our consolidated variable interest entities may not act in the best interests of our company or may not perform
their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through
the contractual arrangements with our consolidated variable interest entities. Although we have the right to replace any shareholder
of our consolidated variable interest entities under the contractual arrangement, if any shareholder of our consolidated variable
interest entities is uncooperative or any dispute relating to these contracts remains unresolved, we will have to enforce our rights
under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore
will be subject to uncertainties in the PRC legal system. See “— Any failure by our consolidated variable interest
entities or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse
effect on our business.” Therefore, our contractual arrangements with our consolidated variable interest entities may not
be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
Any failure by our consolidated VIEs
or their shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect
on our business.
If our consolidated
VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur
substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under
PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be
effective under PRC laws. For example, if the shareholders of our VIEs were to refuse to transfer their equity interest in the
VIEs to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise
to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
All the agreements
under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China.
Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance
with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States.
As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile,
there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable
interest entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate
outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final
and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent
court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may
only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional
expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay
or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over
our consolidated variable interest entities, and our ability to conduct our business may be negatively affected. See “—
Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations
could limit the legal protections available to you and us.”
The shareholders of our consolidated
VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The equity interests
of Dianniu are held by Erxin Zeng, Xiaohui Liu and Qian Lai Qian Wang (Shanghai) Equity Investment Fund Management Co., Ltd. and
the equity interests of Baoxun are held by Erxin Zeng and Xiaohui Liu. Certain or all of these persons were the subject of criminal
enforcement measures by the Shanghai Publioce Security Bureau. Their interests in Dianniu and Baoxun may be the subject of criminal
enforcement action which may adversely impact upon our Company as a whole. These shareholders may have caused our consolidated
VIEs to breach the existing contractual arrangements we have with them and our consolidated VIEs, which would have a material adverse
effect on our ability to effectively control our consolidated VIEs. We cannot assure you that these shareholders have acted in
the best interests of our Company. In such event, we can exercise our purchase option under the exclusive option agreements with
these shareholders to request them to transfer all of their equity interests in Dianniu and/or Baoxun to a PRC entity or individual
designated by us, to the extent permitted by PRC laws.
Contractual arrangements in relation
to our consolidated variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that
we or our PRC consolidated variable interest entities owe additional taxes, which could negatively affect our financial condition
and the value of your investment.
Under applicable PRC
laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities
within ten years after the taxable year when the transactions are conducted. The PRC enterprise income tax law requires every enterprise
in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the
relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related
party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences
if the PRC tax authorities determine that the contractual arrangements between WFOE, our wholly-owned subsidiary in China, our
consolidated VIEs in China, and the shareholders of our VIEs were not entered into on an arm’s length basis in such a way
as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust our VIEs’
income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction
of expense deductions recorded by our VIEs for PRC tax purposes, which could in turn increase its tax liabilities without reducing
WFOEs’ tax expenses. In addition, if WFOE requests the shareholders of our VIEs to transfer their equity interests in the
VIEs at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject our
VIEs to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our VIEs for the
adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected
if our consolidated variable interest entities’ tax liabilities increase or if it is required to pay late payment fees and
other penalties.
We may lose the ability to use and
enjoy assets held by our consolidated VIEs that were material to the operation of our business if the entities go bankrupt or becomes
subject to a dissolution or liquidation proceeding.
Our consolidated
VIEs holds certain assets that were material to the operation of our former online lending business, including domain names
and equipment. Under the contractual arrangements, our consolidated VIEs may not and their shareholders may not cause it to,
in any manner, sell, transfer, mortgage or dispose of their assets or their legal or beneficial interests in the business
without our prior consent. However, in the event our consolidated VIEs’ shareholders breach the these contractual
arrangements and voluntarily liquidate our consolidated VIEs or our consolidated VIEs declare bankruptcy, all or part of
their assets become subject to liens or rights of third-party creditors. If our consolidated VIEs undergo a voluntary or
involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets.
Risks Related to Doing Business in China
Changes in China’s economic,
political or social conditions or government policies could have a material adverse effect on our business and results of operations.
All of our current
operations are located in China although we are attempting to enter the car rental business in the United States and our bitcoin
mining business is worldwide. Accordingly, our business, prospects, financial condition and results of operations may be influenced
to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China
as a whole.
The Chinese economy
differs from the economies of most developed countries in many respects, including the amount of government involvement, level
of development, growth rate, control of foreign exchange and allocation of resources. 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 China
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 China’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 the past decades, growth has been uneven, both geographically and among various sectors
of the economy. 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 increases,
to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, and in particular
in 2020 as a result of COVID-19,China’s economic growth has slowed down. Any prolonged slowdown in the Chinese economy may
reduce the demand for our products and services and materially and adversely affect our business and results of operations.
Uncertainties in the interpretation
and enforcement of Chinese laws and regulations could limit the legal protections available to us.
The PRC legal system
is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively
new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involves uncertainties.
From time to time,
we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and
court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more
difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more
developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of
which are not published in a timely manner or at all) that may have retroactive effect. This is what, in effect, occurred with
regard to our peer to peer lending business. From 2015 to 2019, the guidance for this business from the Chinese government changed
from supporting it, to limiting it, to finally shutting it down. As a result, we may not be aware of our violating these policies
and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual,
property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede
our ability to continue our operations.
Substantial uncertainties exist with
respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact
the viability of our current corporate structure, corporate governance and business operations.
The MOFCOM published
a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing
laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative
Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary
regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory
regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for
both foreign and domestic investments. The MOFCOM is currently soliciting comments on this draft and substantial uncertainties
exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted
as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations
in many aspects.
Among other things,
the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control”
in determining whether a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment Law specifically
provides that entities established in China but “controlled” by foreign investors will be treated as FIEs. Once an
entity is considered to be an FIE, it may be subject to the foreign investment restrictions or prohibitions set forth in a “negative
list” to be separately issued by the State Council later. If an FIE proposes to conduct business in an industry subject to
foreign investment “restrictions” in the “negative list,” the FIE must go through a market entry clearance
by the MOFCOM before being established. If an FIE proposes to conduct business in an industry subject to foreign investment “prohibitions”
in the “negative list,” it must not engage in the business. However, an FIE that is subject to foreign investment “restrictions,”
upon market entry clearance, may apply in writing for being treated as a PRC domestic investment if it is ultimately “controlled”
by PRC government authorities and its affiliates and/or PRC citizens. In this connection, “control” is broadly defined
in the draft law to cover the following summarized categories: (i) holding 50% or more of the voting rights of the subject entity;
(ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats
on the board or other equivalent decision making bodies, or having the voting power to exert material influence on the board, the
shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence,
via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business
operations. Once an entity is determined to be an FIE, it will be subject to the foreign investment restrictions or prohibitions
set forth in a “negative list,” to be separately issued by the State Council at a later date, if the FIE is engaged
in an industry listed in the negative list. Unless the underlying business of the FIE falls within the negative list, which calls
for market entry clearance by the MOFCOM, prior approval from the government authorities as mandated by the existing foreign investment
legal regime would no longer be required for establishment of the FIE.
The “variable
interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary
licenses and permits in the industries that are currently subject to foreign investment restrictions in China. See “—
Risks Related to Our Corporate Structure” and “Our Corporate History and Structure.” Under the draft Foreign
Investment Law, variable interest entities that are controlled via contractual arrangement would also be deemed as FIEs, if they
are ultimately “controlled” by foreign investors. Therefore, for any companies with a VIE structure in an industry
category that is included in the “negative list” as restricted industry, the VIE structure may be deemed legitimate
only if the ultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the
actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as FIEs and any
operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.
The draft Foreign Investment
Law has not taken a position on what actions will be taken with respect to the companies currently employing a VIE structure, whether
or not these companies are controlled by Chinese parties, while it is soliciting comments from the public on this point. In addition,
it is uncertain whether the online consumer finance marketplace industry, in which our variable interest entity operates, will
be subject to the foreign investment restrictions or prohibitions set forth in the “negative list” that is to be issued.
If the enacted version of the Foreign Investment Law and the final “negative list” mandate further actions, such as
MOFCOM market entry clearance or certain restructuring of our corporate structure and operations, to be completed by companies
with existing VIE structure like us, there may be substantial uncertainties as to whether we can complete these actions in a timely
manner, or at all, and our business and financial condition may be materially and adversely affected.
In December 2018, the
Standing Committee of the National People’s Congress published a discussion draft of a new proposed Foreign Investment Law,
aiming to replace the major existing laws governing foreign direct investment in China. On January 29, 2019, the discussion draft
with slight revisions, or the New Draft Foreign Investment Law, was submitted for review. Pursuant to the New Draft Foreign Investment
Law, foreign investments shall be subject to the negative list management system. However, the New Draft Foreign Investment Law
does not mention “actual control” as regulated in the previous draft and the position to be taken with respect to the
existing or future companies with the “variable interest entity” structure. On March 15, 2019, the Foreign Investment
Law of the People’s Republic of China, or the Final Foreign Investment Law, with slight revision, is finally issued and became
effective on January 1, 2020. See “Regulation—Regulations Relating to Foreign Investment—The Draft PRC Foreign
Investment Law”. Since the PRC Foreign Investment Law is newly published, there is still uncertainties in relation to its
interpretation and implementation and it is still possibility that variable interest entities will be deemed as foreign invested
enterprises and be subject to restrictions in the future. If the ownership structure, contractual arrangements and business of
our company, our PRC subsidiary or our VIEs are found to be in violation of any existing or future PRC laws or regulations, or
we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad
discretion in dealing with such violation, including levying fines, confiscating our income or the income of our PRC subsidiary
shutting down our servers or blocking our online platform, discontinuing or placing restrictions or onerous conditions on our operations,
requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from our initial
public offering to finance our business and operations in China, and taking other regulatory or enforcement actions that could
be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage
our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations.
If any of these occurrences results in our inability to direct the activities of our VIEs, we may not be able to consolidate their
results into our consolidated financial statements in accordance with U.S. GAAP.
Although variable interest
entity structures are not included in the Final Foreign Investment Law, it is uncertain whether any interpretation and implementation
of the Final Foreign Investment Law or new PRC laws, rules or regulations relating to variable interest entity structures will
be adopted or if adopted, what they would provide. If the ownership structure, contractual arrangements and business of our company,
our PRC subsidiary or our consolidated variable interest entities are found to be in violation of any existing or future PRC laws
or regulations, or we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities
would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of our
PRC subsidiaries or consolidated variable interest entity, revoking the business licenses or operating licenses of our PRC subsidiaries
or consolidated variable interest entity, shutting down our servers or blocking our online platform, discontinuing or placing restrictions
or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting
our use of proceeds from this offering to finance our business and operations in China, and taking other regulatory or enforcement
actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations
and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results
of operations. If any of these occurrences results in our inability to direct the activities of our consolidated variable interest
entities, and/or our failure to receive economic benefits from our consolidated variable interest entities, we may not be able
to consolidate its results into our consolidated financial statements in accordance with U.S. GAAP.
We rely on dividends and other distributions
on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability
of our PRC subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company,
and we rely on dividends and other distributions on equity paid by our PRC subsidiary for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur.
If our PRC subsidiary incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability
to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require our PRC subsidiary to adjust
its taxable income under the contractual arrangements it currently has in place with our consolidated variable interest entities
in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us. See “—
Risks Related to Our Corporate Structure — Contractual arrangements in relation to our consolidated variable interest entities
may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated variable interest
entity owe additional taxes, which could negatively affect our financial condition and the value of your investment.”
Under PRC laws and
regulations, our PRC subsidiary, as a wholly foreign-owned enterprise in China, may pay dividends only out of their respective
accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly
foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund
certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion,
a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare
and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Any limitation on the
ability of our PRC subsidiary to pay dividends or make other distributions to us 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. See also “— If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification
could result in unfavorable tax consequences to us and our non-PRC shareholders.”
PRC regulation of loans to and direct
investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us
from using offshore funds to make loans to our PRC subsidiary and consolidated affiliated entity and its subsidiaries, or to make
additional capital contributions to our PRC subsidiary.
Under PRC laws and
regulations, we are permitted to utilize offshore funds to fund our PRC subsidiary by making loans to or additional capital contributions
to our PRC subsidiary, subject to applicable government registration and approval requirements.
Any loans to our PRC
subsidiary, which are treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations and foreign exchange
loan registrations. For example, loans by us to our PRC subsidiary to finance their activities cannot exceed statutory limits and
must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The statutory limit for
the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved
by the MOFCOM or its local counterpart and the amount of registered capital of such foreign-invested company.
We may also decide
to finance our PRC subsidiary by means of capital contributions. These capital contributions must be approved by the MOFCOM or
its local counterpart. In addition, SAFE issued a circular in September 2008, SAFE Circular 142, regulating the conversion by a
foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE
Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise
may only be used for purposes within the business scope approved by the applicable government authority and unless otherwise provided
by law, may not be used for equity investments within the PRC. Although on July 4, 2014, the SAFE issued the Circular of the SAFE
on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative Method of the Conversion of Foreign Exchange
Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched a pilot reform of the administration of the settlement
of the foreign exchange capitals of foreign-invested enterprises in certain designated areas from August 4, 2014 and some of the
restrictions under SAFE Circular 142 will not apply to the settlement of the foreign exchange capitals of the foreign-invested
enterprises established within the designate areas and such enterprises mainly engaging in investment are allowed to use its RMB
capital converted from foreign exchange capitals to make equity investment, our PRC subsidiary is not established within the designated
areas. On March 30, 2015, SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 came into force and replaced
both Circular 142 and Circular 36 on June 1, 2015. Circular 19 allows foreign-invested enterprises to make equity investments by
using RMB fund converted from foreign exchange capital. However, Circular 19 continues to prohibit foreign-invested enterprises
from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope,
providing entrusted loans or repaying loans between non-financial enterprises. In addition, SAFE strengthened its oversight of
the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of
such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB
loans if the proceeds of such loans have not been used. Violations of these Circulars could result in severe monetary or other
penalties. These circulars may significantly limit our ability to use RMB converted from offshore funds to fund the establishment
of new entities in China by our PRC subsidiary, to invest in or acquire any other PRC companies through our PRC subsidiary, or
to establish new variable interest entities in the PRC.
In light of the various
requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot
assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals
on a timely basis, if at all, with respect to future loans to our PRC subsidiary or future capital contributions by us to our PRC
subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use offshore funds to capitalize
or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and
our ability to fund and expand our business.
Fluctuations in exchange rates could
have a material adverse effect on our results of operations and the value of your investment.
To date, substantially
all of our revenues and expenditures have been denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result,
fluctuations in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our
U.S. dollar assets. Our reporting currency is the U.S. dollar while the functional currency for our PRC subsidiary and consolidated
variable interest entity is RMB. Gains and losses from the remeasurement of assets and liabilities that are receivable or payable
in RMB are included in our consolidated statements of operations. The remeasurement has caused the U.S. dollar value of our results
of operations to vary with exchange rate fluctuations, and the U.S. dollar value of our results of operations will continue to
vary with exchange rate fluctuations. A fluctuation in the value of RMB relative to the U.S. dollar could reduce our profits from
operations and the translated value of our net assets when reported in U.S. dollars in our financial statements. This could have
a negative impact on our business, financial condition or results of operations as reported in U.S. dollars. If we decide to convert
our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes,
appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition,
fluctuations in currencies relative to the periods in which the earnings are generated may make it more difficult to perform period-to-period
comparisons of our reported results of operations.
There remains significant
international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation
of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends
payable on, our ordinary shares in U.S. dollars. For example, to the extent that we need to convert U.S. dollars into RMB to pay
our operating expenses, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would
receive from the conversion. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce
the U.S. dollar equivalent of our earnings, which in turn could adversely affect the market price of our ordinary shares.
Very limited hedging
options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions
in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our
exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict
our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect
on your investment.
Governmental control of currency
conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The PRC government
imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out
of China. We have received substantially all of our net revenues in RMB. Under our current corporate structure, our company in
the Cayman Islands may rely on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have.
Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and
service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying
with certain procedural requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies to us without
prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain
procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our
company who are PRC residents. But approval from or registration with appropriate government authorities is required 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. The PRC government may also at its discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy
our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
Failure to make adequate contributions
to various employee benefit plans as required by PRC regulations may subject us to penalties.
We are required under
PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance,
housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages
of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time
to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently
by the local governments in China given the different levels of economic development in different locations. As of the date of
this report, we believe that we have made adequate employee benefit payments. If we fail to make adequate payments in the future,
we may be required to make up the contributions for these plans in the amount of 110% of the amount in the preceding month. If
we fail to make or supplement contributions of social security premiums within the stipulated period, the social security premiums
collection agency may enquire into the deposit accounts of the employer with banks and other financial institutions. In an extreme
situation, where we failed to contribute social security premiums in full amount and do not provide guarantee, the social security
premiums collection agency may apply to a Chinese court for seizure, foreclosure or auction of our properties of value equivalent
to the amount of social security premiums payable, and the proceeds from auction shall be used for contribution of social security
premiums. If we are subject to deposit, seizure, foreclosure or auction in relation to the underpaid employee benefits, our financial
condition and results of operations may be adversely affected.
The M&A Rules and certain other
PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make
it more difficult for us to pursue growth through acquisitions in China.
The M&A Rules discussed
in the preceding risk factor and some other regulations and rules concerning mergers and acquisitions established additional procedures
and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including
requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor
takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOFCOM shall be notified in advance
of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOFCOM
that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense
and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic
enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit
any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual
control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements
of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required
approval processes, including obtaining approval from the MOFCOM or its local counterparts may delay or inhibit our ability to
complete such transactions, which could affect our ability to expand our business or maintain our market share.
PRC regulations relating to offshore
investment activities by PRC residents may limit our PRC subsidiary’ ability to increase their registered capital or distribute
profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.
SAFE promulgated the
Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special
Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local
branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment
or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose
vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents,
name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.
SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents
Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE promulgated the
Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February
2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register
with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity
established for the purpose of overseas investment or financing.
If our shareholders
who are PRC residents or entities do not complete their registration as required, our PRC subsidiary may be prohibited from distributing
their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our
ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described
above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
Mr. Erxin Zeng and
Mr. Xiaohui Liu, who directly or indirectly hold shares in our company and who were known to us as being PRC residents, have completed
the foreign exchange registrations required in connection with our recent corporate restructuring. The remaining shareholders who
directly or indirectly hold shares in our Company and who are known to us as being PRC residents are currently processing such
registrations.
However, we may not
be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can
we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our
shareholders or beneficial owners who are PRC residents or entities have complied with and will in the future make or obtain any
applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply
with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to
fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’ ability
to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
Any failure to comply with PRC regulations
regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines
and other legal or administrative sanctions.
In February 2012, SAFE
promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock
Incentive Plan of Overseas Publicly-Listed Company, replacing earlier rules promulgated in March 2007. Pursuant to these rules,
PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any
stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through
a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures.
In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock
options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens
or who have resided in the PRC for a continuous period of not less than one year and who have been granted options or other awards
are subject to these regulations because our company is an overseas listed company. Failure to complete the SAFE registrations
may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary
and limit our PRC subsidiary’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict
our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulation
— Regulations on Stock Incentive Plans.”
If we are classified as a PRC resident
enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC
shareholders.
Under the PRC Enterprise
Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body”
within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the
rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and
substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise.
In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria
for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore
is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise
groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State
Administration of Taxation’s general position on how the “de facto management body” test should be applied in
determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise
controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de
facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the
following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating
to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel
in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder
resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually
reside in the PRC.
We believe none of
our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Taxation — People’s Republic
of China Taxation.” However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities
and uncertainties remain with respect to the interpretation of the term “de facto management body.” As all of our management
members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine
that we or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then we
or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net
income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities
determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition
of our ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC
individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources.
It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their
country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the
returns on your investment in our ordinary shares.
Regulatory bodies of the United States
may be limited in their ability to conduct investigations or inspections of our operations in China.
From time to time,
the Company may receive requests from certain U.S. agencies to investigate or inspect the Company’s operations, or to otherwise
provide information. While the Company will be compliant with these requests from these regulators, there is no guarantee that
such requests will be honored by those entities who provide services to us or with whom we associate, especially as those entities
are located in China. Furthermore, an on-site inspection of our facilities by any of these regulators may be limited or entirely
prohibited. Such inspections, though permitted by the Company and its affiliates, are subject to the unpredictability of the Chinese
enforcers, and may therefore be impossible to facilitate.
Enhanced scrutiny over acquisition
transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
The PRC tax authorities
have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests
in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which
became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which became effective
in February 2015.
Under Circular 698,
where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident
enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise,
being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use
of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject
to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests
in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has
the power to make a reasonable adjustment to the taxable income of the transaction.
In February 2015, the
SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax
regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect
transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer
of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how to assess
reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity
through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person
who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer”
by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident
enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the
relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard
the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of
reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise
income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable
taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
We face uncertainties
on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving
the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such
non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation and request our PRC
subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being
subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required to expend valuable
resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our non-resident enterprises should
not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
The PRC tax authorities
have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable capital gains based on
the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have
no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve
complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the
PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular 698 and Circular
7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our
financial condition and results of operations.
Risks Related to Our Ordinary Shares
The trading price of
our common stock is subject to arbitrary pricing factors that are not necessarily associated with traditional factors that influence
stock prices or the value of non-bitcoin assets such as revenue, cash flows, profitability, growth prospects or business activity
levels since the value and price, as determined by the investing public, may be influenced by future anticipated adoption or appreciation
in value of cryptocurrencies or blockchains generally, factors over which we have little or no influence or control.
Other factors which
could cause volatility in the market price of our common stock include, but are not limited to:
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actual
or anticipated fluctuations in our financial condition and operating results or those of companies perceived to be similar to
us;
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actual or anticipated changes in our growth rate relative to our competitors;
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commercial success and market acceptance of blockchain and bitcoin and other cryptocurrencies;
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actions by our competitors, such as new business initiatives, acquisitions and divestitures;
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strategic transactions undertaken by us;
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additions or departures of key personnel;
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prevailing economic conditions;
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disputes concerning our intellectual property or other proprietary rights;
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sales of our common stock by our officers, directors or significant stockholders;
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other actions taken by our stockholders;
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future sales or issuances of equity or debt securities by us;
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business disruptions caused by earthquakes, tornadoes or other natural disasters;
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issuance of new or changed securities analysts’ reports or recommendations regarding us;
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legal proceedings involving our company, our industry or both;
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changes in market valuations of companies similar to ours;
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the prospects of the industry in which we operate;
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speculation or reports by the press or investment community with respect to us or our industry in general;
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the level of short interest in our stock; and
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other risks, uncertainties and factors described in this annual report.
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In addition, the stock
markets in general have experienced extreme volatility that has often been unrelated to the operating performance of the issuer.
These broad market fluctuations may negatively impact the price or liquidity of our common stock. When the price of a stock has
been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer, and we have
been impacted in that way. See Item 3 – Legal Proceedings, “We, and some of our current and former officers and directors,
have been named as parties to various lawsuits arising out of, or related to, allegedly false and misleading statements made in
prior securities filings, and those lawsuits could adversely affect us, require significant management time and attention, result
in significant legal expenses or damages, and cause our business, financial condition, results of operations and cash flows to
suffer.”
We may be unable to comply with the
applicable continued listing requirements of the Nasdaq Capital Market, which may adversely impact our access to capital markets
and may cause us to default certain of our agreements.
Our common stock
is currently traded on the Nasdaq Capital Market. Nasdaq rules require us to maintain a minimum closing bid price of $1.00
per share of our common stock. The closing bid price of our common stock fell below $1.00 per share for 30 consecutive
trading days, so we were not in compliance with Nasdaq’s rules for listing standards. Although we regained compliance,
there can be no assurance we will continue to meet the minimum bid price requirements or any other requirements in the
future, in which case our common stock could be delisted.
In the event that our
common stock is delisted from Nasdaq and is not eligible for quotation or listing on another market or exchange, trading of our
common stock could be conducted only in the over-the-counter market or on an electronic bulletin board established for unlisted
securities such as the OTC. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for
our common stock and there would likely also be a reduction in our coverage by securities analysts and the news media, which could
cause the price of our common stock to decline further. In addition, our ability to raise additional capital may be severely impacted,
which may negatively affect our plans and the results of our operations.
If securities or industry analysts
do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market
for our common stock will be influenced by whether industry or securities analysts publish research and reports about us, our business,
our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. We may not obtain
or maintain analyst coverage in the future. Any analysts that do cover us may make adverse recommendations regarding our stock,
adversely change their recommendations from time to time and/or provide more favorable relative recommendations about our competitors.
If analysts who may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, or
if analysts fail to cover us or publish reports about us at all, we could lose (or never gain) visibility in the financial markets,
which in turn could cause the stock price of our common stock or trading volume to decline. Moreover, if our operating results
do not meet the expectations of the investor community, one or more of the analysts who cover our company may change their recommendations
regarding our company and our stock price could decline.
Our ordinary shares may be thinly
traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
Our ordinary shares
may be “thinly-traded”, meaning that the number of persons interested in purchasing our ordinary shares at or near
bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors,
including the fact that we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse
and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such
time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will
generally support continuous sales without an adverse effect on share price. Broad or active public trading market for our ordinary
shares may not develop or be sustained.
Volatility in our ordinary shares
price may subject us to securities litigation.
The market for our
ordinary shares may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may
continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated
securities class action litigation against a company following periods of volatility in the market price of its securities. We
may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities
and could divert management’s attention and resources.
We are not likely to pay cash dividends
in the foreseeable future.
We currently intend
to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not expect to pay any
cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we determine to pay dividends
in the future, our ability to do so will depend upon the receipt of dividends or other payments from WFOE. WFOE may, from time
to time, be subject to restrictions on its ability to make distributions to us, including restrictions on the conversion of RMB
into U.S. dollars or other hard currency and other regulatory restrictions.
You may face difficulties in protecting
your interests as a shareholder, as Cayman Islands law provides substantially less protection when compared to the laws of the
United States and it may be difficult for a shareholder of ours to effect service of process or to enforce judgements obtained
in the United States courts.
Our corporate affairs
are governed by our memorandum and articles of association and by the Companies Law (2016 Revision) and common law of the Cayman
Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the
fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of
the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the
Cayman Islands as well as from English common law. Decisions of the Privy Council (which is the final court of appeal for British
overseas territories such as the Cayman Islands) are binding on a court in the Cayman Islands. Decisions of the English courts,
and particularly the Supreme Court of the United Kingdom and the Court of Appeal are generally of persuasive authority but are
not binding on the courts of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors
under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States.
In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States and provide significantly
less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative
action before the United States federal courts. The Cayman Islands courts are also unlikely to impose liabilities against us in
original actions brought in the Cayman Islands, based on certain civil liability provisions of United States securities laws.
As of December 31,
2019, all of our operations are conducted outside the United States, and substantially all of our assets are located outside the
United States. All of our directors and officers are nationals or residents of jurisdictions other than the United States and a
substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to
effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United
States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or
any state in the United States.
As a result of all
of the above, our shareholders may have more difficulty in protecting their interests through actions against us or our officers,
directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
We are a foreign private issuer within
the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States
domestic public companies.
We are a foreign private
issuer within the meaning of the rules under the Exchange Act. As such, we are exempt from certain provisions applicable to United
States domestic public companies. For example:
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we
are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
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for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
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we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
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we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
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we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
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we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.
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We currently intend to file annual reports on Form 20-F and reports on Form 6-K as a foreign private issuer. Accordingly, our shareholders may not have access to certain information they may deem important.
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We are an “emerging growth
company” within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements
available to emerging growth companies, this could make it more difficult to compare our performance with other public companies.
We are an “emerging
growth company” within the meaning of the Securities Act, as modified by the JOBS Act. Section 102(b)(1) of the JOBS Act
exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private
companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of
securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The
JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply
to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended
transition period, which means that when a standard is issued or revised and it has different application dates for public or private
companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new
or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging
growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible
because of the potential differences in accountant standards used.
As an “emerging growth company”
under applicable law, we will be subject to lessened disclosure requirements. Such reduced disclosure may make our ordinary shares
less attractive to investors.
For as long as we remain
an “emerging growth company”, as defined in the JOBS Act, we will elect to take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not “emerging growth companies”,
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute
payments not previously approved. Because of these lessened regulatory requirements, our shareholders would be left without information
or rights available to shareholders of more mature companies. If some investors find our ordinary shares less attractive as a result,
there may be a less active trading market for our ordinary shares and our share price may be more volatile.
If we are classified as a passive
foreign investment company, United States taxpayers who own our ordinary shares may have adverse United States federal income tax
consequences.
A non-U.S. corporation
such as ourselves will be classified as a passive foreign investment company, which is known as a PFIC, for any taxable year if,
for such year, either
|
●
|
at
least 75% of our gross income for the year is passive income; or
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●
|
the
average percentage of our assets (determined at the end of each quarter) during the taxable year which produce passive income
or which are held for the production of passive income is at least 50%.
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Passive income generally
includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or
business) and gains from the disposition of passive assets.
If we are determined
to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. taxpayer who holds our
ordinary shares, the U.S. taxpayer may be subject to increased U.S. federal income tax liability and may be subject to additional
reporting requirements.
Depending on the amount
of cash we raise in a public offering completed in March 2018, together with any other assets held for the production of passive
income, it is possible that, for our 2018 taxable year or for any subsequent year, more than 50% of our assets may be assets which
produce passive income. We will make this determination following the end of any particular tax year. Although the law in this
regard is unclear, we treat our consolidated affiliated entities as being owned by us for United States federal income tax purposes,
not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially
all of their economic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements.
For purposes of the PFIC analysis, in general, a non-U.S. corporation is deemed to own its pro rata share of the gross income and
assets of any entity in which it is considered to own at least 25% of the equity by value.
For a more detailed
discussion of the application of the PFIC rules to us and the consequences to U.S. taxpayers if we were determined to be a PFIC,
see “Item 10.E. Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”
Two former members
of our management team have substantial shareholdings in our Company and their interests may not be aligned with the interests
of our other shareholders
Mr. Zeng, our
former chief executive officer and chairman and Mr. Liu, a former member of our Board of Directors, own approximately 11.35%
and 28.66%, respectively, of our ordinary shares. As a result of their significant shareholdings, Mr. Zeng and Mr. Liu have, and
will continue to have, substantial influence over our business, including decisions regarding mergers, consolidations and the
sale of all or substantially all of our assets, election of directors, and other significant corporate actions. They may take
action that is not in the best interests of us or our other shareholders This concentration of ownership may discourage,
delay or prevent a change of control of our Company, which could deprive our shareholders of an opportunity to receive a
premium for their shares as part of the sale of our Company and might reduce the market price of our ordinary shares. These
actions may be taken even if they are opposed by our other shareholders. For more information regarding our principal
shareholders and their affiliated entities see “6E. Share Ownership.”
ITEM 4. INFORMATION ON THE COMPANY
History and Development of the Company
We began our operations
in China through Shanghai Dianniu Internet Finance Information Service Co. Ltd. (“Dianniu”), which was formed in November
2015. In early 2017, we incorporated Golden Bull Limited under the laws of the Cayman Islands as our offshore holding company under
our former name Point Cattle International Limited. In March 2017, we established our wholly owned Hong Kong subsidiary, Point
Cattle Group Company Limited, which formed Shanghai Fuyu Information and Technology Co., Ltd., its wholly owned subsidiary in PRC
(the “WFOE”). Through the contractual arrangements between the WFOE, Dianniu and the majority shareholders of Dianniu,
we control 93.2% of Dianniu. These contractual arrangements allow us to effectively control and derive 93.2% of the economic interest
from Dianniu.
In addition to Dianniu,
the WFOE has entered into a series of contracts with Shanghai Baoxun Advertisement Design Co., Ltd. (“Baoxun”), a company
formed in February 2017 under the laws of PRC, and Baoxun’s shareholders. Baoxun currently does not have any operations.
On June 3, 2019, Golden
Bull USA, Inc. (“Golden Bull USA”) was incorporated in the State of New York, which is a wholly owned subsidiary of
Golden Bull Limited .Golden Bull USA is our principal office and we plan to develop car rental business through Golden Bull USA.
We’ve been actively seeking car rental business opportunities in both the State of New York as well as the State of Florida.
In
April 2020, we acquired another entity XMAX Chain Limited in Hong Kong as wholly owned subsidiary, operating the bitcoin
mining business and we expect a significant amount of business will be executed under this wholly-owned subsidiary in the
future.
We listed our ordinary
shares on the Nasdaq Capital Market under the symbol “DNJR” on March 19, 2018 and completed an initial public offering
of 1,550,000 ordinary shares on March 22, 2018 (“IPO”), raising approximately US$5.2 million in net proceeds after
deducting underwriting commissions and the offering expenses payable by us. On March 28, 2018, ViewTrade Securities, Inc., who
acted as the sole underwriter and book-runner of the Company’s IPO exercised the full over-allotment option to purchase an
additional 232,500 ordinary shares raising approximately US$850,000 in net proceeds after deducting underwriting commissions and
the offering expenses payable by us.
Our principal executive
offices are located at 136-20 38th Avenue, Suite 9A-2, Flushing, NY United States 11354. Our registered office in the Cayman Islands
is located at Corporate Filing Services Ltd., 3rd Floor, Harbour Place, 103 South Church Street, Grand Cayman, KY 1-1002, Cayman
Islands.
Our agent for service
of process in the United States is Corporation Service Company located at 1180 Avenue of the Americas, Suite 210, New York, New
York 10036. Investors should contact us for any inquiries through the address and telephone number of our principal executive offices.
Capital Expenditures
For the years ended
December 31, 2019, 2018 and 2017, we incurred capital expenditures of approximately $0.87 million, $3.33 million and $0.05 million,
respectively, among which we incurred $nil, $0.75 million and $0.05 million for purchases of property and equipment for our daily
use, $0.76 million, $2.58 million and $nil for the car rental business, and $0.11 million, $nil and $nil for purchases of computers
for our bitcoin mining business. These capital expenditures were financed by cash provided by operating and financing activities.
We expect that our
capital expenditures in fiscal year 2020 will be incurred primarily in connection with the purchase of bitcoin mining machines,
additional computer equipment and IT server to support our services.
Business Overview
We were primarily an
online finance marketplace, or “peer-to-peer” lending company, in China that provided borrowers access to loans.
But on October 24, 2019, the Pudong Branch of the Shanghai Public Security Bureau announced on its website that it has
completed its investigations against Shanghai Dianniu Internet Finance Information Service Co., Ltd., which is a variable
interest entity of Golden Bull Limited’s, for suspected illegal collection of public deposits. As of the report filing
date, the final outcome of investigation was still not published and the impact could not be estimated. Hence, the
Company’s management decided to temporarily suspend the “peer-to-peer” lending business in the fourth
quarter of 2019. The board and management is still in consideration of running related financial businesses in different
manners consistent with PRC regulation and began
to implement operations in the bitcoin mining business and car rental business in 2020.
Bitcoin Mining
Operations of bitcoin
mining
In view of the widespread
adoption of blockchain technology and bitcoin worldwide the Company determined to enter the bitcoin mining industry, which is the
production of bitcoin. We investigated the business since August 2019 and Management believes that bitcoin mining is profitable
and its business plan is viable. In October 2019 the Company decided to implement its business strategy with the temporary suspension
of its existing P2P lending business. Mr. Erke Huang then joined the Company as CFO and a director. Prior to joining the Company
he served as investment director in a venture capital fund in Shenzhen, China and invested in well-known blockchain technology
projects. Mr. Huang brings the resources from miner supply to mining “farm” hosting to execute the Company’s
bitcoin mining business plan. We believe the Company has a discount which can be achieved by bulk purchase and the Company has
also sourced a stable and cheap electricity supply. We have also assembled an experienced operations team to manage and maintain
the daily operations of miners for stable and predictable bitcoin production.
The Company operates
a recently updated bitcoin mining facility for the sole purpose of mining bitcoin. Our facility and mining platform are operating
with the primary intent of accumulating bitcoin which we may sell for fiat currency from time to time depending on market conditions
and management’s determination of our cash flow needs. Our mining operations are in Wuhai, Zhundong, Xinlinhot and Sichuan
China hosting about 21,800 Application Specific Integrated Circuits (”ASIC”) miners since May 2020 which have access
to approximately 74.5 megawatts of power supplied to our leased facilities. During the second quarter of 2020, the Company purchased
16,817 units next generation MicroBT M21S miner, 2,696 units MicroBT M20S miner, 2,000 units MicroBT M10 Miner, 800 units Innosilicon
T3 miner and 256 unites Bitmain T17+ miner, Most of them have now been installed and are currently operating at Wuhai site, Zhundong
site, Xilinhot site and Sichuan Site while some are still in transit. The Company is currently evaluating plans to make more purchases
to increase the total mining hash, conditioned upon our raising required funds.
Performance Metrics
of bitcoin mining
The Company operates
mining hardware which performs computational operations in support of the blockchain measured in “hash rate” or “hashes
per second.” A “hash” is the computation run by mining hardware in support of the blockchain; therefore, a miner’s
“hash rate” refers to the rate at which it is capable of solving such computations. The original equipment used for
mining bitcoin utilized the Central Processing Unit (CPU) of a computer to mine various forms of bitcoin. Due to performance limitations,
CPU mining was rapidly replaced by the Graphics Processing Unit (GPU), which offers significant performance advantages over CPUs.
General purpose chipsets like CPUs and GPUs have since been replaced in the mining industry by Application Specific Integrated
Circuits (ASIC) chips like those found in the MicroBT M21S miner currently utilized by the Company at its mining facility. These
ASIC chips are designed specifically to maximize the rate of hashing operations.
The Company measures our
mining performance and competitive position based on overall hash rate being produced in our mining sites. The latest equipment
the MicroBT M21S miner, performs in the range of approximately 50 - 58 terahash per second (TH/s) per unit, M20S performs in the
range of 64 - 68 TH/s per unit, M10 performs in the range of 31 – 35 TH/s per unit; Bitmain T17+ performs with a maximum
hashrate of 64 TH/s per unit; Innosilicon T3 performs in the range of 41 – 45 TH/s per unit. These mining hardware are on
the cutting edge of available mining equipment, however, advances and improvements to the technology are ongoing and may be available
in quantities to the market in the near future which may affect our perceived position.
Halving
Further affecting the
industry, and particularly for the bitcoin blockchain, the cryptocurrency reward for solving a block is subject to periodic incremental
halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using
a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “halving”.
For bitcoin, the reward was initially set at 50 bitcoin currency rewards per block and this was cut in half to 25 in November 28,
2012 at block 210,000 and again to 12.5 on July 9, 2016 at block 420,000. The next halving for bitcoin is expected in May 2020
at block 630,000 when the reward will reduce to 6.25. This process will reoccur until the total amount of bitcoin currency rewards
issued reaches 21 million, which is expected to occur around 2140.
Network Hash Rate
and Difficulty
In cryptocurrency mining,
“hash rate” is a measure of the processing speed by a mining computer for a specific coin. An individual miner, such
as Riot has a hash rate total of its miners seeking to mine a specific coin, and system wide there is a total has rate of all miners
seeking to mine each specific type of coin. The higher total hash rate of a specific miner, as a percentage of the system wide
total hash rate, generally results over time in a corresponding higher success rate in coin rewards as compared to miners with
lower hash rates.
Mining Pools
A “mining pool” is the pooling
of resources by miners, who share their processing power over a network and split rewards according to the amount of work they
contributed to the probability of placing a block on the blockchain. Mining pools emerged in response to the growing difficulty
and available hashing power that competes to place a block on the bitcoin blockchain.
The Company participates in mining pools
wherein groups of miners associate to pool resources and earn cryptocurrency together allocated to each miner according to the
“hashing” capacity they contribute to the pool. As additional miners competed for the limited supply of blocks, individuals
found that they were working for months without finding a block and receiving any reward for their mining efforts. To address this
variance, miners started organizing into pools to share mining rewards more evenly on a pro rata basis based on total hashing capacity
contributed to the mining pool.
The mining pool operator provides a service
that coordinates the computing power of the independent mining enterprise. Fees are paid to the mining pool operator to cover the
costs of maintaining the pool. The pool uses software that coordinates the pool members’ hashing power, identifies new block
rewards, records how much work all the participants are doing, and assigns block rewards for successful algorithm solutions in-proportion
to the individual hash rate that each participant contributed to a given successful mining transaction. While we do not pay pool
fees directly, pool fees are deducted from amounts we may otherwise earn. Fees (and payouts) fluctuate and historically have been
approximately 2% on average.
Mining pools are subject to various risks such as disruption
and down time. Riot has internally created software that monitors its hashing performance and reward rates to monitor credits for
our contributed hashing power. In the event that a pool experiences down time or not yielding returns, our results may be impacted.
Competition
In bitcoin mining,
companies, individuals and groups generate units of bitcoin through mining. Miners can range from individual enthusiasts to professional
mining operations with dedicated data centers. Miners may organize themselves in mining pools. The Company competes or may in the
future compete with other companies that focus all or a portion of their activities on owning or operating bitcoin exchanges, developing
programming for the blockchain, and mining activities. At present, the information concerning the activities of these enterprises
is not readily available as the vast majority of the participants in this sector do not publish information publicly or the information
may be unreliable. Published sources of information include “bitcoin.org” and “blockchain.info”; however,
the reliability of that information and its continued availability cannot be assured.
Several public companies
(traded in the U.S. and Internationally), such as the following, may be considered to compete with us, although we believe there
is no company, including the following, which engages in the same scope of activities as we do or intend to do:
The competitors we
have are Overstock.com Inc; Bitcoin Investment Trust; Blockchain Industries, Inc; (formerly Omni Global Technologies, Inc.); Bitfarms
Technologies Ltd. (formerly Blockchain Mining Ltd); DMG Blockchain Solutions Inc; Digihost International, Inc; Hive Blockchain
Technologies Inc; Hut 8 Mining Corp; HashChain Technology, Inc; MGT Capital Investments, Inc; DPW Holdings, Inc; Layer1 Technologies,
LLC; Northern Data AG; Riot Blockchain, Inc. The bitcoin industry is a highly competitive and evolving industry and new competitors
and/or emerging technologies could enter the market and affect our competitiveness in the future. For more information regarding
those risk factors known to us, see the section entitled “Risk Factors” herein.
Car Rental Business
Direct Rental
We plan to rent our cars to both individual
and corporate customers initially from our stores in Shanghai and Zhejiang. The rental price varies based on the rental term which
ranges from one day to one month; the longer the rental term, the lower the price. The daily rental price is the highest, while
the average weekly rental prices and average monthly rental prices are 10% to 20% and 20% to 30% cheaper, respectively, than that
of the daily rental price.
Customers can confirm the time and place
for vehicle delivery and rental term via SMS messages, phone calls or face-to-face communication with our sales personnel. Our
sales personnel will then deliver the vehicle to the customers as designated. The customer, before signing the car rental agreement,
will inspect the vehicle in person and pay the rental fee along with the deposit with their credit card, WeChat Pay or AliPay.
The customer is responsible for the gas, tolls, and any other expenses related to the use of the vehicle during the rental term.
Our operations for our Car Rental business
consists of the following steps:
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1)
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Pre- Rental Preparation: Our asset management
personnel are regularly scheduled to conduct comprehensive inspections, repairs, maintenance, and cleaning of the vehicles.
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2)
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Rental Preparation: Our sales personnel will introduce
to the customer in detail information regarding our car rental conditions, price, distance and time limit, required procedures,
the main contents of the rental contract terms, other rental instructions, and related services.
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3)
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Paperwork Preparation: Individual customers are
required to provide their original identification card, driver’s license, and house or land ownership certificate. Corporate
customers are required to provide their company’s business license, enterprise organization code certificate, and the legal
person’s power of attorney and driver’s license.
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4)
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Signing the Contract: Before signing the contract,
our personnel will repeat to the customer material terms of the rental contract. After filling in the vehicle’s information
and other rental terms, the customer will be required to enter their personal information and sign the contract.
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5)
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Rent and Deposit Prepayment: The prepayment of
rental fees and the deposit must be paid by the customer prior to renting the vehicle. The amount of the prepayment is determined
by the rental duration and price of the vehicle.
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6)
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Delivery Inspection: When the vehicle is delivered
to the customer, the sales personnel will hand over the vehicle key, instructions, and other accessories such as data cables and
mobile phone holders. The sales personnel will then guide the customer through a thorough vehicle inspection including the exterior,
steering system, braking system, lubrication system, coolant, tires, and lights. After the vehicle inspection is completed, the
customer will be asked to fill in an inspection form, of which both the customer and the sales department will retain a copy.
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Rental Service with
Cooperative Sites
In addition to directly
renting to customers, we also rent to other auto rental companies in a similar fashion but at a discounted rate. We and our peer
companies have formed a vehicle pool consisting of all available pre-owned vehicles. In the scenario where a customer places a
rental order with a company which does not currently have the requested vehicle in stock, another company in the vehicle pool possessing
the requested vehicle will rent it to the Company at a discounted price upon its request.
The Company has
reached agreements with several franchisees for cooperative rental sites in China. The franchise joined our Car Rental
business to introduce rental customers. These franchisees were all in the automobile business including Car Rental, Car
Repair and Car Sales. They introduced our Car Rental products, prices and procedures to the customers on site. Since January
2020, due to the COVID-19 breakout in mainland China, most of the potential customers stayed home which put a great negative
impact on the development of the business. Currently, the situation is still uncertain and it might last longer than we
expected.
Starting in the second
quarter of 2020, the Golden Bull USA office has established some leads towards Car Rental Business possibly in the State of Florida,
United States. Although it is still in the investigation and due diligence process, we may be able to commence Car Rental Operations
in the United States in the third quarter of 2020.
Peer to peer lending
business
We provided loan facilitation services on our lending marketplace
before October 2019 when the Pudong Branch of the Shanghai Public Security Bureau announced that it has completed its investigations
against Shanghai Dianniu Internet Finance Information Service Co., Ltd., for suspected illegal collection of public deposits. As
a result, our management determined to temporarily suspend the “peer-to-peer” lending business from the last quarter
of 2019. As of the date of this report, the final outcome of investigation was still not published and the impact on our financial
statements could not be estimated. Management and board of directors is still in consideration of continuing operation utilizing
the existing platform and technology in a different manner consistent with PRC regulation.
We generated revenues
primarily from transaction fees and management fees, both of which were charged to borrowers for our services. Our revenues totaled
approximately $4.6 million, $7.9 million and $7.0 million for the years ended December 31, 2019, 2018 and 2017.
Employees
For the year ended December
31, 2019, we decreased our headcount by 28 persons from 91 to 63 headcounts, mostly in our risk management and sales department
resulting from temporary suspension of our peer-to-peer lending business.
As of December 31,
2019, we had a total of 63 employees, all of which employees were either based in Shanghai, or located in garages outside of Shanghai
for the purpose of administering the automobiles used as collateral for the loans we facilitate. The following table sets forth
the breakdown of our employees as of December 31, 2019 by function:
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Number of Employees
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|
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%
of Total
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Function
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|
|
|
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Technology and Development
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3
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4.76
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%
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Risk Management
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4
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6.35
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%
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Operations, Sales and Marketing
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|
|
47
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74.60
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%
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General and Administrative
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|
|
9
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|
|
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14.29
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%
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|
|
|
|
|
|
|
|
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Total
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|
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63
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|
|
|
100
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%
|
As required by PRC
regulations, we participate in various government statutory employee benefit plans, including social insurance funds, namely a
pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a
maternity insurance plan, and a housing provident fund. We are required under PRC law to make contributions to employee benefit
plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified
by the local government from time to time. As of the date of this report, we have made adequate employee benefit payments. However,
if we were found by the relevant authorities that we failed to make adequate payment, we may be required to make up the contributions
for these plans as well as to pay late fees and fines. See “Item 3.D. Risk Factors — Risks Related to Doing Business
in China — Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject
us to penalties.”
We enter into standard
labor and confidentiality agreements with our employees. We believe that we maintain a good working relationship with our employees,
and we have not experienced any major labor disputes.
Insurance
We provide social security
insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees.
We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain product liability
insurance or key-man insurance. We consider our insurance coverage to be sufficient for our business operations in China.
Legal Proceedings
We are currently not
a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative
claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding,
regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s
time and attention.
Regulations
This section sets forth
a summary of the most significant rules and regulations that affect our business activities in China.
Regulations Relating to Foreign Investment
The Draft PRC Foreign Investment Law
In January 2015, the
MOFCOM published a discussion draft of the proposed Foreign Investment Law for public review and comments. The draft law purports
to change the existing “case-by-case” approval regime to a “filing or approval” procedure for foreign investments
in China. The State Council will determine a list of industry categories that are subject to special administrative measures, which
is referred to as a “negative list,” consisting of a list of industry categories where foreign investments are strictly
prohibited, or the “prohibited list” and a list of industry categories where foreign investments are subject to certain
restrictions, or the “restricted list.” Foreign investments in business sectors outside of the “negative list”
will only be subject to a filing procedure, in contrast to the existing prior approval requirements, whereas foreign investments
in any industry categories that are on the “restricted list” must apply for approval from the foreign investment administration
authority.
The draft for the first
time defines a foreign investor not only based on where it is incorporated or organized, but also by using the standard of “actual
control.” The draft specifically provides that entities established in China, but “controlled” by foreign investors
will be treated as FIEs. Once an entity is considered to be an FIE, it may be subject to the foreign investment restrictions in
the “restricted list” or prohibitions set forth in the “prohibited list.” If an FIE proposes to conduct
business in an industry subject to foreign investment restrictions in the “restricted list,” the FIE must go through
a market entry clearance by the MOFCOM before being established. If an FIE proposes to conduct business in an industry subject
to foreign investment prohibitions in the “prohibited list,” it must not engage in the business. However, an FIE that
conducts business in an industry that is in the “restricted list,” upon market entry clearance, may apply in writing
for being treated as a PRC domestic investment if it is ultimately “controlled” by PRC government authorities and its
affiliates and/or PRC citizens. In this connection, “control” is broadly defined in the draft law to cover the following
summarized categories: (i) holding 50% or more of the voting rights of the subject entity; (ii) holding less than 50% of the voting
rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision
making bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent
decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the
subject entity’s operations, financial matters or other key aspects of business operations. According to the draft, variable
interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject
to restrictions on foreign investments. However, the draft law has not taken a position on what actions will be taken with respect
to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled
by Chinese parties.
The draft emphasizes
on the security review requirements, whereby all foreign investments that jeopardize or may jeopardize national security must be
reviewed and approved in accordance with the security review procedure. In addition, the draft imposes stringent ad hoc and periodic
information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and
investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory,
and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant
with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities,
and the persons directly responsible may be subject to criminal liabilities.
In December 2018, the
Standing Committee of the National People’s Congress published a discussion draft of a new proposed Foreign Investment Law,
aiming to replace the major existing laws governing foreign direct investment in China. On January 29, 2019, the discussion draft
with slight revisions, or the New Draft Foreign Investment Law, was submitted for review. Pursuant to the New Draft Foreign Investment
Law, foreign investments shall be subject to the negative list management system. The “negative list”, which is issued
or approved by the State Council, specifies the special management measures for the access of foreign investment in specific areas.
If a foreign investor is found to invest in any prohibited industry in the “negative list”, such foreign investor may
be required to, among other aspects, suspend its investment activities, dispose of its equity interests or assets in the target
companies, and forfeit its income. In addition, if a foreign investor is found to invest in any restricted industry in the “negative
list”, the relevant competent department shall require the foreign investor to take the measures to correct itself.
However, the New Draft
Foreign Investment Law does not mention the “actual control” as regulated in the previous draft and the position to
be taken with respect to existing or future companies with the “variable interest entity” structure. On March 15, 2019,
the Foreign Investment Law of the People’s Republic of China, or the Final Foreign Investment Law, with slight revision,
is finally issued and will become effective on January 1, 2020. Although variable interest entity structures are not included in
the Final Foreign Investment Law, it is uncertain whether any interpretation and implementation of the Final Foreign Investment
Law or new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they
would provide.
When the Final Foreign
Investment Law becomes effective, the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity
Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise
Law, together with their implementation rules and ancillary regulations, will be abolished. The FIEs established in accordance
with the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly
Foreign-invested Enterprise Law before the Final Foreign Investment Law becomes effective, may keep their original organizational
forms for five years after the effectiveness of the Final Foreign Investment Law. See “Risk Factors—Substantial uncertainties
exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it
may impact the viability of our current corporate structure, corporate governance and business operations.”
Industry Catalog Relating to Foreign
Investment
Investment activities
in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, or the Catalog,
which was promulgated and is amended from time to time by the MOFCOM and the National Development and Reform Commission. Industries
listed in the Catalog are divided into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalog
are generally deemed as constituting a fourth “permitted” category. Establishment of wholly foreign-owned enterprises
is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint
ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition,
restricted category projects are subject to higher-level government approvals. Foreign investors are not allowed to invest in industries
in the prohibited category. Industries not listed in the Catalog are generally open to foreign investment unless specifically restricted
by other PRC regulations.
Our PRC subsidiary
is mainly engaged in providing investment and financing consultations and technical services, which fall into the “encouraged”
or “permitted” category under the Catalog. Our PRC subsidiary has obtained all material approvals required for its
business operations. However, industries such as value-added telecommunication services (except e-commerce), including Internet
information services, are restricted from foreign investment. We provide the value-added telecommunication services that are in
the “restricted” category through our consolidated variable interest entities.
Foreign Investment in Value-Added
Telecommunication Services
The Provisions on Administration
of Foreign Invested Telecommunications Enterprises promulgated by the State Council in December 2001 and subsequently amended in
September 2008 prohibit a foreign investor from owning more than 50% of the total equity interest in any value-added telecommunications
service business in China and require the major foreign investor in any value-added telecommunications service business in China
have a good and profitable record and operating experience in this industry. The Guidance Catalog of Industries for Foreign Investment
amended in 2017 allows a foreign investor to own more than 50% of the total equity interest in an E-Commerce business.
In July 2006, the Ministry
of Information Industry, the predecessor of the MIIT, issued the Circular on Strengthening the Administration of Foreign Investment
in the Operation of Value-added Telecommunications Business, pursuant to which a domestic PRC company that holds an operating license
for value-added telecommunications business, which we refer to as a VATS License, is prohibited from leasing, transferring or selling
the VATS License to foreign investors in any form and from providing any assistance, including resources, sites or facilities,
to foreign investors that conduct a value-added telecommunications business illegally in China. Further, the domain names and registered
trademarks used by an operating company providing value-added telecommunications services must be legally owned by that company
or its shareholders. In addition, the VATS License holder must have the necessary facilities for its approved business operations
and to maintain the facilities in the regions covered by its VATS License.
Regulations on Illegal Fund-Raising
Raising funds by entities
or individuals from the general public must be conducted in strict compliance with applicable PRC laws and regulations to avoid
administrative and criminal liabilities. The Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business
Operations promulgated by the State Council in July 1998, and the Notice on Relevant Issues Concerning the Penalty on Illegal Fund-Raising
issued by the General Office of the State Council in July 2007, explicitly prohibit illegal public fund-raising. The main features
of illegal public fund-raising include: (i) illegally soliciting and raising funds from the general public by means of issuing
stocks, bonds, lotteries or other securities without obtaining the approval of relevant authorities, (ii) promising a return of
interest or profits or investment returns in cash, properties or other forms within a specified period of time, and (iii) using
a legitimate form to disguise the unlawful purpose.
To further clarify
the criminal charges and punishments relating to illegal public fund-raising, the Supreme People’s Court promulgated the
Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, or the
Illegal Fund-Raising Judicial Interpretations, which came into force in January 2011. The Illegal Fund-Raising Judicial Interpretations
provide that a public fund-raising will constitute a criminal offense related to “illegally soliciting deposits from the
public” under the PRC Criminal Law, if it meets all the following four criteria: (i) the fund-raising has not been approved
by the relevant authorities or is concealed under the guise of legitimate acts; (ii) the fund-raising employs general solicitation
or advertising such as social media, promotion meetings, leafleting and SMS advertising; (iii) the fundraiser promises to repay,
after a specified period of time, the capital and interests, or investment returns in cash, properties in kind and other forms;
and (iv) the fund-raising targets at the general public as opposed to specific individuals. An illegal fund-raising activity will
be fined or prosecuted in the event that it constitutes a criminal offense. Pursuant to the Illegal Fund-Raising Judicial Interpretations,
an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits from the general public
or illegally solicits deposits in disguised form (i) with the amount of deposits involved exceeding RMB1,000,000 (US$157,342),
(ii) with over 150 fund-raising targets involved, or (iii) with the direct economic loss caused to fund-raising targets exceeding
RMB500,000 (US$78,671), or (iv) the illegal fund-raising activities have caused baneful influences to the public or have led to
other severe consequences. An individual offender is also subject to criminal liabilities but with lower thresholds. In addition,
an individual or an entity who has aided in illegal fund-raising from the general public and charges fees including but not limited
to agent fees, rewards, rebates and commission, constitute an accomplice of the crime of illegal fund-raising. In accordance with
the Opinions of the Supreme People’s Court, the Supreme People’s Procurator and the Ministry of Public Security on
Several Issues concerning the Application of Law in the Illegal Fund-Raising Criminal Cases, the administrative proceeding for
determining the nature of illegal fund-raising activities is not a prerequisite procedure for the initiation of criminal proceeding
concerning the crime of illegal fund-raising, and the administrative departments’ failure in determining the nature of illegal
fund-raising activities does not affect the investigation, prosecution and trial of cases concerning the crime of illegal fund-raising.
We have taken measures
to avoid conducting any activities that are prohibited under the illegal-funding related laws and regulations. We act as a platform
for borrowers and lenders and are not a party to the loans facilitated through our platform. In addition, we do not directly receive
any funds from lenders in our own accounts as funds loaned through our platform are deposited into and settled by a third-party
custody account managed by Bank of Shangrao, a reputable third-party service provider. In November 2018, we finished the transition
from the custodian system of Bank of Shanghai to the custodian system of Bank of Shangrao. Since then, we have cooperated only
with Bank of Shangrao as our custodian for better compliance, as it was one of the twenty-five banks that passed the test of individual
network lending funds depository system, according to a report released by The National Internet Finance Association of China (NIFA)
on September 20, 2018.
Anti-money Laundering Regulations
The PRC Anti-money
Laundering Law, which became effective in January 2007, sets forth the principal anti-money laundering requirements applicable
to financial institutions as well as non-financial institutions with anti-money laundering obligations, including the adoption
of precautionary and supervisory measures, establishment of various systems for client identification, retention of clients’
identification information and transactions records, and reports on large transactions and suspicious transactions. According to
the PRC Anti-money Laundering Law, financial institutions subject to the PRC Anti-money Laundering Law include banks, credit unions,
trust investment companies, stock brokerage companies, futures brokerage companies, insurance companies and other financial institutions
as listed and published by the State Council, while the list of the non-financial institutions with anti-money laundering obligations
will be published by the State Council. The PBOC and other governmental authorities issued a series of administrative rules and
regulations to specify the anti-money laundering obligations of financial institutions and certain non-financial institutions,
such as payment institutions. However, the State Council has not promulgated the list of the non-financial institutions with anti-money
laundering obligations.
The Guidelines jointly
released by ten PRC regulatory agencies in July 2015, purport, among other things, to require internet finance service providers,
including online peer-to-peer lending platforms, to comply with certain anti-money laundering requirements, including the establishment
of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information
and transaction records, and the provision of assistance to the public security department and judicial authority in investigations
and proceedings in relation to anti-money laundering matters. The PBOC will formulate implementing rules to further specify the
anti-money laundering obligations of internet finance service providers.
In cooperation with
our partnering custody banks and payment companies, we have adopted various policies and procedures, such as internal controls
and “know-your-customer” procedures, for anti-money laundering purposes. However, as the implementing rules of the
Guidelines have not been published, there is uncertainty as to how the anti-money laundering requirements in the Guidelines will
be interpreted and implemented, and whether online peer-to-peer lending service providers like us must abide by the rules and procedures
set forth in the PRC Anti-money Laundering Law that are applicable to non-financial institutions with anti-money laundering obligations.
We cannot assure you that our existing anti-money laundering policies and procedures will be deemed to be in full compliance with
any anti-money laundering laws and regulations that may become applicable to us in the future.
Regulations on Internet Information
Security
Internet information in
China is also regulated and restricted from a national security standpoint. The National People’s Congress, China’s
national legislative body, has enacted the Decisions on Maintaining Internet Security, which may subject violators to criminal
punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate
politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual
property rights. The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among
other things, result in a leakage of state secrets or a spread of socially destabilizing content. If an internet information service
provider violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license
and temporarily suspend its websites.
In addition, the Guidelines
jointly released by ten PRC regulatory agencies in July 2015 purport, among other things, to require internet finance service providers,
including peer-to-peer lending platforms, to improve technology security standards, and safeguard customer and transaction information.
The PBOC and other relevant regulatory authorities will jointly adopt the implementing rules and technology security standards.
Regulations on Privacy Protection
In recent years, PRC
government authorities have enacted laws and regulations on internet use to protect personal information from any unauthorized
disclosure. Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in
December 2011, an Internet information service provider may not collect any user personal information or provide any such information
to third parties without the consent of a user. An Internet information service provider must expressly inform the users of the
method, content and purpose of the collection and processing of such user personal information and may only collect such information
necessary for the provision of its services. An Internet information service provider is also required to properly maintain the
user personal information, and in case of any leak or likely leak of the user personal information, the Internet information service
provider must take immediate remedial measures and, in severe circumstances, make an immediate report to the telecommunications
regulatory authority. In addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the
Standing Committee of the National People’s Congress in December 2012 and the Order for the Protection of Telecommunication
and Internet User Personal Information issued by the MIIT in July 2013, any collection and use of user personal information must
be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified
purposes, methods and scopes. An Internet information service provider must also keep such information strictly confidential, and
is further prohibited from divulging, tampering or destroying of any such information, or selling or providing such information
to other parties. An Internet information service provider is required to take technical and other measures to prevent the collected
personal information from any unauthorized disclosure, damage or loss. Any violation of these laws and regulations may subject
the Internet information service provider to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation
of filings, closedown of websites or even criminal liabilities. The Guidelines jointly released by ten PRC regulatory agencies
in July 2015 also prohibit internet finance service providers, including online peer-to-peer lending platforms, from illegally
selling or disclosing customers’ personal information. The PBOC and other relevant regulatory authorities will jointly adopt
the implementing rules. Pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the National People’s
Congress in August 2015 and becoming effective in November, 2015, any internet service provider that fails to fulfill the obligations
related to internet information security administration as required by applicable laws and refuses to rectify upon orders, shall
be subject to criminal penalty for the result of (i) any dissemination of illegal information in large scale; (ii) any severe effect
due to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe situation,
and any individual or entity that (i) sells or provides personal information to others in a way violating the applicable law, or
(ii) steals or illegally obtain any personal information, shall be subject to criminal penalty in severe situation.
In operating our online
consumer finance marketplace, we collect certain personal information from borrowers and lenders, and also need to share the information
with our business partners such as third-party online payment companies and loan collection service providers for the purpose of
facilitating loan transactions between borrowers and lenders over our marketplace. We have obtained consent from the borrowers
and lenders on our marketplace to collect and use their personal information, and have also established information security systems
to protect the user information and privacy. However, as the implementing rules of the Guidelines have not been published, there
is uncertainty as to how the requirements for protecting customers’ personal information in the Guidelines will be interpreted
and implemented. We cannot assure you that our existing policies and procedures will be deemed to be in full compliance with any
laws and regulations that may become applicable to us in the future.
Regulations Relating to Dividend
Withholding Tax
Pursuant to the Enterprise
Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the
PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment,
it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between Mainland
China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding
tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard
rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State
Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81,
a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax:
(i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (ii)
it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends.
There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations.
In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy
Treatments under Tax Treaties, or Circular 60, which became effective on November 1, 2015. Circular 60 provides that non-resident
enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax
rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed
criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and
supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities.
Regulations on Foreign Currency Exchange
The principal regulations
governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August
2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments
and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE
by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities
is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as
direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities
outside of China. On February 28, 2015, the SAFE promulgated the Notice on Further Simplifying and Improving the Administration
of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015,
instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment
from SAFE, entities and individuals will be required to apply for such foreign exchange registrations from qualified banks. The
qualified banks, under the supervision of the SAFE, will directly examine the applications and conduct the registration.
In August 2008, SAFE
issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement
of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested
enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142
provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used
for purposes within the business scope approved by the applicable government authority and may not be used for equity investments
within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency
registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval,
and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations
may result in severe monetary or other penalties.
In November 2012, SAFE
promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment,
which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various
special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee
accounts, the reinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits
and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE,
and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition,
SAFE promulgated another circular in May 2013, which specifies that the administration by SAFE or its local branches over direct
investment by foreign investors in the PRC must be conducted by way of registration and banks must process foreign exchange business
relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.
In July 2014, SAFE
issued SAFE Circular 36, which purports to reform the administration of settlement of the foreign exchange capitals of foreign-invested
enterprises in certain designated areas on a trial basis. Under the pilot program, some of the restrictions under SAFE Circular
142 will not apply to the settlement of the foreign exchange capitals of the foreign-invested enterprises established within the
designated areas and the enterprises mainly engaging in investment are allowed to use its RMB capital converted from foreign exchange
capitals to make equity investment. However, our PRC subsidiary is not established within the designated areas. On March 30, 2015,
the SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 came into force and replaced both Circular 142 and
Circular 36 on June 1, 2015. Circular 19 allows foreign-invested enterprises to make equity investments by using RMB fund converted
from foreign exchange capital. However, Circular 19 continues to, prohibit foreign-invested enterprises from, among other things,
using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing entrusted loans
or repaying loans between non-financial enterprises.
Regulations on Foreign Exchange Registration
of Overseas Investment by PRC Residents
SAFE issued SAFE Circular
on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose
Vehicles, or SAFE Circular 37, that became effective in July 2014, replacing the previous SAFE Circular 75. SAFE Circular 37 regulates
foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore
investment and financing or conduct round trip investment in China. Under SAFE Circular 37, a SPV refers to an offshore entity
established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or
making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment”
refers to direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises
to obtain the ownership, control rights and management rights. SAFE Circular 37 provides that, before making contribution into
an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch. SAFE promulgated
the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February
2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register
with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity
established for the purpose of overseas investment or financing.
PRC residents or entities
who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before
the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks.
An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change
of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount,
transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE
Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of the foreign-invested
enterprise that is established through round-trip investment, may result in restrictions being imposed on the foreign exchange
activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds
from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from
the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration
regulations. We are aware that our PRC resident beneficial owners subject to these registration requirements. Mr. Erxin Zeng and
Mr. Xiaohui Liu have all fulfilled the registration under relevant SAFE regulations.
Regulations on Regulations on car
rental under PRC Laws
Regulations applicable
to all automotive vehicles generally apply to rental vehicles. According to the Road Traffic Safety Law promulgated by the NPC
Standing Committee in October 2003, which was amended in December 2007 and April 2011, respectively, all automotive vehicles are
required to be registered with relevant local administration authorities. Vehicle registration certificates, vehicle plates and
vehicle licenses shall be obtained from the same authorities, and the compulsory traffic accident insurance shall be purchased
for each vehicle.
There are additional
requirements for rental vehicles. In most cities, the usage stated in the vehicle licenses of such vehicles shall be registered
as rental or operational. Some cities require additional licenses or vehicle plates for such vehicles. For instance, in Shanghai,
Nanchang, Suzhou, Wuxi, Shenyang, Dalian, Wuhan and Kunming, a special transport license or passenger rental vehicle license is
required for each rental vehicle. In Shanghai, special vehicle plates shall be obtained for rental vehicles. In Beijing, Guangzhou,
Hangzhou and Chongqing, filing with relevant local authority is required for rental vehicles. However, local practices differ and
some of these requirements are not strictly implemented or may be modified or suspended by the local administration authorities
in practice. If we fail to maintain such licenses needed for operation, our business may be adversely affected.
As the car rental industry
is at an early stage of development in China, the legislation of the car rental industry continues to evolve. The MOT and the NPC,
the predecessor of NDRC, promulgated the Interim Rules on Administration of Car Rental Industry in 1998, which was abolished
in 2007. Since then, there have been no national laws and regulations in place to specifically regulate the car rental industry
in China except the Notice on Promoting the Healthy Development of Car Rental Industry, or the 2011 MOT Notice, promulgated in
April 2011 by MOT. The 2011 MOT Notice sets forth general guidelines for the car rental industry in China and requires local
government authorities to (i) establish and improve local rules and regulations on car rental business, (ii) promptly
formulate local development plans for the car rental industry, (iii) encourage large and well-managed car rental companies
of good reputation to set up branches and establish national or regional networks without any restrictions due to local protectionism,
(iv) enhance the administration of the car rental business, including requirements to obtain and carry a valid permit or license
for each rental car, and prohibitions of car rental companies from engaging in road transportation businesses without appropriate
approval, (v) encourage car rental companies to innovate and develop new types of car rental services, (vi) create a
favorable environment for the development of the car rental industry, and (vii) enhance the administration and supervision
of the car rental industry.
The Road Transportation
Regulation promulgated by the State Council in 2004, and amended in 2012 and 2016, regulates road transportation businesses (including
road passenger transportation business and road freight transportation business) and other business operations related to road
transportation (including operations of transportation terminals (sites), vehicle maintenance and repair businesses and training
of drivers). However, the Road Transport Regulation does not include any provisions relating to car rental businesses.
The Administrative
Rules on Urban Taxis promulgated by the Ministry of Construction and the MPS, which became effective in 1998, regulates the
planning, operations, administration and services related to urban taxis, which was abolished in March 2016. MOT promulgated
the Parade Taxi Management Service Regulations in August 2016, which was implemented on November 1, 2016. According to
such regulations, “Taxi” is an integral part of the city’s comprehensive transportation system and supplement
of urban public transportation and providing personalized transportation services to the public”. “Taxi provider”
should choose a reasonable route according to the destination specified by the passenger and use metering equipment as required
to protect passenger’s rights.
The regulatory distinctions
between car rental businesses and road transportation businesses or taxi businesses are not clear. As a result, local government
authorities in China have imposed different requirements on the operating entities and/or vehicles that are involved in car rental
businesses in the respective province or city.
Regulations on limitation of use
and purchase of motor vehicles
Certain cities in China
have issued local regulations or rules to control the number of motor vehicles. For example, Beijing imposes an annual quota
on the issuance of new vehicle license plates. Potential motor vehicle purchasers need to meet specific criteria and enter into
a monthly draw. Only candidates who have been allocated a plate in the draw can apply to have their motor vehicles registered with
the local vehicle administration. Shanghai is implemented an auction system for the issuance of new vehicle license plates. Under
this system, each applicant is required to submit a “blind” bid for a vehicle license plate. Only successful bidders
can apply to have their motor vehicles registered with the local vehicle administration. There are similar policies that restrict
the issuance of new vehicle license plates in Guangzhou, Tianjin, Hangzhou and Guiyang.
In addition, some cities
in China such as Beijing, Shanghai, Shijiazhuang, Nanjing, Wuhan, Harbin, Jinan, Nanchang, Chengdu, Guiyang, Hangzhou, Changchun,
Lanzhou, Guangzhou, Tianjin, Linfen, Langfang, Baoding and Dalian also have promulgated regulations or rules to prohibit vehicles
with certain license plate from driving on road. For instance, in Beijing vehicles with restricted tail number of license plates
are not allowed to drive within five rings road (excluding the fifth ring road) during 7:00 am to 20:00 pm each workday, and the
vehicles with non-Beijing license plates shall also be subject to such restrictions. In Shanghai vehicles bearing non-Shanghai
license plates are not allowed on certain roads during specified rush hours on workdays.
Regulations on Stock Incentive Plans
SAFE promulgated the
Stock Option Rules in February 2012, replacing the previous rules issued by SAFE in March 2007. Under the Stock Option Rules and
other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas publicly-listed company
are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive
plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly listed company
or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect
to the stock incentive plan on behalf of the participants. In addition, the PRC agent is required to amend the SAFE registration
with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or other material
changes. The PRC agent must, on behalf of the PRC residents who have the right to exercise the employee share options, apply to
SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’
exercise of the employee share options. The foreign exchange proceeds received by the PRC residents from the sale of shares under
the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts
in the PRC opened by the PRC agents before distribution to such PRC residents.
Regulations on Dividend Distribution
Under our current corporate
structure, we may rely on dividend payments from WFOE, which is a wholly foreign-owned enterprise incorporated in China, to fund
any cash and financing requirements we may have. The principal regulations governing distribution of dividends of foreign-invested
enterprises include the Foreign-Invested Enterprise Law, as amended in October 2000, and its implementation rules. Under these
laws and regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated after-tax profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in
China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve
funds until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign-owned companies may, at
their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds.
These reserves are not distributable as cash dividends.
Regulations Relating to Employment
The PRC Labor Law and
the Labor Contract Law require that employers must execute written employment contracts with full-time employees. If an employer
fails to enter into a written employment contract with an employee within one year from the date on which the employment relationship
is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay
the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment
of the employment relationship to the day prior to the execution of the written employment contract. All employers must compensate
their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract
Law may result in the imposition of fines and other administrative sanctions, and serious violations may result in criminal liabilities.
Enterprises in China
are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely
a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity
insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries,
including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they
operate their businesses or where they are located. Dianniu has been participating in employee benefit plans required by PRC laws
and regulations and has made adequate contribution to such plans as of the date of this report. If we fail to make adequate contributions
to various employee benefit plans in the future, we may be subject to fines and other administrative sanctions under PRC law.
Organizational Structure
We began our operations
in China through Shanghai Dianniu Internet Finance Information Service Co. Ltd., which was formed in November 2015. In early 2017,
we incorporated Golden Bull Limited under the laws of the Cayman Islands as our offshore holding company under our former name
Point Cattle International Limited. In March 2017, we established our wholly owned Hong Kong subsidiary, Point Cattle Group Company
Limited, which formed Shanghai Fuyu Information and Technology Co., Ltd., its wholly owned subsidiary in PRC (the “WFOE”).
Through the contractual arrangements between the WFOE, Dianniu and the majority shareholders of Dianniu, we control 93.2% of Dianniu.
These contractual arrangements allow us to effectively control and derive 93.2% of the economic interest from Dianniu.
In addition to Dianniu,
the WFOE has entered into a series of contracts with Shanghai Baoxun Advertisement Design Co., Ltd. (“Baoxun”), a company
formed in February 2017 under the laws of PRC, and Baoxun’s shareholders. Baoxun currently does not have any operations.
In 2018, Dianniu formed
two wholly owned subsidiaries, Shanghai Youwang Vehicle Rental Limited (“Shanghai Youwang”) and Shanghai Xingjiuhao
Network Technology Limited (“Shanghai Xingjiuhao” or the “Xingjiuhao”) under the laws of PRC. Shanghai
Youwang is expected to engage in vehicle sales, vehicle rental, providing consultation and services in the field of automotive
technology. Xingjiuhao is expected to engage in production and sales for Internet of Things technology and technical consulting.
Neither Shanghai Youwang nor Xingjiuhao currently have any operations as of the date of this report.
On June 3, 2019, Golden
Bull USA Inc. was incorporated in the State of New York, which is a wholly- owned subsidiary of Golden Bull Limited. Golden Bull
USA is our principal office and we plan to develop our car rental business through Golden Bull USA Inc..
On April 8, 2020, Golden
Bull Limited entered into an Instrument of Transfer with Mr. Ching Yeh to acquire his 100% of the ownership interest (10,000 shares)
in XMAX Chain Limited (“XMAX”) for HKD 10,000 (HKD 1.00 per one share). After the acquisition, XMAX became a wholly
owned subsidiary of Golden Bull Limited. XMAX is a Hong Kong company, engaging bitcoin mining business and was incorporated on
March 21, 2018.
Organizational Structure Chart
The following diagram
illustrates our corporate structure, including our subsidiaries and consolidated affiliated entities, as of the date of this report:
Variable Interest Entity Arrangements
In establishing our
business, we have used a variable interest entity, or VIE, structure. In the PRC, investment activities by foreign investors are
principally governed by the Guidance Catalog of Industries for Foreign Investment, or the Catalog, which was promulgated and is
amended from time to time by the PRC Ministry of Commerce, or MOFCOM, and the PRC National Development and Reform Commission, or
NDRC. The Catalog divides industries into three categories: encouraged, restricted and prohibited. Industries not listed in the
Catalog are generally open to foreign investment unless specifically restricted by other PRC regulations. Our Company and the WFOE
are considered as foreign investors or foreign invested enterprises under PRC law. The provision of internet financing services
providing value-add telecommunications business, which we previously conducted through our VIE, is within the category under the
Catalog in which foreign investment is currently restricted, which makes a VIE structure necessary. In addition, we intend to centralize
our management and operation in the PRC without being restricted to conduct certain business activities which are important for
our current or future business but are restricted or might be restricted in the future. As such, we believe the agreements between
the WFOE and Dianniu are essential for our business operation. These contractual arrangements with Dianniu and its shareholders
enable us to exercise effective control over Dianniu and hence consolidate its financial results as our VIE.
In our case, the WFOE
effectively assumed management of the business activities of Dianniu through a series of agreements which are referred to as the
VIE Agreements. The VIE Agreements are comprised of a series of agreements and amendments to some of the agreements, including
Equity Pledge Agreements and an Amendment, a Technical Consultation and Service Agreement and an Amendment to it, a Business Cooperation
Agreement and an Amendment to it, Equity Option Agreements and an Amendment, and Voting Rights Proxy and Finance Supporting Agreements
and an Amendment. Through the VIE Agreements, the WFOE has the right to advise, consult, manage and operate Dianniu for an annual
consulting service fee in the amount of 93.2% of Dianniu’s net profit. Three Shareholders of Dianniu Erxin Zeng, Xiaohui
Liu and Qian Lai Qian Wang (Shanghai) Equity Investment Fund Management Co., Ltd. (the “Dianniu Participating Shareholders”)
have each pledged all of their right, title and equity interests in Dianniu as security for the WFOE to collect consulting services
fees provided to Dianniu through the Equity Pledge Agreement. In order to further reinforce the WFOE’s rights to control
and operate Dianniu, the Dianniu Participating Shareholders have granted the WFOE an exclusive right and option to acquire all
of their equity interests in Dianniu through the Equity Option Agreement.
The material terms
of the VIE Agreements with Dianniu are as follows:
Technical Consultation
and Service Agreement. Pursuant to the Technical Consultation and Service Agreement between WFOE and Dianniu dated June 8,
2017, as amended by the Amendment to Technical Consultation and Service Agreement between WFOE and Dianniu dated December 4, 2017,
WFOE has the exclusive right to provide consultation and services to Dianniu in the area of fund, human, technology and intellectual
property rights. For such services, Dianniu agrees to pay service fees in the amount of 93.2% of its net income and also has the
obligation to absorb 93.2% of Dianniu’s losses. WFOE exclusively owns any intellectual property rights arising from the performance
of this Technical Consultation and Service Agreement. The amount of service fees and payment term can be amended by the WFOE and
Dianniu’s consultation and the implementation. The term of the Technical Consultation and Service Agreement is 20 years.
WFOE may terminate this agreement at any time by giving 30 day’s written notice to Dianniu.
Business Cooperation
Agreement. Pursuant to the Business Cooperation Agreement between WFOE and Dianniu dated June 8, 2017, as amended by the Amendment
to Business Cooperation Agreement between WFOE and Dianniu dated December 4, 2017, WFOE has the exclusive right to provide Dianniu
with technical support, business support and related consulting services, including but not limited to technical services, business
consultations, equipment or property leasing, marketing consultancy, system integration, product research and development, and
system maintenance. In exchange, WFOE is entitled to a service fee that equals to 93.2% of the net income of Dianniu determined
by U.S. GAAP, the service fees may be adjusted based on the services rendered by WFOE in that month and the operational needs of
Dianniu. WFOE also exclusively owns any intellectual property rights arising from the performance of the Business Cooperation Agreement.
The Business Cooperation Agreement shall remain effective unless it is terminated or is compelled to terminate under applicable
PRC laws and regulations. WFOE may terminate this Business Cooperation Agreement at any time by giving 30 days’ prior written
notice to Dianniu.
Equity Pledge Agreement.
Pursuant to the Equity Pledge Agreements among WFOE, Dianniu and Dianniu Participating Shareholders dated June 8, 2017 and the
Amendment to Equity Pledge Agreement among WFOE, Dianniu and Xiaohui Liu dated December 4, 2017, Dianniu Participating Shareholders
pledged all of their equity interests in Dianniu to WFOE to guarantee Dianniu’s performance of relevant obligations and indebtedness
under the Technical Consultation and Service Agreement and other control agreements (“Control Agreement”). In addition,
Dianniu Participating Shareholders have completed the registration of the equity pledge under the Equity Pledge Agreement with
the competent local authority. If Dianniu breaches its obligation under the Control Agreement, WFOE, as pledgee, will be entitled
to certain rights, including the right to dispose the pledged equity interests in order to recover these breached amounts. The
Pledge shall be continuously valid until all of the Dianniu Participating Shareholders are no longer shareholders of Dianniu or
the satisfaction of all its obligations by Dianniu under the Control Agreements.
Equity Option Agreement.
Pursuant to the Equity Option Agreements among WFOE, Dianniu and Dianniu Participating Shareholders dated June 8, 2017 and the
Amendment to Equity Option Agreement among WFOE, Dianniu and Xiaohui Liu dated December 4, 2017, WFOE has the exclusive right to
require each Dianniu Participating Shareholder to fulfill and complete all approval and registration procedures required under
PRC laws for WFOE to purchase, or designate one or more persons to purchase, each Dianniu Participating Shareholder’s equity
interests in Dianniu, once or at multiple times at any time in part or in whole at WFOE’s sole and absolute discretion. The
purchase price shall be the lowest price allowed by PRC laws. The Equity Option Agreements shall remain effective until all the
equity interest owned by each Dianniu Participating Shareholder has been legally transferred to WFOE or its designee(s).
Voting Rights Proxy
and Financial Supporting Agreement. Pursuant to the Voting Rights Proxy and Financial Supporting Agreements among WFOE, Dianniu
and Dianniu Participating Shareholders dated June 8, 2017 and pursuant to the Amendment to Voting Rights Proxy and Financial Supporting
Agreement among WFOE, Dianniu and Xiaohui Liu dated December 4, 2017, each Dianniu Participating Shareholder irrevocably appointed
WFOE or WFOE’s designee to exercise all his or her rights as Dianniu Participating Shareholders under the Articles of Association
of Dianniu, including but not limited to the power to exercise all shareholder’s voting rights with respect to all matters
to be discussed and voted in the shareholders’ meeting of Dianniu. The term of the Voting Rights Proxy and Financial Supporting
Agreements is 20 years.
The WFOE has also entered
into a series of VIE agreements with Baoxun, and Baoxun’s shareholders, upon the same materials terms as described above.
Baoxun currently does not have any operations. However, we expect that in the future Baoxun will engage in the design and production
of online advertisement and marketing survey services for online marketplaces. Social survey, including marketing survey service,
is within the category in which foreign investment is restricted pursuant to the Catalog.
The material terms
of the VIE Agreements with Baoxun are as follows:
Technical Consultation
and Service Agreement. Pursuant to the Technical Consultation and Service Agreement between WFOE and Baoxun dated June 8, 2017,
WFOE has the exclusive right to provide consultation and technology services to Baoxun in the areas of finance, human resource,
technology and intellectual property rights. For such services, Baoxun agrees to pay an annual service fee in the amount of 100%
of its net income as determined in accordance with U.S. GAAP and a quarterly flowing charge and also has the obligation to absorb
100% of Baoxun’s net loss determined in accordance with U.S. GAAP. WFOE exclusively owns any intellectual property rights
arising from the performance of this Technical Consultation and Service Agreement. The service fees can be adjusted by the parties
upon the request of the WFOE. The term of the Technical Consultation and Service Agreement is 20 years. WFOE may terminate this
agreement at any time by giving 30 days’ written notice to Baoxun.
Business Cooperation
Agreement. Pursuant to the Business Cooperation Agreement between WFOE and Baoxun dated June 8, 2017, WFOE has the exclusive
right to provide Baoxun with technical support, business support and related consulting services, including but not limited to
technical services, business consultation, equipment and property leasing, marketing consulting, system integration, product research
and development, and system maintenance. In exchange, WFOE is entitled to a service fee that equals to 100% of the net income of
Baoxun determined by U.S. GAAP and absorb all the losses of Baoxun determined in accordance with U.S. GAAP. The service fees may
be adjusted based on the services rendered by WFOE in that month and the operational needs of Baoxun. WFOE also exclusively owns
any intellectual property rights arising from the performance of the Business Cooperation Agreement. The Business Cooperation Agreement
shall maintain effective unless it is terminated by WFOE upon 30 days’ written notice or in accordance with applicable PRC
laws and regulations. WFOE may terminate this Business Cooperation Agreement at any time by giving 30 days’ prior written
notice to Baoxun.
Equity Pledge Agreements.
Pursuant to the Equity Pledge Agreements among WFOE, Baoxun and all the shareholders of Baoxun (“Baoxun Shareholders”)
dated June 8, 2017, Baoxun Shareholders pledged all of their equity interests in Baoxun to WFOE to guarantee Baoxun’s performance
of its obligations under the Technical Consultation and Service Agreement and other control agreements (“Baoxun Control Agreements”).
The equity pledge shall become effective on such date when the pledge has been registered with relevant local authority. Baoxun
Shareholders have completed the registration of the equity pledge with the competent local authority. If Baoxun breaches its obligation
under the Baoxun Control Agreement, WFOE, as pledgee, will be entitled to certain rights, including the right to dispose the pledged
equity interests. The Equity Pledge Agreement is valid until the satisfaction of all its obligations by Baoxun under the Baoxun
Control Agreements.
Equity Option Agreements.
Pursuant to the Equity Option Agreements among WFOE, Baoxun and Baoxun Shareholders dated June 8, 2017, for a consideration of
RMB 1, WFOE is granted an option to require each Baoxun Shareholder to fulfill and complete all approval and registration procedures
required under PRC laws for WFOE or its designee to purchase Baoxun Shareholders’ equity interests in Baoxun, once or at
multiple times at any time in part or in whole at WFOE’s sole and absolute discretion. The purchase price shall be the lowest
price allowed by PRC laws. The Equity Option Agreement shall remain effective until all the equity interest owned by each Baoxun
Shareholder has been legally transferred to WFOE or its designee(s).
Voting Rights Proxy
and Financial Supporting Agreements. Pursuant to the Voting Rights Proxy and Financial Supporting Agreements among WFOE, Baoxun
and Baoxun Shareholders dated June 8, 2017, each Baoxun Shareholder irrevocably appointed WFOE or its designee to exercise all
his or her rights as Baoxun Shareholders under the Articles of Association of Baoxun, including but not limited to the power to
exercise all shareholder’s voting rights with respect to all matters to be discussed and voted in the shareholders’
meeting of Baoxun. The Baoxun Shareholders also agree to provide necessary financial support to Baoxun in connection with its operation.
The term of the Voting Rights Proxy and Finance Supporting Agreements is 20 years.
We do not expect that the classification
of either Dianniu or Baoxun under the Catalog will change or either of our VIE entities will be re-classified to a different industry
in the near future.
Property, Plant and Equipment
The principal executive
office is located on leased premise in Flushing, New York, United States. The lease for our principal executive office is effective
until June 30, 2020. The Company has ceased the leasing of Shanghai Office in August 2019 and got a total refund of $106,090 (RMB
733,317) including the deposit of $60,623 (RMB 419,039) and one and a half month rent of $45,467 (RMB 314,278). The Company is
considering opening an office in Hong Kong before the end of 2020 depending on the COVID-19 situation status. We believe that we
will be able to obtain adequate facilities, principally through leasing, to accommodate our future expansion plans.
We believe that our
current property rights are sufficient for our current operations.
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ITEM
10.
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ADDITIONAL
INFORMATION
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10.A. Share Capital
Not Applicable.
10.B. Memorandum and Articles of Association
We are a Cayman Islands
exempted company and our affairs are governed by our memorandum and articles of association and the Companies Law (2016 Revision)
of the Cayman Islands, which we refer to as the Companies Law below.
Dividends. Subject
to any rights and restrictions of any other class or series of shares, our board of directors may, from time to time, declare dividends
on the shares issued and authorize payment of the dividends out of our lawfully available funds. No dividends shall be declared
by the board out of our company except the following:
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“share
premium account,” which represents the excess of the price paid to our company on issue of its shares over the par or “nominal”
value of those shares, which is similar to the U.S. concept of additional paid in capital.
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However, no dividend
shall bear interest against the Company.
Voting Rights. The
holders of our ordinary shares are entitled to one vote per share, including the election of directors. Voting at any meeting of
shareholders is by show of hands unless a poll is demanded. On a show of hands every shareholder present in person or by proxy
shall have one vote. On a poll every shareholder entitled to vote (in person or by proxy) shall have one vote for each share for
which he is the holder. A poll may be demanded by the chairman or one or more shareholders present in person or by proxy holding
not less than fifteen percent of the paid-up capital of the Company entitled to vote. A quorum required for a meeting of shareholders
consists of shareholders who hold at least one-third of our outstanding shares entitled to vote at the meeting present in person
or by proxy. While not required by our articles of association, a proxy form will accompany any notice of general meeting convened
by the directors to facilitate the ability of shareholders to vote by proxy.
Any ordinary resolution
to be made by the shareholders requires the affirmative vote of a simple majority of the votes of the ordinary shares cast in a
general meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes of the ordinary
shares cast. Under Cayman Islands law, some matters, such as amending the memorandum and articles, changing the name or resolving
to be registered by way of continuation in a jurisdiction outside the Cayman Islands, require approval of shareholders by a special
resolution.
There are no limitations
on non-residents or foreign shareholders in the memorandum and articles to hold or exercise voting rights on the ordinary shares
imposed by foreign law or by the charter or other constituent document of our company. However, no person will be entitled to vote
at any general meeting or at any separate meeting of the holders of the ordinary shares unless the person is registered as of the
record date for such meeting and unless all calls or other sums presently payable by the person in respect of ordinary shares in
the Company have been paid.
Winding Up; Liquidation.
Upon the winding up of our company, after the full amount that holders of any issued shares ranking senior to the ordinary
shares as to distribution on liquidation or winding up are entitled to receive has been paid or set aside for payment, the holders
of our ordinary shares are entitled to receive any remaining assets of the Company available for distribution as determined by
the liquidator. The assets received by the holders of our ordinary shares in a liquidation may consist in whole or in part of property,
which is not required to be of the same kind for all shareholders.
Calls on Ordinary
Shares and Forfeiture of Ordinary Shares. Our board of directors may from time to time make calls upon shareholders for any
amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time and
place of payment. Any ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption of Ordinary
Shares. We may issue shares that are, or at its option or at the option of the holders are, subject to redemption on such terms
and in such manner as it may, before the issue of the shares, determine. Under the Companies Law, shares of a Cayman Islands exempted
company may be redeemed or repurchased out of profits of the company, out of the proceeds of a fresh issue of shares made for that
purpose or out of capital, provided the memorandum and articles authorize this and it has the ability to pay its debts as they
come due in the ordinary course of business.
No Preemptive Rights.
Holders of ordinary shares will have no preemptive or preferential right to purchase any securities of our company.
Variation of Rights
Attaching to Shares. If at any time the share capital is divided into different classes of shares, the rights attaching to
any class (unless otherwise provided by the terms of issue of the shares of that class) may, subject to the memorandum and articles,
be varied or abrogated with the consent in writing of the holders of three fourths of the issued shares of that class or with the
sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
Anti-Takeover
Provisions. Some provisions of our current memorandum and articles of association may discourage, delay or prevent a
change of control of our company or management that shareholders may consider favorable, including provisions that authorize
our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences,
privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
Exempted Company.
We are an exempted company with limited liability under the Companies Law. The Companies Law distinguishes between ordinary resident
companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of
the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially
the same as for an ordinary company except that an exempted company:
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does
not have to file an annual return of its shareholders with the Registrar of Companies;
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is not required to open its register of members for inspection;
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does not have to hold an annual general meeting;
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may issue shares with no par value;
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may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given
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for 20 years in the first instance);
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may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
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may register as a limited duration company; and
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may register as a segregated portfolio company.
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“Limited liability”
means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company.
Material Differences between U.S. Corporate
Law and Cayman Islands Corporate Law
The Companies Law is
modeled after that of English law but does not follow many recent English law statutory enactments. In addition, the Companies
Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant
differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the
State of Delaware.
Mergers and Similar
Arrangements. A merger of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation
to be approved by the directors of each constituent company and authorization by (a) a special resolution of the shareholders and
(b) such other authorization, if any, as may be specified in such constituent company’s articles of association.
A merger between a
Cayman Islands parent company and its Cayman Islands subsidiary or subsidiaries does not require authorization by a resolution
of shareholders of that Cayman Islands subsidiary if a copy of the plan of merger is given to every member of that Cayman Islands
subsidiary to be merged unless that member agrees otherwise. For this purpose, a subsidiary is a company of which at least ninety
percent (90%) of the issued shares entitled to vote are owned by the parent company.
The consent of each
holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court
in the Cayman Islands.
Save in certain circumstances,
a dissentient shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares upon dissenting
to a merger or consolidation. The exercise of appraisal rights will preclude the exercise of any other rights save for the right
to seek relief on the grounds that the merger or consolidation is void or unlawful.
In addition, there
are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved
by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition
represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting
either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently
the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express
to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it
determines that:
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the statutory provisions as to the required majority vote have been met;
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the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class;
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the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and
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the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
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When a takeover offer
is made and accepted by holders of 90.0% of the shares within four months, the offeror may, within a two-month period commencing
on the expiration of such four-month period, require the holders of the remaining shares to transfer such shares on the terms of
the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an
offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and
reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise
ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the
judicially determined value of the shares.
Shareholders’
Suits. In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought
by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the
Cayman Islands, there are exceptions to the foregoing principle, including when:
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a company acts or proposes to act illegally or ultra vires;
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the act complained of, although not ultra vires, could only be affected duly if authorized by more than a simple majority vote that has not been obtained; and
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those who control the company are perpetrating a “fraud on the minority.”
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Indemnification
of Directors and Executive Officers and Limitation of Liability. Cayman Islands law does not limit the extent to which
a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the
extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification
against civil fraud or the consequences of committing a crime. Our current memorandum and articles of association permit indemnification
of officers and directors for losses, damages, costs and expenses incurred in their capacities as such unless such losses or damages
arise from dishonesty or fraud of such directors or officers. This standard of conduct is generally the same as permitted under
the Delaware General Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements with
our directors and executive officers that provide such persons with additional indemnification beyond that provided in our current
memorandum and articles of association.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the
foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Directors’
Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the
corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires
that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances.
Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available
regarding a significant transaction. The duty of loyalty requires that a director acts in a manner he reasonably believes to be
in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits
self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any
interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general,
actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action
taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of
the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director must prove the procedural
fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of Cayman
Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore
it is considered that he or she owes the following duties to the company — a duty to act bona fide in the best interests
of the company, a duty not to make a profit based on his or her position as director (unless the company permits him or her to
do so) and a duty not to put himself or herself in a position where the interests of the company conflict with his or her personal
interest or his or her duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill
and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree
of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth
courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to
be followed in the Cayman Islands.
Shareholder Action
by Written Consent. Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to
act by written consent by amendment to its certificate of incorporation. Cayman Islands law and our current articles of association
provide that shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each
shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
Shareholder Proposals.
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders,
provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors
or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
Cayman Islands law
does not provide shareholders any right to put proposals before a meeting or requisition a general meeting. However, these rights
may be provided in articles of association. Our current articles of association allow our shareholders holding not less than one-third
of all voting power of our share capital in issue to requisition a shareholder’s meeting. Other than this right to requisition
a shareholders’ meeting, our current articles of association do not provide our shareholders other right to put proposal
before a meeting. As a Cayman Islands exempted company, we are not obliged by law to call shareholders’ annual general meetings.
Cumulative Voting.
Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s
certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority
shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is
entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There
are no prohibitions in relation to cumulative voting under the laws of the Cayman Islands but our current articles of association
do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue
than shareholders of a Delaware corporation.
Removal of Directors.
Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with
the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise.
Under our current articles of association, directors may be removed with or without cause, by an ordinary resolution of our shareholders.
Transactions
with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to
Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment
to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested
shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder
generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting share within the
past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in
which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which
such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction
which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation
to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law
has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business
combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant
shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not
with the effect of constituting a fraud on the minority shareholders.
Dissolution;
Winding up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve,
dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution
is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware
law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection
with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts
of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due,
by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including
where it is, in the opinion of the court, just and equitable to do so. Under the Companies Law and our current articles of association,
our company may be dissolved, liquidated or wound up by a special resolution of our shareholders.
Variation of
Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with
the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise.
Under Cayman Islands law and our current articles of association, if our share capital is divided into more than one class of shares,
we may vary the rights attached to any class with the written consent of the holders of three-fourths of the issued shares of that
class or with the sanction of a resolution passed by not less than three-fourths of such holders of the shares of that class as
may be present at a general meeting of the holders of the shares of that class.
Amendment of
Governing Documents. Under the Delaware General Corporation Law, a corporation’s governing documents may be amended
with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise.
As permitted by Cayman Islands law, our current memorandum and articles of association may only be amended with a special resolution
of our shareholders.
Rights of Non-resident
or Foreign Shareholders. There are no limitations imposed by our post-offering amended and restated memorandum and articles
of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition,
there are no provisions in our current memorandum and articles of association governing the ownership threshold above which shareholder
ownership must be disclosed.
10.C. Material Contracts
We have not entered
into any material contracts other than in the ordinary course of business and other than those described in this annual report.
10.D. Exchange Controls
Cayman Islands
There are currently
no exchange control regulations in the Cayman Islands applicable to us or our shareholders.
The PRC
China regulates foreign
currency exchanges primarily through the following rules and regulations:
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Foreign
Currency Administration Rules of 1996, as amended; and
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Administrative
Rules of the Settlement, Sale and Payment of Foreign Exchange of 1996.
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As we disclosed in
the risk factors above, Renminbi is not a freely convertible currency at present. Under the current PRC regulations, conversion
of Renminbi is permitted in China for routine current-account foreign exchange transactions, including trade and service-related
foreign exchange transactions, payment of dividends and service of foreign debts. Conversion of Renminbi for most capital-account
items, such as direct investments, investments in PRC securities markets and repatriation of investments, however, is still subject
to the approval of SAFE.
Pursuant to the above-mentioned
administrative rules, foreign-invested enterprises may buy, sell and/or remit foreign currencies for current account transactions
at banks in China with authority to conduct foreign exchange business by complying with certain procedural requirements, such as
presentment of valid commercial documents. For capital-account transactions involving foreign direct investment, foreign debts
and outbound investment in securities and derivatives, approval from SAFE is a pre-condition. Capital investments by foreign-invested
enterprises outside China are subject to limitations and requirements in China, such as prior approvals from the PRC Ministry of
Commerce or SAFE.
10.E. Taxation
The following summary
of the material Cayman Islands, PRC and U.S. tax consequences of an investment in our ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect.
This summary is not intended to be, nor should it be construed as, legal or tax advice and is not exhaustive of all possible tax
considerations. This summary also does not deal with all possible tax consequences relating to an investment in our ordinary shares,
such as the tax consequences under state, local, non-U.S., non-PRC, and non-Cayman Islands tax laws. Investors should consult their
own tax advisors with respect to the tax consequences of the acquisition, ownership and disposition of our ordinary shares.
Cayman Islands Taxation
The Cayman Islands
currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation
in the nature of inheritance tax or estate duty. There are no other taxes levied by the Government of the Cayman Islands that are
likely to be material to holders of ordinary shares or ordinary shares. The Cayman Islands is not party to any double tax treaties.
There are no exchange control regulations or currency restrictions in the Cayman Islands.
People’s Republic
of China Taxation
Under the EIT Law,
an enterprise established outside the PRC with a “de facto management body” within the PRC is considered a PRC resident
enterprise for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide
income as well as tax reporting obligations. Under the Implementation Rules, a “de facto management body” is defined
as a body that has material and overall management and control over the manufacturing and business operations, personnel and human
resources, finances and properties of an enterprise. In addition, SAT Circular 82 issued in April 2009 specifies that certain offshore-incorporated
enterprises controlled by PRC enterprises or PRC enterprise groups will be classified as PRC resident enterprises if all of the
following conditions are met: (a) senior management personnel and core management departments in charge of the daily operations
of the enterprises have their presence mainly in the PRC; (b) their financial and human resources decisions are subject to determination
or approval by persons or bodies in the PRC; (c) major assets, accounting books and company seals of the enterprises, and minutes
and files of their board’s and shareholders’ meetings are located or kept in the PRC; and (d) half or more of the enterprises’
directors or senior management personnel with voting rights habitually reside in the PRC. Further to SAT Circular 82, the SAT issued
SAT Bulletin 45, which took effect in September 2011, to provide more guidance on the implementation of SAT Circular 82. SAT Bulletin
45 provides for procedures and administration details of determination on PRC resident enterprise status and administration on
post-determination matters. If the PRC tax authorities determine that Golden Bull Limited is a PRC resident enterprise for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. For example, Dianniu may be subject
to enterprise income tax at a rate of 25% with respect to its worldwide taxable income. Also, a 10% withholding tax would be imposed
on dividends we pay to our non-PRC enterprise shareholders and with respect to gains derived by our non-PRC enterprise shareholders
from transferring our shares or ordinary shares and potentially a 20% of withholding tax would be imposed on dividends we pay to
our non-PRC individual shareholders and with respect to gains derived by our non-PRC individual shareholders from transferring
our shares or ordinary shares.
It is unclear whether,
if we are considered a PRC resident enterprise, holders of our shares or ordinary shares would be able to claim the benefit of
income tax treaties or agreements entered into between China and other countries or areas. See “Risk Factors — Risk
Factors Relating to Doing Business in China — Under the PRC Enterprise Income Tax Law, we may be classified as a PRC resident
enterprise for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us
and our non-PRC Shareholders and have a material adverse effect on our results of operations and the value of your investment”.
The SAT issued SAT
Circular 59 together with the Ministry of Finance in April 2009 and SAT Circular 698 in December 2009. Both SAT Circular 59 and
SAT Circular 698 became effective retroactively as of January 1, 2008. By promulgating and implementing these two circulars, the
PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of equity interests in a PRC resident enterprise
by a non-PRC resident enterprise. Under SAT Circular 698, where a non-PRC resident enterprise transfers the equity interests of
a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, and the overseas holding
company is located in a tax jurisdiction that: (1) has an effective tax rate of less than 12.5% or (2) does not impose tax on foreign
income of its residents, the non-PRC resident enterprise, being the transferor, must report to the relevant tax authority of the
PRC resident enterprise this Indirect Transfer. Using a “substance over form” principle, the PRC tax authority may
disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the
purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC
tax at a rate of up to 10%. Although it appears that SAT Circular 698 was not intended to apply to share transfers of publicly
traded companies, there is uncertainty as to the application of SAT Circular 698 and we and our non-PRC resident investors may
be at risk of being required to file a return and being taxed under SAT Circular 698 and we may be required to expend valuable
resources to comply with SAT Circular 698 or to establish that we should not be taxed under SAT Circular 698. See “Risk Factors
— Risk Factors Relating to Doing Business in China — We face uncertainty regarding the PRC tax reporting obligations
and consequences for certain indirect transfers of our operating company’s equity interests. Enhanced scrutiny over acquisition
transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.”
Pursuant to the Arrangement
between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion
on Income, or the Tax Arrangement, where a Hong Kong resident enterprise which is considered a non-PRC tax resident enterprise
directly holds at least 25% of a PRC enterprise, the withholding tax rate in respect of the payment of dividends by such PRC enterprise
to such Hong Kong resident enterprise is reduced to 5% from a standard rate of 10%, subject to approval of the PRC local tax authority.
Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses
of Tax Agreements, or Circular 81, a resident enterprise of the counter-party to such Tax Arrangement should meet the following
conditions, among others, in order to enjoy the reduced withholding tax under the Tax Arrangement: (i) it must directly own the
required percentage of equity interests and voting rights in such PRC resident enterprise; and (ii) it should directly own such
percentage in the PRC resident enterprise anytime in the 12 months prior to receiving the dividends. Furthermore, the Administrative
Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation), or the Administrative
Measures, which became effective in October 2009, requires that the non-resident enterprises must obtain the approval from the
relevant tax authority in order to enjoy the reduced withholding tax rate under the tax treaties. There are also other conditions
for enjoying such reduced withholding tax rate according to other relevant tax rules and regulations. Accordingly, Dianniu HK may
be able to enjoy the 5% withholding tax rate for the dividends it receives from the WFOE, if it satisfies the conditions prescribed
under Circular 81 and other relevant tax rules and regulations, and obtains the approvals as required under the Administrative
Measures. However, according to Circular 81, if the relevant tax authorities consider the transactions or arrangements we have
for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding
tax in the future.
United States Federal
Income Taxation
The following is a
discussion of United States federal income tax considerations relating to the acquisition, ownership, and disposition of our ordinary
shares by a U.S. Holder, as defined below, that acquires our ordinary shares and holds our ordinary shares as “capital assets”
(generally, property held for investment) under the United States Internal Revenue Code of 1986, as amended (the “Code”).
This discussion is based upon existing United States federal income tax law, which is subject to differing interpretations or change,
possibly with retroactive effect. No ruling has been sought from the Internal Revenue Service (the “IRS”) with respect
to any United States federal income tax consequences described below, and there can be no assurance that the IRS or a court will
not take a contrary position. This discussion does not address all aspects of United States federal income taxation that may be
important to particular investors in light of their individual circumstances, including investors subject to special tax rules
(such as, for example, certain financial institutions, insurance companies, regulated investment companies, real estate investment
trusts, broker-dealers, traders in securities that elect mark-to-market treatment, partnerships and their partners, tax-exempt
organizations (including private foundations)), investors who are not U.S. Holders, investors that own (directly, indirectly, or
constructively) 10% or more of our voting stock, investors that hold their ordinary shares as part of a straddle, hedge, conversion,
constructive sale or other integrated transaction), or investors that have a functional currency other than the U.S. dollar, all
of whom may be subject to tax rules that differ significantly from those summarized below. In addition, this discussion does not
address any tax laws other than the United States federal income tax laws, including any state, local, alternative minimum tax
or non-United States tax considerations, or the Medicare tax. Each potential investor is urged to consult its tax advisor regarding
the United States federal, state, local and non-United States income and other tax considerations of an investment in our ordinary
shares.
General
For purposes of this
discussion, a “U.S. Holder” is a beneficial owner of our ordinary shares that is, for United States federal income
tax purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated
as a corporation for United States federal income tax purposes) created in, or organized under the laws of, the United States or
any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for United States
federal income tax purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary
supervision of a United States court and which has one or more United States persons who have the authority to control all substantial
decisions of the trust or (B) that has otherwise elected to be treated as a United States person under the Code.
If a partnership (or
other entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of our ordinary shares,
the tax treatment of a partner in the partnership will depend upon the status of the partner and the activities of the partnership.
Partnerships and partners of a partnership holding our ordinary shares are urged to consult their tax advisors regarding an investment
in our ordinary shares.
The discussion set
forth below is addressed only to U.S. Holders that purchase ordinary shares. Prospective purchasers are urged to consult their
own tax advisors about the application of the U.S. federal income tax rules to their particular circumstances as well as the state,
local, foreign and other tax consequences to them of the purchase, ownership and disposition of our ordinary shares.
Taxation of Dividends and Other Distributions
on our Ordinary Shares
Subject to the passive
foreign investment company rules discussed below, the gross amount of distributions made by us to you with respect to the ordinary
shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income
on the date of receipt by you, but only to the extent that the distribution is paid out of our current or accumulated earnings
and profits (as determined under U.S. federal income tax principles). With respect to corporate U.S. Holders, the dividends will
not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
With respect to non-corporate
U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified
dividend income, provided that (1) the ordinary shares are readily tradable on an established securities market in the United States,
or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange
of information program, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in
which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Because there is
no income tax treaty between the United States and the Cayman Islands, clause (1) above can be satisfied only if the ordinary shares
are readily tradable on an established securities market in the United States. Under U.S. Internal Revenue Service authority, ordinary
shares are considered for purpose of clause (1) above to be readily tradable on an established securities market in the United
States if they are listed on Nasdaq. You are urged to consult your tax advisors regarding the availability of the lower rate for
dividends paid with respect to our ordinary shares, including the effects of any change in law after the date of this report.
To the extent that
the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income
tax principles), it will be treated first as a tax-free return of your tax basis in your ordinary shares, and to the extent the
amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our
earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will
be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital
gain under the rules described above.
Taxation of Dispositions of Ordinary
Shares
Subject to the passive
foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable
disposition of a share equal to the difference between the amount realized (in U.S. dollars) for the share and your tax basis (in
U.S. dollars) in the ordinary shares. The gain or loss will be capital gain or loss. If you are a non-corporate U.S. Holder, including
an individual U.S. Holder, who has held the ordinary shares for more than one year, you may be eligible for reduced tax rates on
any such capital gains. The deductibility of capital losses is subject to limitations.
Passive Foreign Investment Company
A non-U.S. corporation is considered
a PFIC for any taxable year if either:
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least 75% of its gross income for such taxable year is passive income; or
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least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable
to assets that produce or are held for the production of passive income (the “asset test”).
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Passive income generally
includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or
business) and gains from the disposition of passive assets. We will be treated as owning our proportionate share of the assets
and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25%
(by value) of the stock. In determining the value and composition of our assets for purposes of the PFIC asset test, (1) the cash
we hold will generally be considered to be held for the production of passive income and (2) the value of our assets must be determined
based on the market value of our ordinary shares from time to time, which could cause the value of our non-passive assets to be
less than 50% of the value of all of our assets (including the cash raised in any offering) on any particular quarterly testing
date for purposes of the asset test.
We must make a separate
determination each year as to whether we are a PFIC. Depending on the amount of cash we hold, together with any other assets held
for the production of passive income, it is possible that, for our 2018 taxable year or for any subsequent taxable year, more than
50% of our assets may be assets held for the production of passive income. We will make this determination following the end of
any particular tax year. Although the law in this regard is unclear, we treat our consolidated affiliated entities, as being owned
by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such
entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their
operating results in our consolidated financial statements. In particular, because the value of our assets for purposes of the
asset test will generally be determined based on the market price of our ordinary shares and because cash is generally considered
to be an asset held for the production of passive income, our PFIC status will depend in large part on the market price of our
ordinary shares and the amount of cash we hold. Accordingly, fluctuations in the market price of the ordinary shares may cause
us to become a PFIC. In addition, the application of the PFIC rules is subject to uncertainty in several respects. We are under
no obligation to take steps to reduce the risk of our being classified as a PFIC, and as stated above, the determination of the
value of our assets will depend upon material facts (including the market price of our ordinary shares from time to time that may
not be within our control. If we are a PFIC for any year during which you hold ordinary shares, we will continue to be treated
as a PFIC for all succeeding years during which you hold ordinary shares. However, if we cease to be a PFIC and you did not previously
make a timely “mark-to-market” election as described below, you may avoid some of the adverse effects of the PFIC regime
by making a “purging election” (as described below) with respect to the ordinary shares.
If we are a PFIC for
your taxable year(s) during which you hold ordinary shares, you will be subject to special tax rules with respect to any “excess
distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the ordinary
shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year
that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years
or your holding period for the ordinary shares will be treated as an excess distribution. Under these special tax rules:
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the
excess distribution or gain will be allocated ratably over your holding period for the ordinary shares;
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the
amount allocated to your current taxable year, and any amount allocated to any of your taxable year(s) prior to the first taxable
year in which we were a PFIC, will be treated as ordinary income, and
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the
amount allocated to each of your other taxable year(s) will be subject to the highest tax rate in effect for that year and the
interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
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The tax liability for
amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating
losses for such years, and gains (but not losses) realized on the sale of the ordinary shares cannot be treated as capital, even
if you hold the ordinary shares as capital assets.
A U.S. Holder of “marketable
stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the tax treatment discussed
above. If you make a mark-to-market election for first taxable year which you hold (or are deemed to hold) ordinary shares and
for which we are determined to be a PFIC, you will include in your income each year an amount equal to the excess, if any, of the
fair market value of the ordinary shares as of the close of such taxable year over your adjusted basis in such ordinary shares,
which excess will be treated as ordinary income and not capital gain. You are allowed an ordinary loss for the excess, if any,
of the adjusted basis of the ordinary shares over their fair market value as of the close of the taxable year. However, such ordinary
loss is allowable only to the extent of any net mark-to-market gains on the ordinary shares included in your income for prior taxable
years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition
of the ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to any loss realized on the actual
sale or disposition of the ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains
previously included for such ordinary shares. Your basis in the ordinary shares will be adjusted to reflect any such income or
loss amounts. If you make a valid mark-to-market election, the tax rules that apply to distributions by corporations which are
not PFICs would apply to distributions by us, except that the lower applicable capital gains rate for qualified dividend income
discussed above under “— Taxation of Dividends and Other Distributions on our ordinary shares” generally would
not apply.
The mark-to-market
election is available only for “marketable stock”, which is stock that is traded in other than de minimis quantities
on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market (as defined
in applicable U.S. Treasury regulations), including Nasdaq. If the ordinary shares are regularly traded on Nasdaq and if you are
a holder of ordinary shares, the mark-to-market election would be available to you were we to be or become a PFIC.
Alternatively, a U.S.
Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such PFIC to elect out of the
tax treatment discussed above. A U.S. Holder who makes a valid qualified electing fund election with respect to a PFIC will generally
include in gross income for a taxable year such holder’s pro rata share of the corporation’s earnings and profits for
the taxable year. However, the qualified electing fund election is available only if such PFIC provides such U.S. Holder with certain
information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not currently intend
to prepare or provide the information that would enable you to make a qualified electing fund election. If you hold ordinary shares
in any taxable year in which we are a PFIC, you will be required to file U.S. Internal Revenue Service Form 8621 in each such year
and provide certain annual information regarding such ordinary shares, including regarding distributions received on the ordinary
shares and any gain realized on the disposition of the ordinary shares.
If you do not make
a timely “mark-to-market” election (as described above), and if we were a PFIC at any time during the period you hold
our ordinary shares, then such ordinary shares will continue to be treated as stock of a PFIC with respect to you even if we cease
to be a PFIC in a future year, unless you make a “purging election” for the year we cease to be a PFIC. A “purging
election” creates a deemed sale of such ordinary shares at their fair market value on the last day of the last year in which
we are treated as a PFIC. The gain recognized by the purging election will be subject to the special tax and interest charge rules
treating the gain as an excess distribution, as described above. As a result of the purging election, you will have a new basis
(equal to the fair market value of the ordinary shares on the last day of the last year in which we are treated as a PFIC) and
holding period (which new holding period will begin the day after such last day) in your ordinary shares for tax purposes.
You are urged to consult
your tax advisors regarding the application of the PFIC rules to your investment in our ordinary shares and the elections discussed
above.
Information Reporting and Backup
Withholding
Dividend payments with
respect to our ordinary shares and proceeds from the sale, exchange or redemption of our ordinary shares may be subject to information
reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding at a current rate of 24%. Backup withholding
will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification
on U.S. Internal Revenue Service Form W-9 or who is otherwise exempt from backup withholding. U.S. Holders who are required to
establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders
are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding
is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability,
and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for
refund with the U.S. Internal Revenue Service and furnishing any required information. We do not intend to withhold taxes for individual
shareholders. However, transactions effected through certain brokers or other intermediaries may be subject to withholding taxes
(including backup withholding), and such brokers or intermediaries may be required by law to withhold such taxes.
Under the Hiring Incentives
to Restore Employment Act of 2010, certain U.S. Holders are required to report information relating to our ordinary shares, subject
to certain exceptions (including an exception for ordinary shares held in accounts maintained by certain financial institutions),
by attaching a complete Internal Revenue Service Form 8938, Statement of Specified Foreign Financial Assets, with their tax return
for each year in which they hold ordinary shares.
10.F. Dividends and Paying Agents
Not Applicable.
10.G. Statement by Experts
Not Applicable.
10.H. Documents on Display
The Company is subject
to the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports, registration statements
and other information with the SEC. The Company’s reports, registration statements and other information can be inspected
on the SEC’s website at www.sec.gov and such information can also be inspected and copies ordered at the public reference
facilities maintained by the SEC at the following location: 100 F Street NE, Washington, D.C. 20549. However, information contained
on our website does not constitute a part of this annual report.
10.I. Subsidiary Information
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Financial instruments
that expose us to concentrations of credit risk primarily consist of cash and accounts receivables. The maximum amount of loss
due to credit risk in the event of other parties failing to perform their obligations is represented by the carrying amount of
each financial asset as stated in our consolidated balance sheets.
As of December 31,
2019, 2018, and 2017, substantially all of our cash included bank deposits in accounts maintained within the PRC where there is
currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However,
we have not experienced any losses in such accounts and we believe we are not exposed to any significant risks on our cash in bank
accounts.
We are exposed to various
types of market risks, including changes in foreign exchange rates, commodity prices and inflation in the normal course of business.
Interest rate risk
We are subject to risks
resulting from fluctuations in interest rates on our bank balances. A substantial portion of our cash is held in China in interest
bearing bank deposits and denominated in RMB. To the extent that we may need to raise debt financing in the future, upward fluctuations
in interest rates would increase the cost of new debt. We do not currently use any derivative instruments to manage our interest
rate risk.
Commodity price
risk
Certain raw materials
used by us are subject to price volatility caused by supply conditions, political and economic variables and other unpredictable
factors. The primary purpose of our commodity price management activities is to manage the volatility associated with purchases
of commodities in the normal course of business. We do not speculate on commodity prices.
Foreign exchange
risk
The RMB is not a freely
convertible currency. The PRC government may take actions that could cause future exchange rates to vary significantly from current
or historical exchange rates. Fluctuations in exchange rates may adversely affect the value of any dividends we declare.
Very limited hedging
transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any
hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions
in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully
hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
Inflation risk
Inflationary factors
such as increases in the cost of our products and overhead costs may adversely affect our operating results. A high rate of inflation
may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses
as a percentage of net revenues if the selling prices of our products do not increase proportionately with these increased costs.