Item
1. Business
Forward-looking
statements
Statements
made in this Form 10-K that are not historical or current facts are “forward-looking statements” made pursuant to the safe
harbor provisions of Section 27A of the Securities Act of 1933 (the “Act”) and Section 21E of the Securities Exchange Act
of 1934. These statements often can be identified by the use of terms such as “may,” “will,” “expect,”
“believe,” “anticipate,” “estimate,” “approximate” or “continue,” or the
negative thereof. We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution
readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking
statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject
to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from
historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to
revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence
of anticipated or unanticipated events.
Financial
information contained in this report and in our financial statements is stated in United States dollars and are prepared in accordance
with United States generally accepted accounting principles.
Addentax
Group Corp. was incorporated in the State of Nevada on October 28, 2014. We were originally incorporated to produce images on multiple
surfaces, such as glass, leather, plastic, ceramic, textile, and others using a 3D sublimation vacuum heat transfer machine. We no longer
pursue opportunities related to 3D printing positioning.
We
have a fiscal year-end of March 31. The business office is located at Kingkey 100, Block A, Room 5403, Luohu District, Shenzhen City,
China 518000. Our telephone number is +(86) 755 8233 0336.
Current
Business
Effective
December 28, 2016, Addentax Group Corp. (“ATXG” or the “Company”) executed a Sale & Purchase Agreement (“S&P”)
for the acquisition of 100% of the shares of Yingxi Industrial Chain Group Co., Ltd. (“YICG”), a company incorporated under
the laws of the Republic of Seychelles. Pursuant to the S&P, the Company agreed to issue five hundred million (500,000,000) restricted
common shares of the company to the owners of YICG.
After
the completion of the S&P, YICG’s business became our business. We are a garment manufacturer and logistics service provider
based in China. We are listed on the OTCQB under the symbol of “ATXG”. We classify our businesses into four segments: garment
manufacturing, logistics services, property management and subleasing, and epidemic prevention
supplies.
Our
garment manufacturing business consists of sales made principally to wholesaler located in the People’s Republic of China (“PRC”).
We have our own manufacturing facilities, with sufficient production capacity and skilled workers on production lines to ensure that
we meet our high quality control standards and timely meet the delivery requirements for our customers. We conduct our garment manufacturing
operations through four-wholly owned subsidiaries, namely Dongguan Heng Sheng Wei Garments Co., Ltd (“HSW”), Dongguan Yushang
Clothing Co., Ltd (“YS”), Shantou Yi Bai Yi Garment Co., Ltd (“YBY”), and Shantou Chenghai Dai Tou Garments Co.,
Ltd (“DT”), which are located in the Guangdong province, China. In October, the Company
disposed of DT to a third party at fair value, which was also its carrying value as of September 30, 2020.
Our
logistics business consists of delivery and courier services covering approximately seven provinces in China. Although we have our own
motor vehicles and drivers, we currently outsource some of the business to our contractors. We believe outsourcing allows us to maximize
our capacity and maintain flexibility while reducing capital expenditures and the costs of keeping drivers during slow seasons. We conduct
our logistic operations through three wholly owned subsidiaries, namely Shenzhen Xin Kuai Jie Transportation Co., Ltd (“XKJ”),
Shenzhen Hua Peng Fa Logistic Co., Ltd (“HPF”), and Shenzhen Yingxi Peng Fa Logistic Co., Ltd (“PF”) which are
located in the Guangdong province, China. In November, the Company disposed of HPF to a third party
at fair value, which was also its carrying value as of November 30, 2020.
The
business operations, customers and suppliers of DT and HPF were retained by the Company; therefore, the disposition of the two subsidiaries
did not qualify as discontinued operations.
Our
property management and subleasing business provides shops subleasing and property management services for garment wholesalers and retailers
in garment market. We conduct our property management and subleasing operation through a wholly owned subsidiary, namely Dongguan Yingxi
Daying Commercial Co., Ltd (“DY”).
Our
epidemic prevention supplies business consists of manufacturing and distribution of epidemic prevention products and reselling of epidemic
prevention supplies purchased from third parties in both domestic and overseas markets. We conduct our manufacturing of the epidemic
prevention products in YS. We conduct the trading of epidemic prevention suppliers through Addentax Group Corp. (“ATXG”)
and Shenzhen Qianhai Yingxi Industrial Chain Services Co., Ltd (“YX”), an indirect wholly owned subsidiary of the Company.
Competitive
Strengths
We
believe we have the following competitive strengths:
Cost-effective
production. We have adopted a vertical integration production process. We produce garments in our own production facilities and employ
our in-house transport teams to deliver garments to our customers. This one-stop service optimizes production efficiency and saves costs
by lowering the cost per unit, thereby achieving economies of scale.
Stringent
quality control process. As of March 31, 2021, we had seven employees in
the production department that are responsible for conducting our quality control process. We implement a stringent quality control process
which monitors various stages of our garment manufacturing business, including sampling checks of semi-finished products and finished
products. We prepare inspection reports to address the quality problems and make recommendations to improve the quality of our products.
During final product inspection, we pay special attention to the measurements, workmanship, ironing and packaging of our products to
help best ensure that the quality of our products comply with the specifications, standards and requirements of our customers.
Strong
design capabilities. Our design team works closely with our customers to understand their needs and make recommendations to them.
Our design team also conducts market research and attends industry exhibitions to understand the latest market trends. As of March 31,
2021, our design team consisted of five members.
Extensive
delivery network. Our logistics business has nine routes and covers 79 cities in seven provinces and two municipalities in the PRC.
Stable
Production Supply Chain. We integrated various epidemic prevention suppliers located in China & Malaysia and established strategic
cooperation relationship with them, which can help us to purchase the epidemic prevention products in competitive lower price and stable
supply. We also received mask production license from relevant governance and some of the products we manufactured passed the inspection
of quality inspection agency.
Business
Strategies
Key
elements of our business and growth strategies include the following:
Sales
of raw materials. We intend to enter into exclusive agreements with textile and garment suppliers in Southeast China to be their
exclusive agent and supply their textiles and garments to our customers. To execute this plan, we intend to set up several retailers
for the sales of textiles and garments to retail customers and supply the textiles and garments exclusively to various high-end fashion
brands.
Development
of our own brands. We intend to develop our own brands that focus on fast fashion with teenagers being our primary target customers.
We plan to adopt a low-cost strategy at the early stage and improve the quality of our products after increasing our market share. We
are in the process of registering a trademark for our own brand and intend to start our advertising campaign after the registration of
this trademark. We plan to distribute our products in different channels, including our own retailers, co-operative retailers and franchisees.
Expand
our delivery network. As of March 31, 2021, we provided logistics services to over 79 cities in seven provinces and two municipalities
in the PRC. We plan to open our logistics points in 20 more cities in the PRC in the third and fourth quarters of 2021.
Develop
international logistics services and warehousing services. We intend to develop international logistics services for customers located
all over the world and international warehousing services.
Development
of international trading. We developed our international trading during the global epidemic situation of Covid-19 to import and export
diverse epidemic protection products including medical masks, latex gloves etc.
Develop
E-commerce business. We integrated resources in shopping mall, intend to develop e-commerce bases and the internet celebrity economy
together to drive to increase the value of the stores in the area.
Develop
our epidemic prevention supply chain. We intend to develop our own epidemic prevention supply
chain as we see the potential and opportunity of medical and health industry. We expect to establish a one-step epidemic prevention supply
chain from product manufacturing line establishment to sales networking construction. Currently, we are focusing on the civil mask market
in China and provide cost-effective masks to customers. We will improve our product quality constantly and develop oversee markets.
Our
garment manufacturing business
We
manufacture garments for various high-end fashion brands through four of our wholly-owned subsidiaries, HSW, YS, YBY, and DT,
which are located in Guangdong, the PRC. The company sold DT to another third party in October 2020, with consideration of $604,773,
equal to the carrying amount of its net assets.
Operations
Our
customer relationship team is responsible for cultivating and maintaining our relationship with customers.
Our
design team works closely with our customer relationship team to understand our customers’ needs and make recommendations to them
based on their designs.
Our
fabric team leverages our experience in fabric sourcing as well as our understanding in fabric features to recommend the types of fabric
to be used in our customers’ products. Our fabric team may also suggest alternative fabrics to our customers. Our fabric team works
with our research and development team to understand fabric types and aims to identify different fabric we source and improve the quality
and comfort of the fabric we produce.
Our
product and technical team is mainly responsible for development samples of products, preparing structural and production guidance of
products as well as producing paper patterns for our garment production team. Upon order confirmation from our customers, our customer
relationship team informs our fabric team to carry out raw material sourcing.
We
source finished fabric and yarns from our suppliers for garment production. The procedures for fabric production are normally divided
into the following stages: (i) spinning; (ii) weaving or knitting; (iii) dyeing or printing; and (iv) finishing. Generally, our fabric
team requires four to six weeks to source raw materials from our suppliers.
Our
garment production team is responsible for produce garments based on the raw materials we source. The major stages involved in garment
production include: (i) paper patterning; (ii) fabric cutting; (iii) sewing; (iv) interim quality inspection; (v) trimming; (vi) washing;
and (vii) ironing.
Seasonality
We
generally receive more purchase orders during our second and third quarters and less manufacture orders during May and June.
Credit
period
For
our long-term and established customers with good payment track records, we generally provide payment terms between 30 to 180 days following
the delivery of finished goods. For our new customers, we generally require advances or deposits to be made when placing orders.
Our
logistics business
We
pack products and provide logistics service to our customers through two of our wholly-owned subsidiaries, XKJ, HPF and PF which are
located in Guangdong province, the PRC. Our in-house logistics teams deliver to approximately seven provinces and two municipalities
in the PRC. The company sold HPF to another third party in November 2020, with consideration of $173,170, equal to the carrying amount
of its net assets.
Where
a customer is located in an area not covered by our delivery fleet or where our in-house logistics teams are fully engaged, we will outsource
delivery to third-party contractors. We believe outsourcing allows us to maximize our delivery capacity and improve inventory flexibility
while minimizing capital expenditures, such as shipping costs and the costs of additional drivers during low seasons.
Our
logistics services
We
provide comprehensive logistics services to our customers, which include storage, transportation, warehousing, handling, packaging and
order processing. We also provide customs declaration and tax clearance service to our customers who export goods to overseas.
Our
network
We
have 758 logistics points and they are located in seven provinces and two municipalities which cover 79 cities in the PRC.
Our
internal management
Our
management in logistics business is responsible for setting out business strategies and managing the daily operation. Specifically, they
have regular meetings with different departments, conduct inspection and supervise the finance department, operation department and administration
department.
Seasonality
We
generally receive more delivery orders in our third and fourth quarters and are more vulnerable to shipping delays in the PRC during
Chinese New Year due to traffic and port congestion, border crossing delays and customs clearance issues.
Credit
period
We
generally require payments from the customers between 30 to 90 days following their acknowledgement of receipt of goods.
Customers
and Suppliers
Customers
Our
customer base is diverse. Our customers in garment manufacturing business are mainly garment wholesalers and retailers and our customers
in logistics business are mainly trading companies and logistic companies. For the year ended March 31, 2020, there was one customer
accounted for more than 30% of net sales which is 30.18% out of total net sales. For the year ended March 31, 2021, there is one customer
accounted for more than 30% of our net sales which is approximately 35.4% out of our total net sales.
Suppliers
We
procured our garments through various textile companies in our garment manufacturing business. In our logistics business, we procured
from packing companies and transportation companies. No single supplier accounted for more than 60% of our total costs for the years
ended March 31, 2020 and 2021.
Inventory
Garment
manufacturing business. We maintain our raw materials in our storage facilities. We review our inventory levels in order to identify
slow-moving materials and broken assortments.
Logistics
business. Since we deliver products as soon as we receive orders from customers, we do not operate distribution centers and hence
do not need to carry a significant amount of inventory.
Our
property management and subleasing business. We do not need to carry a significant amount of inventory due to the nature of the business.
Epidemic
prevention supplies business. Since we procured and manufactured epidemic prevention supplies on order basis, we maintain low level
of inventories and do not have slow-moving items.
Intellectual
Property
We
currently do not own any intellectual property rights. We are in the process of registering trademarks and copyright in relation to our
garment manufacturing business pending approval from the PRC government.
Competition
While
the PRC is still the world’s largest clothing manufacturer with enormous production capacity, oversupply, increasing labor costs
and rising local protectionism have eroded its competitiveness.
The
principal competitive factors in the garment manufacturing market include:
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brand
awareness and focus;
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breadth
of product offerings; and
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quality
control.
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The
principal competitive factors in the logistics market include:
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delivery
time; and
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network
coverage.
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The
principal competitive factors in the epidemic prevention supply market include:
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delivery
time;
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cost
control; and
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quality
control
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The
principal competitive factors in the property management and subleasing market include:
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Cost
control; and
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network
coverage.
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We
believe we compete favorably with our competitors on the basis of the above factors as a result of our market position and customer base.
By offering one-stop-shop services and affordable price points, we provide services to our customers that are difficult for other competitors
to address.
Employees
As
of March 31, 2021, we had approximately 132 employees and there was no labor union established by our employees. The following table
sets out a breakdown of the number of employees by function as of March 31, 2021:
Function
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Number
of
employees
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Administration
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15
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Finance
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8
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Logistics
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2
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Marketing
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10
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Production
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20
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Operation
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77
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Total
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132
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According
to PRC regulations, we must participate in various employee social security plans organized by local governments, including pension,
unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are also required
under PRC law to contribute 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.
We
believe that we maintain a good working relationship with our employees, and to date we have not experienced any significant labor disputes.
Government
Regulations
Currently,
apart from customary business laws and regulations, the PRC government does not regulate the garment manufacturing business and logistics
business. The PRC government may, however, from time to time institute rules and regulations on such businesses which makes it difficult
or impossible for us to operate successfully, if at all, in the PRC. Please see the section on “Risk Factors” for further
details.
The
PRC government encourages small to medium-sized companies in traditional industries, such as garment manufacturing, to modernize their
business models with technological updates in order to sharpen their competitive edge in global markets.
Item
1A. Risk Factors
You
should carefully consider the risks described below and elsewhere in this Form 10-K, which could materially and adversely affect our
business, results of operations or financial condition. Our business faces significant risks and the risks described below may not be
the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may materially affect
our business, results of operations, or financial condition. If any of these risks occur, the trading price of our common stock could
decline, and you may lose all or part of your investment. You should consider our business and prospects in light of the challenges we
face, including the ones discussed in this section. In the event that any of the events described in the risk factors below occur, it
could have a material adverse effect on our operations and cash flow and cause the value of our securities to decline in value or become
worthless.
Risks
Associated with Our Company
Our
success depends on our customer’s ability to market and sell their products manufactured by us.
All
of our customers in our garment manufacturing business are garment wholesalers and retailers. Consequently, our business and results
of operations are directly affected by the demand of their end customers for their products supplied by us. Drastic changes in consumer
preferences are beyond our control and will affect the demand for certain products supplied by us. We may not be able to anticipate and
respond to such changes in consumer preferences in a timely manner. If the sales of our customers’ products decrease or do not
grow as we expect, our customers may decrease the volume or purchase price of their orders, which could materially and adversely affect
our business, financial condition and results of operations.
Our
future expansion plans are subject to uncertainties and risks.
We
have set out our future business plans in the “Business Strategies” section in this report. The implementation of such future
plans requires us to effectively manage our sales, procurement, new logistics points and other aspects of our operations. If we fail
to effectively and efficiently implement our future plans, we may not be successful in achieving desirable and profitable results. Even
if we effectively and efficiently implement our future plans, there may be other unexpected events or factors that prevent us from achieving
the desirable and profitable results from the implementation of our future plans, such as changes in our ability to comply with local
rules and regulations or any delays or difficulties in obtaining the necessary licenses and approvals from local governments. Our business,
financial condition, results of operations and growth prospects may be materially and adversely affected if our future expansion plans
fail to achieve positive results.
If
we are unable to create brand influence, we may face difficulties in attracting new business partners and clients.
Our
brand is still being nurtured. It is of critical importance that we create and develop brand awareness in our industry in order to attract
new clients and business partners. Our major competitors have built well-known brands and continue to increase their influence. Our failure
to create and develop brand awareness for any reason may result in a material adverse effect on our business, operational results, and
financial position.
Our
ability to adequately protect our trade names, trademarks and patents could have an impact on our brand images and ability to penetrate
new markets.
We
believe that our trade names, trademarks and patents are important assets and an essential element of our strategy. We have applied the
registration of these trade names, trademarks and patents in China and Hong Kong, and these registrations are currently pending approval
from the corresponding departments. There can be no assurance that we will obtain such registrations or that the registrations we obtain
will prevent the imitation of our products or infringement of our intellectual property rights by others. In particular, the laws of
certain foreign countries may not protect proprietary rights to the same extent as the laws of the U.S. If any third-party copies our
products or our stores in a manner that projects lesser quality or carries a negative connotation, it could have a material adverse effect
on our brand image and reputation as well as our results of operations, financial condition and cash flows.
We
may be impacted by our ability to adequately source, distribute and sell merchandise and other materials in China.
We
face a variety of other risks generally associated with doing business in China. For example:
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political
instability, significant health hazards, environmental hazards or natural disasters which could negatively affect international economies,
financial markets and business activity;
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imposition
of new or retaliatory trade duties, sanctions or taxes and other charges on imports or exports;
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evolving,
new or complex legal and regulatory matters;
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volatility
in currency exchange rates;
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local
business practice and political issues (including issues relating to compliance with domestic or international labor standards) which
may result in adverse publicity or threatened or actual adverse consumer actions, including boycotts;
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potential
delays or disruptions in shipping and transportation and related pricing impacts;
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disruption
due to labor disputes; and
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changing
expectations regarding product safety due to new legislation or other factors.
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We
also rely upon third-party transportation providers for certain of our product shipments, including shipments to and from our distribution
centers, to our customers. Our utilization of these delivery services for shipments is subject to risks, including increases in labor
costs and fuel prices, which would increase our shipping costs, and associate strikes and inclement weather, which may impact our transportation
providers’ ability to provide delivery services that adequately meet our shipping needs.
Future
price increases in raw materials or changes in the supply of raw materials may materially and adversely affect our business, financial
condition and results of operations.
The
purchase of raw materials accounted for a substantial amount of our total purchases. The price of finished fabric and yarns can be volatile
and affected by factors such as weather, industry demand and supply. We cannot assure you that we can fully pass on the increased cost
in raw materials to our customers. Future price increases in raw materials or changes in the supply of raw materials may materially and
adversely affect our business, financial condition and results of operations.
Future
increases in cost of epidemic prevention supplies or changes in the demand and supply may materially and adversely affect our business,
financial condition and results of operations.
The
purchase of epidemic prevention supplies accounted for a substantial amount of our total purchases for the fiscal year 2021. The price
of finished face masks and nitrile gloves can be volatile and affected by factors such as COVID-19 outbreak condition, weather, industry
demand and supply. We cannot assure you that we can fully pass on the increased cost to our customers. Future increases in cost of epidemic
prevention supplies or changes in the demand and supply may materially and adversely affect our business, financial condition and results
of operations.
The
company’s revenue increased in the first nine months of fiscal 2021 due to a new business segment of epidemic prevention supplies
business. The company made a significant net loss despite of its overall revenue increase and the addition of a new business segment.
During first nine months of fiscal 2021, we accepted a nitrile glove purchase order from a customer. However, due to significant price
increase in nitrile glove due to the COVID-19 driven demand surge and the shortage of raw materials, the Company incurred a significant
loss during this period.
Our
top customers accounted for a major portion of our total revenue for the years ended March 31, 2021 and 2020 and may materially adversely
affect our financial condition and results of operations.
For
the year ended March 31, 2021, two customers accounted for approximately 76.2%, and 13.5% of the Company’s total garment manufacturing
revenues, respectively. For the year ended March 31, 2020, two customers accounted for approximately 85.5% and 10.2% of the Company’s
total garment manufacturing revenues. For the year ended March 31, 2021, three customers accounted for approximately 13.6%, 13.2% and
10.5% of the Company’s total logistic services revenues, respectively. For the year ended March 31, 2020, three customers
accounted for approximately 22.4%, 18.3% and 17.8% of the Company’s total logistic services revenues. However, our top customers
are not obligated in any way to continue to provide us with new businesses in the future at a level similar to that in the past or at
all. If any of our top customers reduce their orders with us or terminate their business relationship with our Group and if we
are not able to secure orders of a comparable size from other customers as replacement, our business operations and financial performance
may be materially and adversely affected.
We
are exposed to concentration risk of heavy reliance on our major supplier for the supply of our products, and any shortage of, or delay
in, the supply may significantly impact on our business and results of operation.
During
the years ended March 31, 2021 and 2020, approximately 98.7% and 92.7% of total inventory purchases were from the Company’s five
largest suppliers, respectively. Our business, financial condition and operating results depend on the continuous supply of products
from our largest suppliers and our continuous supplier-customer relationship with them. Our heavy reliance on our largest
suppliers for the supply of our products will have significant impact on our business and results of operation in the event of any
shortage of, or delay in the supply.
Any
labor shortages, increased labor costs or other factors affecting labor supply for our production materials may materially and adversely
affect our business operations.
We
rely on skilled workers to a significant extent as our production process in our garment manufacturing business is labor intensive in
nature. Our business performance relies on the steady supply of relatively low cost labor in the PRC. There is no guarantee that our
supply of labor will not be disrupted or that our labor costs will not increase. If we fail to retain our existing labor resources and/or
recruit sufficient labor in a timely manner, we may not be able to accommodate sudden increases in demand for our products.
Labor
costs are affected by the demand for and supply of labor and economic factors, such as the inflation rate and costs of living. Labor
costs may further increase in the future due to a shortage of skilled labor and growing industry demands. The failure to identify and
recruit replacement staff immediately following the unexpected loss of skilled workers could reduce our competitiveness. In addition,
we expect continued increases in labor costs in the PRC. In these circumstances, our business, financial condition, results of operations
and prospects could be materially and adversely affected.
We
may be impacted by our ability to attract, develop and retain qualified associates and manage labor-related costs.
We
believe our competitive advantage is providing a positive, engaging and satisfying experience for each customer, which requires us to
have highly trained and engaged associates. Our success depends in part upon our ability to attract, develop and retain a sufficient
number of qualified associates, including skill intensive labor. The turnover rate in the textile industry is generally high, and qualified
individuals of the requisite caliber and number needed to fill these positions may be in short supply in our operations. Competition
for such qualified individuals or changes in labor laws could require us to incur higher labor costs. Our inability to recruit a sufficient
number of qualified individuals in the future may delay planned delivery of finished products or affect the speed with which we expand.
Delayed deliveries, significant increases in associate turnover rates or significant increases in labor-related costs could have a material
adverse effect on our results of operations, financial condition and cash flows.
We
may be impacted by our vendors’ ability to manufacture and deliver raw materials in a timely manner, meet quality standards and
comply with applicable laws and regulations.
We
purchase raw materials from third-party vendors. Factors outside our control, such as production or shipping delays or quality problems,
could disrupt merchandise deliveries and result in lost sales, cancellation charges or excessive markdowns.
In
addition, quality problems could result in a product liability judgment or a widespread product
recall that may negatively impact our sales and profitability for a period of time depending
on product availability, competition reaction and consumer attitudes. Even if the product
liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding
any assertions could adversely impact our reputation with existing and potential customers
and our brand image.
Our
business could also suffer if our third-party vendors fail to comply with applicable laws and regulations. While our internal and vendor’s
operating guidelines promote ethical business practices and our associates visit and monitor the operations of our third-party vendors,
we do not control these vendors or their practices. The violation of labor, environmental or other laws by third-party vendors used by
us, or the divergence of a third-party vendor’s or partner’s labor or environmental practices from those generally accepted
as ethical or appropriate, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation.
Large
and similar sized competitors could steal our market share by offering lower prices.
We
endeavor to provide the highest possible quality service to our clients at the best possible price, however, large and similar sized
competitors might steal some of our market share by offering lower prices, causing us to lose some of our clients. If this happens, we
might not be able to generate adequate revenues and may soon find ourselves lacking the capital that is required to continue operations.
If
we are unable to attract additional customers and clients to purchase our services (and future products we may develop or sell), it will
have a negative effect on our ability to generate the revenue.
We
currently have a limited number of clients and customers. We have identified additional potential clients, but we cannot guarantee that
we will be able to secure them as clients. Even if we obtain additional clients and customers, there is no guarantee that we will be
able develop products and/or services that our clients and customers will want to purchase. If we are unable to attract enough customers
and clients to purchase services (and any products we may develop or sell) it will have a negative effect on our ability to generate
the revenue that is necessary to operate or expand our business. The lack of sufficient revenue will have a negative effect on the ability
of our company to continue operations and could force us to cease operations.
We
may be adversely affected by the performance of third-party contractors.
We
engaged third-party contractors to carry out logistics services. We endeavor to engage third-party companies with a strong reputation
and track record, high performance reliability and adequate financial resources. However, any such third-party contractor may still fail
to provide satisfactory logistics services at the level of quality or within the timeframe required by us or our customers. While we
generally require our logistics contractors to fully reimburse us for any losses arising from delay in delivery or non-delivery, our
results of operation and financial condition may be adversely affected if any of the losses are not borne by them. If the performance
of any third-party contractor is not satisfactory, we may need to replace such contractor or take other remedial actions, which could
adversely affect the cost structure and delivery schedule of our products and thus have a negative impact on our reputation, financial
position and business operations. In addition, as we are expanding our business into other geographical locations in the PRC, there may
be a shortage of third-party contractors that meet our quality standards and other selection criteria in such locations and, as a result,
we may not be able to engage a sufficient number of high-quality third-party contractors in a timely manner, which may adversely affect
our delivery schedules and delivery costs and hence our business, results of operations and financial conditions.
Our
insurance may not be sufficient.
We
carry insurance that we consider adequate in regard to the nature of the covered risks and the costs of coverage. We are not fully insured
against all possible risks, nor are all such risks insurable.
Our
business depends on the continued contributions made by Mr. Hong Zhida, as our key executive officer, the loss of who may result in a
severe impediment to our business.
Our
success is dependent upon the continued contributions made by our CEO and President, Mr. Hong Zhida. We rely on his expertise in business
operations when we are developing new products and services. The Company has no “Key Man” insurance to cover the resulting
losses in the event that any of our officer or directors should die or resign.
If
Mr. Hong Zhida cannot serve the Company or is no longer willing to do so, the Company may not be able to find alternatives in a timely
manner or at all. This would likely result in a severe damage to our business operations and would have an adverse material impact on
our financial position and operational results. To continue as a viable operation, the Company may have to recruit and train replacement
personnel at a higher cost.
Additionally,
if Mr. Hong Zhida joins our competitors or develops similar businesses that are in competition with our Company, our business may also
be negatively impacted.
Our
future success depends on our ability to attract and retain qualified long-term staff to fill management, technology, sales, marketing,
and customer services positions. We have a great need for qualified talent, but we may not be successful in attracting, hiring, developing,
and retaining the talent required for our success.
We
may be adversely impacted by certain compliance or legal matters.
We,
along with third parties we do business with, are subject to complex compliance and litigation risks. Actions filed against us from time
to time include commercial, tort, intellectual property, customer, employment, wage and hour, data privacy, securities, anti-corruption
and other claims, including purported class action lawsuits. The cost of defending against these types of claims against us or the ultimate
resolution of such claims, whether by settlement or adverse court decision, may harm our business. Further, potential claimants may be
encouraged to bring lawsuits based on a settlement from us or adverse court decisions against us. We cannot currently assess the likely
outcome of such suits, but if the outcome were negative, it could have a material adverse effect on our reputation, results of operations,
financial condition and cash flows.
In
addition, we may be impacted by litigation trends, including class action lawsuits involving consumers and shareholders, that could have
a material adverse effect on our reputation, the market price of our common stock, results of operations, financial condition and cash
flows.
Failure
to make adequate contributions to various employee benefits plans as required by PRC regulations may subject us to penalties.
Companies
operating in China are required 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 employees up to a maximum amount specified by the local government from time to time at
locations where they operate their 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 December 31, 2020, we have
made adequate employee benefit payments in strict compliance with the relevant PRC regulations for and on behalf of our employees.
There
is no guarantee that we will not fail in making adequate employee benefit payments in strict compliance with applicable PRC labor related
laws and regulations in the future. Our failure in making contributions to various employee benefits plans in strict compliance with
applicable PRC labor related laws and regulations may subject us to late payment penalties, and we could also be required to make up
the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid
employee benefits, our financial condition and results of operations may be adversely affected.
A
recent joint statement by the SEC and the Public Company Accounting Oversight Board (United States), or the “PCAOB,” proposed
rule changes submitted by Nasdaq, and the newly enacted “Holding Foreign Companies Accountable Act” all call for additional
and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially
the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.
On
April 21, 2020, the SEC and the PCAOB released a joint statement highlighting the risks associated with investing in companies based
in or having substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack
of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.
On
May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply a minimum offering size requirement for companies primarily operating
in a “Restrictive Market,” (ii) adopt a new requirement relating to the qualification of management or the board of directors
for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the
qualifications of the company’s auditor.
On
December 18, 2020, the “Holding Foreign Companies Accountable Act” was signed by previous President of the United States
and became law. This legislation requires certain issuers of securities to establish that they are not owned or controlled by a foreign
government. Specifically, an issuer must make this certification if the PCAOB is unable to audit specified reports because the issuer
has retained a foreign public accounting firm not subject to inspection by the PCAOB. Furthermore, if the PCAOB is unable to inspect
the issuer’s public accounting firm for three consecutive years, the issuer’s securities are banned from trade on a national
exchange or through other methods.
The
lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the
auditors based in China. As a result, investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB
to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firm’s audit
procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could
cause investors and potential investors in our Ordinary Shares to lose confidence in our audit procedures and reported financial information
and the quality of our financial statements.
Our
auditor, BF Borgers CPA PC, is an independent registered public accounting firm with the PCAOB, and as an auditor of publicly traded
companies in the U.S., is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess its compliance
with the applicable professional standards. Our auditor has been inspected by the PCAOB on a regular basis. If we were to be found out
of compliance with the existing or future guidelines discussed above, it may impair or halt the ability to trade our shares on Nasdaq
or other applicable trading market within the US.
There
are uncertainties under the PRC Securities Law relating to the procedures and requisite timing for the U.S. securities regulatory agencies
to conduct investigations and collect evidence within the territory of the PRC.
On
December 28, 2019, the newly amended Securities Law of the PRC (the “PRC Securities Law”) was promulgated, which became effective
on March 1, 2020. According to Article 177 of the PRC Securities Law (“Article 177”), the securities regulatory authority
of the State Council may establish a regulatory cooperation mechanism with securities regulatory authorities of another country or region
for the implementation of cross-border supervision and administration. Article 177 further provides that overseas securities regulatory
authorities shall not engage in activities pertaining to investigations or evidence collection directly conducted within the territories
of the PRC, and that no Chinese entities or individuals shall provide documents and information in connection with securities business
activities to any organizations and/or persons aboard without the prior consent of the securities regulatory authority of the State Council
and the competent departments of the State Council. As
of the date of this prospectus, we are not aware of any implementing rules or regulations which have been published regarding application
of Article 177.
As
advised by our PRC counsel, Article 177 is only applicable where the activities of overseas authorities constitute a direct investigation
or evidence collection by such authorities within the territory of the PRC. Our principal business operation is conducted in the PRC.
In the event that the U.S. securities regulatory agencies carry out an investigation on us such as an enforcement action by the Department
of Justice, the SEC or other authorities, such agencies’ activities will constitute conducting an investigation or collecting evidence
directly within the territory of the PRC and accordingly fall within the scope of Article 177. In that case, the U.S. securities regulatory
agencies may have to consider establishing cross-border cooperation with the securities regulatory authority of the PRC by way of judicial
assistance, diplomatic channels or establishing a regulatory cooperation mechanism with the securities regulatory authority of the PRC.
However, there is no assurance that the U.S. securities regulatory agencies will succeed in establishing such cross-border cooperation
in this particular case and/or establish such cooperation in a timely manner.
Furthermore,
as Article 177 is a recently promulgated provision and, as the date of this prospectus, there have not been implementing rules or regulations
regarding the application of Article 177, it remains unclear as to how it will be interpreted, implemented or applied by the Chinese
Securities Regulatory Commission or other relevant government authorities. As such, there are uncertainties as to the procedures and
requisite timing for the U.S. securities regulatory agencies to conduct investigations and collect evidence within the territory of the
PRC. If the U.S. securities regulatory agencies are unable to conduct such investigations, there exists a risk that they may determine
to suspend or de-register our registration with the SEC and may also delist our securities from Nasdaq or other applicable trading market
within the US.
We
are exposed to liabilities relating to environmental protection and safety laws and regulations.
Our
operations are subject to comprehensive and frequently changing laws and regulations relating to environmental protection and health
and safety. The discharge of waste and pollutants from our manufacturing operations into the environment may give rise to liabilities
that may require us to incur costs to remedy such discharge. If we violate such laws or regulations, we may be required to implement
corrective actions and could be subject to civil or criminal fines or penalties or other sanctions.
However,
we cannot assure you that any environmental laws adopted in the future will not materially increase our operating costs and other expenses.
We cannot assure you that we will not have to make significant capital or operating expenditures in the future in order to comply with
existing or new laws and regulations or that we will comply with applicable environmental laws at all times. Such violations or liability
could have a material adverse effect on our business, financial condition and results of operations.
If
our employees do not maintain a strong work ethic and comply with our code of ethics, including our confidentiality requirements, their
actions may negatively influence our business and reputation.
Employees
with good professional ethics are important for any company’s development. An employee might, either intentionally or unintentionally,
disclose confidential information about our Company or our clients and particularly unscrupulous employees might endeavor to sell material
information to industry competitors. Furthermore, our employees will develop relationships with our business partners and clients, and
may acquire information that could be used to harm their business interests. If this should happen, our partners and clients might lose
faith in our company. While we can never eliminate these ethical risks entirely, we will attempt to reduce the likelihood of breaches
of trust and mitigate their impacts of it by hiring highly professional employees and establishing strong internal information management
systems.
We
also plan to establish a series of policies to reduce the likelihood of such events.
However,
in the event that any employee discloses confidential information about our Company or our clients or sells material information to industry
competitors, it could have a material adverse effect on our reputation, operations and cash flow.
We
face risks associated with future Chinese regulations.
Currently
there are no government regulations in China regarding our type of services. The Chinese government encourages small-medium sized traditional
industry companies to conduct business model transformation and technology updates, which may help companies gain more competitive advantages
in international markets.
Other
than the required adherence to general business laws and regulatory disclosures, our services are not affected by any specific additional
Chinese government regulations. However, this does not preclude the possibility that China may institute regulations that will make it
difficult or impossible for us to operate successfully, if at all, in the future. If that occurs, we may have to focus our business on
companies located outside China. This could cause our results of operations to be materially adversely effected, reduce our revenues
and cause the value of our securities to decline in value.
We
may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing
when needed.
We
may need to obtain additional debt or equity financing to fund future capital expenditures. While we do not anticipate seeking additional
financing in the immediate future, any additional equity may result in dilution to the holders of our outstanding shares of capital stock.
Additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:
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our ability to pay dividends or require us to seek consent for the payment of dividends;
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our vulnerability to general adverse economic and industry conditions;
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us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash
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our flexibility in planning for, or reacting to, changes in our business and our industry.
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We
cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
Natural
disasters and other events beyond our control could materially adversely affect us.
Natural
disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy,
and thus could have a strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power
shortages, pandemics and other events beyond our control. This may result in delivery delays, malfunctioning of facilities or shutdown
of logistic points. Such events could make it difficult or impossible for us to deliver our products and services to our customers and
could decrease demand for our services. In the past, there was no significant disruption of operation at our production facilities and
logistic points. However, we could not assure you that the production facilities and logistic points will always operate normally in
the future.
We
are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth
companies will make our common stock less attractive to investors.
We
are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot
predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common
stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
General
Risks Associated with Business Operations in China
You
may have difficulty enforcing judgments against us.
We
are a Nevada corporation and most of our assets are and will be located outside of the United States. Almost all of our operations will
be conducted in China. In addition, our officers and directors are nationals and residents of a country other than the United States.
All of their assets are located outside the United States. As a result, it may be difficult for you to effect service of process within
the United States upon them. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of
the U.S. federal securities laws against us and our officer and director, since he is not a resident in the United States. In addition,
there is uncertainty as to whether the courts of China would recognize or enforce judgments of U.S. courts.
Foreign
exchange fluctuations may affect our business.
We
accept the payment for services in Chinese Yuan (CNY), Hong Kong Dollars (HKD), and U.S. Dollars (USD). Therefore, foreign exchange fluctuations
may influence our business in unpredictable ways.
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political
and economic conditions and the foreign exchange policy adopted by the PRC government. For instance, in August 2015, the People’s
Bank of China, or PBOC, changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers
who submit for reference rates to consider the previous day’s closing spot rate, foreign-exchange demand and supply as well as
changes in major currency rates. In 2016 and 2017, the value of the Renminbi depreciated approximately 7.2% and appreciated 6.3% against
the U.S. dollar, respectively. From April 2020 through the end of March 2021, the value of the Renminbi appreciated by approximately
7.4% against the U.S. dollar. It is difficult to predict how market forces or PRC or U.S. government policy, including any interest rate
increases by the Federal Reserve, may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There remains
significant international pressure on the PRC government to adopt a more flexible currency policy, including from the U.S. government,
which has threatened to label China as a “currency manipulator,” which could result in greater fluctuation of the Renminbi
against the U.S. dollar.
A
substantial percentage of our revenues and costs are denominated in Renminbi, and a significant portion of our assets are also denominated
in Renminbi. We are a holding company and we rely on dividends, loans and other distributions on equity paid by our operating subsidiaries
in China. Any significant fluctuations in the value of the Renminbi may materially and adversely affect our liquidity and cash flows.
Appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount we would receive. Conversely,
to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar
would have an adverse effect on the Renminbi amount we would receive.
Inflation
could pose a risk to our business.
Inflation
is an important factor that must be considered as we move forward. A change in the rate of inflation could influence the profits that
we generate from our business. When the rate of inflation rises, the operational costs of running our company would increase, such as
labor costs, raw materials and public utilities, affecting our ability to provide our services at competitive prices. An increase in
the rate of inflation would force our clients to search for other service providers, causing us to lose business and revenue.
We
face the risk that changes in the policies of the PRC government could have a significant impact upon the business we may be able to
conduct in the PRC and the profitability of such business.
The
PRC’s economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted
by the central government that set national economic development goals. Policies of the PRC government can have significant effects on
the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy.
Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries
and business development in the PRC will follow market forces. While we believe that this trend will continue, we cannot assure you that
this will be the case. A change in policies by the PRC government could adversely affect our interests by, among other factors: changes
in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of
supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform
policies for more than two decades, we cannot assure you that the government will continue to pursue such policies or that such policies
may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances
affecting the PRC’s political, economic and social environment.
There
are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
Most
of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject to
laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes.
Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
In
1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general.
The overall effect of legislation over the past four decades has significantly enhanced the protections afforded to various forms of
foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations
may not sufficiently cover all aspects of economic activities in China or may be subject to significant degree of interpretation by PRC
regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, and because of the limited
number of published decisions and the non-precedential nature of these decisions, and because the laws, rules and regulations often give
the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations
involve uncertainties and can be inconsistent and unpredictable. Therefore, it is possible that our existing operations may be found
not to be in full compliance with relevant laws and regulations in the future. In addition, the PRC legal system is based in part on
government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive
effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
Any
administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management
attention. 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. These uncertainties may impede our ability to enforce the contracts we have entered into
and could materially and adversely affect our business, financial condition and results of operations.
PRC
regulations regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult
for us to pursue growth through acquisitions.
Under
the PRC Anti-Monopoly Law, companies undertaking acquisitions relating to businesses in China must notify the anti-monopoly enforcement
agency, in advance of any transaction where the parties’ revenues in the China market exceed certain thresholds and the buyer would
obtain control of, or decisive influence over, the other party. In addition, on August 8, 2006, six PRC regulatory agencies, including
the MOFCOM, the State-Owned Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China
Securities Regulatory Commission, or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8,
2006 and was amended on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where overseas
companies established or controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC enterprises or
residents. Applicable PRC laws, rules and regulations also require certain merger and acquisition transactions to be subject to security
review.
PRC
regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC
subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries or limit our PRC subsidiaries’
ability to increase their registered capital or distribute profits.
SAFE
promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and
Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former
circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents
to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for
the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic
enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular
37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle,
such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material
event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration,
the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from
carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to
contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described
above could result in liability under PRC law for evasion of foreign exchange controls.
We
have notified substantial beneficial owners of shares of common stock who we know are PRC residents of their filing obligation, and pursuant
to SAFE Circular 37, we have periodically filed and updated the above-mentioned foreign exchange registration on behalf of certain employee
shareholders who we know are PRC residents. However, we may not be aware of the identities of all of our beneficial owners who are PRC
residents. We do not have control over our beneficial owners and cannot assure you that all of our PRC-resident beneficial owners will
comply with SAFE Circular 37 and subsequent implementation rules. The failure of our beneficial owners who are PRC residents to register
or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure
of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular
37 and subsequent implementation rules, may subject the beneficial owners or our PRC subsidiaries to fines and legal sanctions. On February
13, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment,
or SAFE Notice 13, which became effective on June 1, 2015. Pursuant to SAFE Notice 13, entities and individuals are required to apply
for foreign exchange registration of foreign direct investment and overseas direct investment, including those required under the SAFE
Circular 37, with designated domestic banks, instead of SAFE. The designated domestic banks will directly review the applications and
conduct the registration.
Furthermore,
since it is unclear how those new SAFE regulations, and any future regulation concerning offshore or cross-border transactions, will
be interpreted, amended and implemented by the relevant PRC government authorities, we cannot predict how these regulations will affect
our business operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to contribute
additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to our company. These
risks may have a material adverse effect on our business, financial condition and results of operations.
We
may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject
to PRC income tax on our global income.
Under
the PRC Enterprise Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established
under the laws of jurisdictions outside of China with “de facto management bodies” located in China may be considered PRC
tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income.
“De facto management body” refers to a managing body that exercises substantive and overall management and control over the
production and business, personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice
Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the basis of de
facto management bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the
“de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular
82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the
determining criteria set forth in Circular 82 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 offshore enterprises, regardless of whether
they are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise
income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result
of our global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is a PRC
resident enterprise for PRC tax purposes. 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.”
Restrictions
on currency exchange may limit our ability to utilize our PRC revenue effectively.
Substantially
all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes
dividends, trade and service-related foreign exchange transactions, but requires approval from or registration with appropriate government
authorities or designated banks under the “capital account,” which includes foreign direct investment and loans, including
loans we may secure from our onshore subsidiaries or variable interest entities. Currently, our PRC subsidiaries, which are wholly-foreign
owned enterprises, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends
to us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities
may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions.
Since
2016, PRC governmental authorities have imposed more stringent restrictions on outbound capital flows, including heightened scrutiny
over “irrational” overseas investments for certain industries, as well as over four kinds of “abnormal” offshore
investments, which are:
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investments through enterprises established for only a few months without substantive operation;
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investments with amounts far exceeding the registered capital of onshore parent and not supported by its business performance shown on
financial statements;
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investments in targets which are unrelated to onshore parent’s main business; and
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investments with abnormal sources of Renminbi funding suspected to be involved in illegal transfer of assets or illegal operation of
underground banking.
On
January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness
and Compliance Verification, which tightened the authenticity and compliance verification of cross-border transactions and cross-border
capital flow, including requiring banks to verify board resolutions, tax filing forms and audited financial statements before wiring
foreign invested enterprises’ foreign exchange dividend distribution of over US$50,000. In addition, the Outbound Investment Sensitive
Industry Catalogue (2018) lists certain sensitive industries that are subject to NDRC pre-approval requirements prior to remitting investment
funds offshore, which subjects us to increased approval requirements and restrictions with respect to our overseas investment activity.
Since a significant amount of our PRC revenue is denominated in Renminbi, any existing and future restrictions on currency exchange may
limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC, make investments, service
any debt we may incur outside of China or pay dividends in foreign currencies to our shareholders.
The
disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any
regulatory bodies in the PRC.
We
are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations
promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC reports and other disclosure and public pronouncements
are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings
are not subject to the review by China Securities Regulatory Commission, a PRC regulator that is responsible for oversight of the capital
markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding
that no local regulator has done any review of us, our SEC reports, other filings or any of our other public pronouncements.
Introduction
of new laws or changes to existing laws by the PRC government may adversely affect our business.
The
PRC legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal guidelines.
Unlike common law jurisdictions like the U.S., decided cases (which may be taken as reference) do not form part of the legal structure
of the PRC and thus have no binding effect on subsequent cases with similar issues and fact patterns. Furthermore, in line with its transformation
from a centrally-planned economy to a more free market-oriented economy, the PRC government is still in the process of developing a comprehensive
set of laws and regulations. As the legal system in the PRC is still evolving, laws and regulations or the interpretation of the same
may be subject to further changes. For example, the PRC government may impose restrictions on the amount of service fees that may be
payable by municipal governments to wastewater and sludge treatment service providers. Also, the PRC central and municipal governments
may impose more stringent environmental regulations which would affect our ability to comply with, or our costs to comply with, such
regulations. Such changes, if implemented, may adversely affect our business operations and may reduce our profitability.
Risks
Related to our Common Stock
The
market price of our shares is likely to be highly volatile and subject to wide fluctuations in response to factors such as:
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variations
in our actual and perceived operating results;
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news
regarding gains or losses of customers or partners by us or our competitors;
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news
regarding gains or losses of key personnel by us or our competitors;
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announcements
of competitive developments, acquisitions or strategic alliances in our industry by us or our competitors;
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changes
in earnings estimates or buy/sell recommendations by financial analysts;
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potential
litigation;
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the
imposition of fines or penalties related to our activities in the PRC and failure to comply with applicable rules and regulations;
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general
market conditions or other developments affecting us or our industry; and
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the
operating and stock price performance of other companies, other industries and other events or factors beyond our control.
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In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to
the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price
of the shares.
We
may never be able to pay dividends and are unlikely to do so.
To
date, we have not paid, nor do we intend to pay in the foreseeable future, dividends on our common stock, even if we become profitable.
Earnings, if any, are expected to be used to advance our activities and for working capital and general corporate purposes, rather than
to make distributions to stockholders. Since we are not in a financial position to pay dividends on our common stock and future dividends
are not presently being contemplated, investors are advised that return on investment in our common stock is restricted to an appreciation
in the share price. The potential or likelihood of an increase in share price is uncertain.
In
addition, under Nevada law, we may only pay dividends subject to our ability to service our debts as they become due and provided that
our assets will exceed our liabilities after the dividend. Our ability to pay dividends will therefore depend on our ability to generate
sufficient profits. Further, because of the various rules applicable to our operations in China and the regulations on foreign investments
as well as the applicable tax law, we may be subject to further limitations on our ability to declare and pay dividends to our shareholders.
Shareholders
may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of securities.
Wherever
possible, our board of directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that
the non-cash consideration will consist of shares of our common stock, warrants to purchase shares of our common stock or other securities.
Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued
shares of common stock or warrants to purchase such shares of common stock. In addition, we may attempt to raise capital by selling shares
of our common stock, possibly at a discount to market in the future. These actions will result in dilution of the ownership interests
of existing shareholders and may further dilute common stock book value, and that dilution may be material. Such issuances may also serve
to enhance existing management’s ability to maintain control of us, because the shares may be issued to parties or entities committed
to supporting existing management.
Our
shares may trade under $5.00 per share and thus will be a penny stock. Trading in penny stocks has many restrictions and these restrictions
could severely affect the price and liquidity of our shares.
In
the event that our stock trades below $5.00 per share, our stock would be known as a “penny stock”, which is subject to various
regulations involving disclosures to be given to you prior to the purchase of any penny stock. The SEC has adopted regulations which
generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share, subject
to certain exceptions. Depending on market fluctuations, our common stock could be considered to be a “penny stock”. A penny
stock is subject to rules that impose additional sales practice requirements on broker/dealers who sell these securities to persons other
than accredited investors. For transactions covered by these rules, the broker/dealer must make a special suitability determination for
the purchase of these securities. In addition, he must receive the purchaser’s written consent to the transaction prior to the
purchase. He must also provide certain written disclosures to the purchaser. Consequently, the “penny stock” rules may restrict
the ability of broker/dealers to sell our securities, and may negatively affect the ability of holders of shares of our common stock
to resell them. These disclosures require you to acknowledge that you understand the risks associated with buying penny stocks and that
you can absorb the loss of your entire investment. Penny stocks are low priced securities that do not have a very high trading volume.
Consequently, the price of the stock is often volatile and you may not be able to buy or sell the stock when you want to.