Item 1A. Risk Factors.
An investment in our common stock is highly speculative
and should only be made by persons who can afford to lose their entire investment in us. You should carefully consider the following risk
factors and other information in this Form 10-K before deciding to become a holder of our common stock. If any of the following risks
actually occur, our business and financial results could be negatively affected to a significant extent.
Risks Related to Doing Business in
the People’s Republic of China (“PRC”)
Because all of our operations are in China,
our business is subject to the complex and rapidly evolving laws and regulations there. The Chinese government may exercise significant
oversight and discretion over the conduct of our business and may intervene in or influence our operations at any time, which could result
in a material change in our operations and/or the value of our common stock.
As a business operating in China, we are subject to
the laws and regulations of the PRC, which can be complex and evolve rapidly. The PRC government has the power to exercise significant
oversight and discretion over the conduct of our business, and the regulations to which we are subject may change rapidly and with little
notice to us or our shareholders. As a result, the application, interpretation, and enforcement of new and existing laws and regulations
in the PRC are often uncertain. In addition, these laws and regulations may be interpreted and applied inconsistently by different agencies
or authorities, and inconsistently with our current policies and practices. New laws, regulations, and other government directives in
the PRC may also be costly to comply with, and such compliance or any associated inquiries or investigations or any other government actions
may:
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Delay or impede our development; |
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Result in negative publicity or increase our operating costs; |
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Require significant management time and attention; and |
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Subject us to remedies, administrative penalties and even criminal liabilities that may harm our business, including fines assessed for our current or historical operations, or demands or orders that we modify or even cease our business practices. |
The promulgation of new laws or regulations, or the
new interpretation of existing laws and regulations, in each case that restrict or otherwise unfavorably impact the ability or manner
in which we conduct our business and could require us to change certain aspects of our business to ensure compliance, which could reduce
revenues, increase costs and require us to obtain more licenses, permits, approvals or certificates, or subject us to additional liabilities.
To the extent any new or more stringent measures are required to be implemented, our business, financial condition and results of operations
could be adversely affected as well as materially decrease the value of our common stock.
Furthermore, if the PRC government determines that
our corporate structure does not comply with PRC regulations, or if these regulations change or are interpreted different in the future,
our securities may decline in value or become worthless if the determinations, changes or interpretations result in our inability to assert
control over the assets of our PRC subsidiaries that accordingly conduct all or substantially all of our operations.
If the Chinese government chooses to exert more
oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers, such action could significantly
limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to
significantly decline or be worthless.
Recent statements by the Chinese government have indicated
an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China based issuers.
PRC has recently adopted new rules that requires companies collecting or holding large amounts of data to undergo a cybersecurity review
prior to listing in foreign countries, a move that would significantly tighten oversight over China-based internet giants. Pursuant to
the Measures for Cybersecurity Review (2021 version) which was promulgated and took effect on February 15, 2022, any “online platform
operators” controlling personal information of more than one million users which seeks to list in a foreign stock exchange should
also be subject to cybersecurity review.
Our business mainly belongs to the consulting services of cultural industry
in China at present, which does not involve the collection of user data, implicate cybersecurity, or involve any other type of restricted
industry.. Based on the advice of our PRC legal counsel, Zhejiang TaoTeng Law Firm (“Zhejiang Taoteng”) in their
legal opinion dated on August 4, 2022, and our understanding of currently applicable PRC laws and regulations, as of the date of this
Form 10-K, our common stock, listing and trading of our common stock on the over-the-counter stock market or public offering in the U.S.
is not subject to the review or any prior approval of the Cyberspace Administration of China (the “CAC”) , the China Securities
Regulatory Commission (the “CRSC”) or any other PRC governmental agency. Uncertainties still exist, however, due to the possibility
that laws, regulations, or policies in the PRC could change rapidly in the future. Any future action by the PRC government expanding the
categories of industries and companies whose foreign securities offerings are subject to review by the CRSC or the CAC could significantly
limit or completely hinder our ability to offer or continue to offer securities to investors and could cause the value of such securities
to significantly decline or be worthless.
4
If the Chinese government were to impose new
requirements for approval from the PRC Authorities to issue our common stock to foreign investors or list on a foreign exchange, such
action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the
value of such securities to significantly decline or be worthless.
As of the date
of Form 10-K, we (1) are not required to obtain any approval from any PRC authorities, including the China Securities Regulatory Commission
(the “CSRC”), the Cyberspace Administration of China (the “CAC”) or any other PRC governmental agency to issue
our common stock to foreign investors and list on a foreign exchange, (2) are not subject to permission requirements from the CSRC, the
CAC or any other entity that is required to approve of our PRC subsidiary’s operations, and (3) have not received or were denied
such approval or permissions by any PRC authorities. Nevertheless, the General Office of the Central Committee of the Communist Party
of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities
Activities According to Law,” or the Opinions, which were made available to the public on July 6, 2021. The Opinions emphasized
the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas
listings by Chinese companies. Given the current PRC regulatory environment, it is uncertain when and whether we or our PRC subsidiary,
will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such permission is
obtained, whether it will be denied or rescinded. We have been closely monitoring regulatory developments in China regarding any
necessary approvals from the CSRC or other PRC governmental authorities required for overseas listings, including this registration statement.
As of the date of this Form 10-K, we have not received any inquiry, notice, warning, sanctions or regulatory objection to this registration
statement from the CSRC, the CAC or other PRC governmental authorities. However, there remains significant uncertainty as to the enactment,
interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital markets activities.
On December 24, 2021, the CSRC released
the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft
for Comments) (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance of Securities and Listing
Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”, and collectively with the Draft
Administrative Provisions, the “Draft Rules Regarding Overseas Listing”), which stipulate that Chinese-based companies,
or the issuer, shall fulfill the filing procedures after the issuer makes an application for initial public offering and listing in an
overseas market, and certain overseas offering and listing such as those that constitute a threat to or endanger national security, as
reviewed and determined by competent authorities under the State Council in accordance with law, may be prohibited under the Draft Rules
Regarding Overseas Listing. On February 17, 2023, with the approval of the State Council, the CSRC released the Trial Administrative
Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”) and five supporting guidelines,
which will come into effect on March 31, 2023. According to the Trial Measures, among other requirements, (1) domestic companies
that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedures with the CSRC; if a
domestic company fails to complete the filing procedures, such domestic company may be subject to administrative penalties; and (2) where
a domestic company seeks to indirectly offer and list securities in an overseas market, the issuer shall designate a major domestic operating
entity responsible for all filing procedures with the CSRC, and such filings shall be submitted to the CSRC within three business days
after the submission of the overseas offering and listing application. On the same day, the CSRC also held a press conference for the
release of the Trial Measures and issued the Notice on Administration for the Filing of Overseas Offering and Listing by Domestic Companies,
which clarifies that (1) on or prior to the effective date of the Trial Measures, domestic companies that have already submitted valid
applications for overseas offering and listing but have not obtained approval from overseas regulatory authorities or stock exchanges
may reasonably arrange the timing for submitting their filing applications with the CSRC, and must complete the filing before the completion
of their overseas offering and listing; (2) a six-month transition period will be granted to domestic companies which, prior to the
effective date of the Trial Measures, have already obtained the approval from overseas regulatory authorities or stock exchanges, but
have not completed the indirect overseas listing; if domestic companies fail to complete the overseas listing within such six-month transition
period, they shall file with the CSRC according to the requirements; (3) the CSRC will solicit opinions from relevant regulatory authorities
and complete the filing of the overseas listing of companies with contractual arrangements which duly meet the compliance requirements,
and support the development and growth of these companies; and (4) domestic companies that are already listed on overseas exchanges by
or before March 31, 2023 are not required to make any filings with CSRC unless they raise additional equity financing.
As of the date of this Form 10-K, neither we
nor any of the PRC subsidiaries have been subject to any investigation, or received any notice, warning, or sanction from the CSRC or
other applicable government authorities related to our listing. If we are required to file with the CSRC for our future offering, there
is no assurance that we can complete such filing in a timely manner or even at all. Any failure by us to comply with such filing requirements
may result in an order to rectify, warnings and fines against us and could materially hinder our ability to offer or continue to offer
our securities.
PRC regulations relating to investments in foreign
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.
As an U.S. holding company of our PRC subsidiaries,
we may make loans to our PRC subsidiaries or may make additional capital contributions to our PRC subsidiaries, subject to satisfaction
of applicable governmental registration and approval requirements.
Any loans we extend to our PRC subsidiaries, which
are treated as foreign-invested enterprises under PRC law, cannot exceed the statutory limit and must be registered with the local counterpart
of the State Administration of Foreign Exchange (“SAFE”).
5
In July 2014, 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, which replaces the previous SAFE Circular 75. SAFE Circular 37 requires PRC residents,
including PRC individuals and PRC corporate entities, to register with SAFE or its local branches in connection with their direct or indirect
offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any
offshore acquisitions that we may make in the future.
Under SAFE Circular 37, PRC residents who make, or
have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose vehicles, or SPVs,
are required to register such investments with SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder
of an SPV, is required to update its registration with the local branch of SAFE with respect to that SPV, to reflect any material change.
Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to update their registration with the
local branch of SAFE to reflect any material change. If any PRC resident shareholder of such SPV fails to make the required registration
or to update the registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from
any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions
into its subsidiary in China. In February 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration
Policy on Direct Investment, or SAFE Notice 13. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign
direct investments and outbound direct investments, including those required under SAFE Circular 37, must be filed with qualified banks
instead of SAFE. Qualified banks should examine the applications and accept registrations under the supervision of SAFE. We have used
our best efforts to notify PRC residents or entities who directly or indirectly hold shares in our U.S. holding company and who are known
to us as being PRC residents to complete the foreign exchange 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. We cannot assure you that all other shareholders or beneficial owners of ours who are PRC residents or
entities have complied with, and will in the future make, obtain or update 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, and limit our PRC subsidiary’s ability to make distributions or pay dividends to us or affect our ownership structure,
which could adversely affect our business and prospects.
Furthermore, as these foreign exchange and outbound
investment related regulations are relatively new and their interpretation and implementation has been constantly evolving, it is unclear
how these regulations, and any future regulation concerning offshore or cross-border investments and transactions, will be interpreted,
amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval
process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings,
which may adversely affect our financial condition and results of operations. We cannot assure you that we have complied or will be able
to comply with all applicable foreign exchange and outbound investment related regulations. In addition, if we decide to acquire a PRC
domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary
approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability
to implement our acquisition strategy and could adversely affect our business and prospects.
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 the proceeds we expect to receive from our future offering and to fund our PRC may be negatively
affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
PRC regulation of loans to and direct investment
in PRC entities by offshore holding companies and governmental control of currency conversion may impact us to make loans or additional
capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand
our business.
Any funds we transfer to our PRC subsidiaries,
either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration with relevant governmental
authorities in China. According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in China, capital contributions
to our PRC subsidiary are subject to the approval of or filing with the Ministry of Commerce, or MOFCOM or its local branches and registration
with a local bank authorized by the State Administration of Foreign Exchange, or SAFE. In addition, any medium or long-term loan to be
provided by us to our PRC operating subsidiaries, must be registered with certain authorities. If we fail to complete such registrations,
our ability to use the proceeds of our future offering and to capitalize our PRC operations may be negatively affected, which could adversely
affect our liquidity and our ability to fund and expand our business.
6
On March 30, 2015, the SAFE promulgated the Circular
on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular
19, which took effect as of June 1, 2015. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the
foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit
FIEs from using the Renminbi fund converted from their foreign exchange capital for expenditure beyond their business scopes, providing
entrusted loans or repaying loans between nonfinancial enterprises. The SAFE issued the Circular on Reforming and Regulating Policies
on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective in June 2016. Pursuant to SAFE Circular
16, enterprises registered in China may also convert their foreign debts from foreign currency to Renminbi on a self-discretionary basis.
SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including but not limited
to foreign currency capital and foreign debts) on a self-discretionary basis which applies to all enterprises registered in China. SAFE
Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly
or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted Renminbi shall
not be provided as loans to its non-affiliated entities. As this circular is relatively new, there remains uncertainty as to its interpretation
and application and any other future foreign exchange related rules. Violations of these Circulars could result in severe monetary or
other penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted from loans or capital
contributions of the Company to fund our PRC operating subsidiary, to invest in or acquire any other PRC companies through our PRC Subsidiary,
which may adversely affect our business, financial condition and results of operations.
Changes in China’s economic, political
or social conditions or government policies could have a material adverse effect on our business and operations.
Substantially all of our assets and operations are
located in the PRC. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant
degree by political, economic and social conditions in the PRC generally. The Chinese economy differs from the economies of most developed
countries in many respects, including the level of government involvement, development, growth rate, control of foreign exchange and allocation
of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform,
the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises,
a substantial portion of productive assets in the PRC is still owned by the government. In addition, the Chinese government continues
to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant
control over the PRC’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant
growth over past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in
economic conditions in the PRC, in the policies of the Chinese government or in the laws and regulations in the PRC could have a material
adverse effect on the overall economic growth of the PRC. Such developments could adversely affect our business and operating results,
lead to a reduction in demand for our consulting services and adversely affect our competitive position. The Chinese government has implemented
various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese
economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected
by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented
certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic
activity in the PRC, which may adversely affect our business and operating results.
Non-compliance with labor-related laws and regulations
of the PRC may have an adverse impact on our financial condition and results of operation.
We have been subject to stricter regulatory requirements
in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including pensions, housing
fund, medical insurance, work-related injury insurance, unemployment insurance and childbearing insurance to designated government agencies
for the benefit of our employees. Pursuant to the PRC Labor Contract Law, or the Labor Contract Law, that became effective in January
2008 and its implementing rules that became effective in September 2008 and was amended in July 2013, employers are subject to stricter
requirements in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation
and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment
or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or
cost-effective manner, which could adversely affect our business and results of operations. We believe our current practice complies with
the Labor Contract Law and its amendments. However, the relevant governmental authorities may take a different view and impose fines on
us.
As the interpretation and implementation of labor-related
laws and regulations are still evolving, we cannot assure you that our employment practice does not and will not violate labor-related
laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated
relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business, financial
condition and results of operations could be materially and adversely affected.
7
PRC laws and regulations governing our current
business operations are sometimes vague and uncertain. Uncertainties with respect to the PRC legal system, including those regarding the
enforcement of laws, and sudden or unexpected changes, with little advance notice, in laws and regulations in China could adversely affect
us and limit the legal protections available to you and us.
There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business
and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes
vague and may be subject to future changes, and their official interpretation and enforcement could be unpredictable, with little advance
notice. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations,
may be delayed, and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a
manner different from our understanding of these laws and regulations. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations
may have on our business.
Our subsidiaries, Hangzhou
Longwen, HZYS and HWF are formed under and governed by the laws of the PRC. The PRC legal system is a civil law system based on written
statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference, but have limited
precedential value. 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 the enforcement of these laws, regulations and rules involves uncertainties.
In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations governing economic matters in general, such as foreign investment,
corporate organization and governance, commerce, taxation and trade. The overall effect of legislation over the past three decades has
significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system
continues to evolve rapidly, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws,
regulations and rules involves uncertainties and sudden changes, sometimes with little advance notice. As a significant part of our business
is conducted in China, our operations are principally governed by PRC laws and regulations, which may limit legal protections available
to us. Uncertainties due to evolving laws and regulations could also impede the ability of a China-based company, such as our company,
to obtain or maintain permits or licenses required to conduct business in China. In the absence of required permits or licenses, governmental
authorities could impose material sanctions or penalties on us. In addition, some regulatory requirements issued by certain PRC government
authorities may not be consistently applied by other PRC government authorities (including local government authorities), thus making
strict compliance with all regulatory requirements impractical, or in some circumstances impossible. For example, we may have to resort
to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative
and court authorities have discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict
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 on a timely basis or
at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime
after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs
and diversion of resources and management attention.
The PRC government has significant
oversight and discretion over the conduct of our business and may intervene or influence our operations as the government deems appropriate
to further regulatory, political and societal goals. The PRC government has recently published new policies that significantly affected
certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future release
regulations or policies regarding our industry that could adversely affect our business, financial condition and results of operations.
Furthermore, the PRC government has recently indicated an intent to exert more oversight and control over securities offerings and other
capital markets activities that are conducted overseas and foreign investment in China-based companies like us. Any such action, once
taken by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors
and cause the value of such securities to significantly decline or in extreme cases, become worthless.
Furthermore, if China adopts more stringent standards
with respect to certain areas such as environmental protection or corporate social responsibilities, we may incur increased compliance
costs or become subject to additional restrictions in our operations. Certain areas of the law, including intellectual property rights
and confidentiality protections in China may also not be as effective as in the United States or other countries. In addition, we cannot
predict the effects of future developments in the PRC legal system on our business operations, including the promulgation of new laws,
or changes to existing laws or the interpretation or enforcement thereof. These uncertainties could limit the legal protections available
to us and our investors, including you.
8
We may become subject
to a variety of laws and regulations in the PRC regarding privacy, data security, cybersecurity, and data protection. We may be liable
for improper use or appropriation of personal information provided by our customers.
We may become subject to a variety of laws and regulations
in the PRC regarding privacy, data security, cybersecurity, and data protection. These laws and regulations are continuously evolving
and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting,
particularly with respect to foreign laws. In particular, there are numerous laws and regulations regarding privacy and the collection,
sharing, use, processing, disclosure, and protection of personal information and other user data. Such laws and regulations often vary
in scope, may be subject to differing interpretations, and may be inconsistent among different jurisdictions.
We expect to obtain information about various aspects
of our operations as well as regarding our employees and third parties. We also maintain information about various aspects of our operations
as well as regarding our employees. The integrity and protection of our customer, employee and company data is critical to our business.
Our customers and employees expect that we will adequately protect their personal information. We are required by applicable laws to keep
strictly confidential the personal information that we collect, and to take adequate security measures to safeguard such information.
The PRC Criminal Law, as amended by its Amendment
7 (effective on February 28, 2009) and Amendment 9 (effective on November 1, 2015), prohibits institutions, companies and their employees
from selling or otherwise illegally disclosing a citizen’s personal information obtained during the course of performing duties
or providing services or obtaining such information through theft or other illegal ways. On November 7, 2016, the Standing Committee of
the National People’s Congress of China (SCNPC) issued the Cyber Security Law of the PRC, or Cyber Security Law, which became effective
on June 1, 2017.
Pursuant to the Cyber Security Law, network operators
must not, without users’ consent, collect their personal information, and may only collect users’ personal information necessary
to provide their services. Providers are also obliged to provide security maintenance for their products and services and shall comply
with provisions regarding the protection of personal information as stipulated under the relevant laws and regulations.
The Civil Code of the PRC (issued by the PRC National
People’s Congress on May 28, 2020 and effective from January 1, 2021) provides main legal basis for privacy and personal information
infringement claims under the Chinese civil laws. PRC regulators, including the Cyberspace Administration of China, MIIT, and the Ministry
of Public Security have been increasingly focused on regulation in the areas of data security and data protection.
The PRC regulatory requirements regarding cybersecurity
are constantly evolving. For instance, various regulatory bodies in China, including the Cyberspace Administration of China, the Ministry
of Public Security and the SAMR, have enforced data privacy and protection laws and regulations with varying and evolving standards and
interpretations. In April 2020, the Chinese government promulgated Cybersecurity Review Measures, which came into effect on June 1, 2020.
According to the Cybersecurity Review Measures, operators of critical information infrastructure must pass a cybersecurity review when
purchasing network products and services which do or may affect national security.
In November 2016, the SCNPC passed China’s first
Cybersecurity Law (“CSL”), which became effective in June 2017. The CSL is the first PRC law that systematically lays out
the regulatory requirements on cybersecurity and data protection, subjecting many previously under-regulated or unregulated activities
in cyberspace to government scrutiny. The legal consequences of violation of the CSL include penalties of warning, confiscation of illegal
income, suspension of related business, winding up for rectification, shutting down the websites, and revocation of business license or
relevant permits. In April 2020, the Cyberspace Administration of China and certain other PRC regulatory authorities promulgated the Cybersecurity
Review Measures, which became effective in June 2020. Pursuant to the Cybersecurity Review Measures, operators of critical information
infrastructure must pass a cybersecurity review when purchasing network products and services which do or may affect national security.
On July 10, 2021, the Cyberspace Administration of China issued a revised draft of the Measures for Cybersecurity Review for public comments
(“Draft Measures”), which required that, in addition to “operator of critical information infrastructure,” any
“data processor” carrying out data processing activities that affect or may affect national security should also be subject
to cybersecurity review, and further elaborated the factors to be considered when assessing the national security risks of the relevant
activities, including, among others, (i) the risk of core data, important data or a large amount of personal information being stolen,
leaked, destroyed, and illegally used or exited the country; and (ii) the risk of critical information infrastructure, core data, important
data or a large amount of personal information being affected, controlled, or maliciously used by foreign governments after listing abroad.
The Cyberspace Administration of China has said that under the proposed rules companies holding data on more than 1,000,000 users must
now apply for cybersecurity approval when seeking listings in other nations because of the risk that such data and personal information
could be “affected, controlled, and maliciously exploited by foreign governments,” The cybersecurity review will also investigate
the potential national security risks from overseas IPOs. On June 10, 2021, the SCNPC promulgated the PRC Data Security Law, which took
effect on September 1, 2021. The Data Security Law also sets forth the data security protection obligations for entities and individuals
handling personal data, including that no entity or individual may acquire such data by stealing or other illegal means, and the collection
and use of such data should not exceed the necessary limits. The costs of compliance with, and other burdens imposed by, CSL and any other
cybersecurity and related laws may limit the use and adoption of our products and services and could have an adverse impact on our business.
Further, if the enacted version of the Measures for Cybersecurity Review mandates clearance of cybersecurity review and other specific
actions to be completed by companies like us, we face uncertainties as to whether such clearance can be timely obtained, or at all.
9
On August 20, 2021, the SCNPC promulgated the PRC
Personal Information Protection Law, which will take effect in November 2021. The Personal Information Protection Law provides that any
entity involving processing of personal information (“Personal Information Processer”)shall take various measures to prevent
the disclosure, modification or losing of the personal information processed by such entity, including, but not limited to, formulating
a related internal management system and standard of operation, conducting classified management of personal information, taking safety
technology measures to encrypt and de-identify the processed personal information, providing regular safety training and education for
staff and formulating a personal information safety emergency accident plan. The Personal Information Protection Law further provides
that a Personal Information Processer shall conduct a prior evaluation of the impact of personal information protection before the occurrence
of various situations, including, but not limited to, processing of sensitive personal information (personal information that, once leaked
or illegally used, may lead to discrimination against an individual or serious harm to an individual’s personal or property safety,
including information on an individual’s ethnicity, religious beliefs, personal biological characteristics, medical health, financial
accounts, personal whereabouts), using personal information to make automated decisions and providing personal information to any overseas
entity.
On November 14, 2021, the Cyberspace Administration
of China released the Regulations on Network Data Security (draft for public comments) and accepted public comments until December 13,
2021. The draft Regulations on Network Data Security provide that data processors refer to individuals or organizations that autonomously
determine the purpose and the manner of processing data. If a data processor that processes personal data of more than one million users
intends to list overseas, it shall apply for a cybersecurity review. In addition, data processors that process important data or are listed
overseas shall carry out an annual data security assessment on their own or by engaging a data security services institution, and the
data security assessment report for the prior year should be submitted to the local cyberspace affairs administration department before
January 31 of each year. On December 28, 2021, the Measures for Cybersecurity Review (2021 version) was promulgated and took effect on
February 15, 2022, which iterates that any “online platform operators” controlling personal information of more than one million
users which seeks to list in a foreign stock exchange should also be subject to cybersecurity review. As advised by our PRC legal counsel,
Zhejiang TaoTeng, we are not among the “operator of critical information infrastructure” or “data processor” as
mentioned above. The Company, through Hangzhou Longwen, is to engage in project development and to provide consulting services in culture
fields in China, and neither the Company nor its subsidiary is engaged in data activities as defined under the Personal Information Protection
Law, which includes, without limitation, collection, storage, use, processing, transmission, provision, publication and deletion of data.
In addition, neither the Company nor its subsidiary is an operator of any “critical information infrastructure” as defined
under the PRC Cybersecurity Law and the Security Protection Measures on Critical Information Infrastructure. However, Measures for Cybersecurity
Review (2021 version) was recently adopted and the Regulations on Network Data Security (draft for comments) is in the process of being
formulated and the Opinions remain unclear on how it will be interpreted, amended and implemented by the relevant PRC governmental authorities.
There remains uncertainties as to when the final measures
will be issued and take effect, how they will be enacted, interpreted or implemented, and whether they will affect us. If we inadvertently
conclude that the Measures for Cybersecurity Review (2021 version) do not apply to us, or applicable laws, regulations, or interpretations
change and it is determined in the future that the Measures for Cybersecurity Review (2021 version) become applicable to us, we may be
subject to review when conducting data processing activities, and may face challenges in addressing its requirements and make necessary
changes to our internal policies and practices. We may incur substantial costs in complying with the Measures for Cybersecurity Review
(2021 version), which could result in material adverse changes in our business operations and financial position. If we are not able to
fully comply with the Measures for Cybersecurity Review (2021 version), our ability to offer or continue to offer securities to investors
may be significantly limited or completely hindered, and our securities may significantly decline in value or become worthless.
10
The CSRC has released the Trial Administrative
Measures of Overseas Securities Offering and Listing by domestic companies and five guidelines, which will come into effect on March 31,
2023. The Chinese government may exert more oversight and control over offerings that are conducted overseas and foreign investment in
China-based issuers, which could significantly limit or completely hinder our ability to offer or continue to offer our common stock to
investors and could cause the value of our common stock to significantly decline or become worthless
On December 24, 2021, the CSRC released
the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (Draft
for Comments) (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance of Securities and Listing
Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”, and collectively with the Draft
Administrative Provisions, the “Draft Rules Regarding Overseas Listing”), which stipulate that Chinese-based companies,
or the issuer, shall fulfill the filing procedures after the issuer makes an application for initial public offering and listing in an
overseas market, and certain overseas offering and listing such as those that constitute a threat to or endanger national security, as
reviewed and determined by competent authorities under the State Council in accordance with law, may be prohibited under the Draft Rules
Regarding Overseas Listing. On February 17, 2023, with the approval of the State Council, the CSRC released the Trial Administrative
Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”) and five supporting guidelines,
which will come into effect on March 31, 2023. According to the Trial Measures, among other requirements, (1) domestic companies
that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedures with the CSRC; if a
domestic company fails to complete the filing procedures, such domestic company may be subject to administrative penalties; and (2) where
a domestic company seeks to indirectly offer and list securities in an overseas market, the issuer shall designate a major domestic operating
entity responsible for all filing procedures with the CSRC, and such filings shall be submitted to the CSRC within three business days
after the submission of the overseas offering and listing application. On the same day, the CSRC also held a press conference for the
release of the Trial Measures and issued the Notice on Administration for the Filing of Overseas Offering and Listing by Domestic Companies,
which clarifies that (1) on or prior to the effective date of the Trial Measures, domestic companies that have already submitted valid
applications for overseas offering and listing but have not obtained approval from overseas regulatory authorities or stock exchanges
may reasonably arrange the timing for submitting their filing applications with the CSRC, and must complete the filing before the completion
of their overseas offering and listing; (2) a six-month transition period will be granted to domestic companies which, prior to the
effective date of the Trial Measures, have already obtained the approval from overseas regulatory authorities or stock exchanges, but
have not completed the indirect overseas listing; if domestic companies fail to complete the overseas listing within such six-month transition
period, they shall file with the CSRC according to the requirements; (3) the CSRC will solicit opinions from relevant regulatory authorities and complete the filing of the overseas listing
of companies with contractual arrangements which duly meet the compliance requirements, and support the development and growth of these
companies; and (4) domestic companies that are already listed on overseas exchanges by or before March 31, 2023 are not required to make
any filings with CSRC unless they raise additional equity financing.
As of the date of this Form 10-K, neither we
nor any of the PRC subsidiaries have been subject to any investigation, or received any notice, warning, or sanction from the CSRC or
other applicable government authorities related to our listing or this Form 10-K. If we are required to file with the CSRC for our future
offering, there is no assurance that we can complete such filing in a timely manner or even at all. Any failure by us to comply with such
filing requirements may result in an order to rectify, warnings and fines against us and could materially hinder our ability to offer
or continue to offer our securities.
In addition, if the PRC government authorities later
promulgate new rules or explanations requiring that we obtain their approvals for filings, registrations or other kinds of authorizations
for an offering, there is no assurance that we can obtain the approval, authorizations, or complete required procedures or other requirements
in a timely manner, or at all, or obtain a waiver of the requisite requirements if and when procedures are established to obtain such
a waiver.
We are a holding company
and will rely on dividends paid by our subsidiaries for our cash needs. Any limitation on the ability of our subsidiaries to make dividend
payments to us, or any tax implications of making dividend payments to us, could limit our ability to pay our parent company expenses
or pay dividends to holders of our common stocks.
We are a holding company and conduct substantially
all of our business through our PRC subsidiaries. We may rely on dividends to be paid by our PRC subsidiaries to fund our cash and financing
requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we
may incur and to pay our operating expenses. If our PRC subsidiaries incur debt on its own behalf in the future, the instruments governing
the debt may restrict its ability to pay dividends or make other distributions to us.
11
Under PRC laws and regulations, our PRC directly owned
subsidiary, Hangzhou Longwen, may pay dividends only out of its accumulated 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 a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital.
The reserve fund is not distributable as cash dividends.
Our PRC subsidiaries generate primarily all of their
revenue in Renminbi, which is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit
the ability of our PRC subsidiaries to use their Renminbi revenues to pay dividends to us. The PRC government may continue to strengthen
its capital controls, and more restrictions and substantial vetting process may be put forward by SAFE for cross-border transactions falling
under both the current account and the capital account. Any limitation on the ability of our PRC subsidiaries to pay dividends or make
other kinds of payments 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.
In addition, the Enterprise Income Tax Law, or EIT,
and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies
to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government
and governments of other countries or regions where the non-PRC resident enterprises are incorporated. 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.
Because our business is conducted in RMB and
the price of our common stock is quoted in United States dollars, changes in currency conversion rates may affect the value of your investments.
Our business is conducted in the PRC, our books and
records are maintained in RMB, which is the currently of the PRC, and the financial statements that we file with the SEC and provide to
our shareholders are presented in United States dollars. Changes in the exchange rate between the RMB and dollar affect the value of our
assets and the results of our operations in United States dollars. The value of the RMB against the United States dollar and other currencies
may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions and perceived changes
in the economy of the PRC and the United States. Any significant revaluation of the RMB may materially and adversely affect our cash flows,
revenue and financial condition.
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 in China and by
China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the
Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between
July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow
band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30,
2015, the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies
that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a
freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese
yen and the British pound. In the fourth quarter of 2016, the Renminbi depreciated significantly in the backdrop of a surging U.S. dollar
and persistent capital outflows of China.
This depreciation halted in 2017, and the RMB appreciated
approximately 7% against the U.S. dollar during this one-year period. The Renminbi in 2018 depreciated approximately by 5% against the
U.S. dollar. Starting from the beginning of 2019, the Renminbi has depreciated significantly against the U.S. dollar again. In early August
2019, the PBOC set the Renminbi’s daily reference rate at RMB7.0039 to US$1.00, the first time that the exchange rate of Renminbi
to U.S. dollar exceeded 7.0 since 2008. With the development of the foreign exchange market and progress towards interest rate liberalization
and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot
assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult
to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in
the future.
There remains significant international pressure on
the Chinese government to adopt a flexible currency policy to allow the Renminbi to appreciate against the U.S. dollar. Significant revaluation
of the Renminbi may have a material and adverse effect on your investment. Substantially all of our revenues and costs are denominated
in Renminbi. Any significant revaluation of Renminbi may materially and adversely affect our revenues, earnings and financial position,
and the value of, and any dividends payable on, our common stock in U.S. dollars.
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 Renminbi into foreign currency.
As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
12
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 receive substantially all of our
net revenues in RMB. Under our current corporate structure, our Company in the United States relies 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.
In light of the flood of capital outflows of China
in 2016 due to the weakening RMB, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of
major outbound capital movement. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions
falling under the capital account. 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.
Under the PRC Enterprise Income Tax Law, or
the EIT Law, we may be classified as a “resident enterprise” of China, which could result in unfavorable tax consequences
to us and our non-PRC shareholders.
The EIT Law and its implementing rules provide that
enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident
enterprises” under PRC tax laws. The implementing rules promulgated under the EIT Law define the term “de facto management
bodies” as a management body which substantially manages, or has control over the business, personnel, finance and assets of an
enterprise. In April 2009, the State Administration of Taxation, or SAT, issued the Circular on Issues Concerning the Identification of
Chinese-Controlled Overseas Registered Enterprises as Resident Enterprises in accordance with the Actual Standards of Organizational Management,
known as Circular 82, which has provided certain specific criteria for determining whether the “de facto management bodies”
of a PRC-controlled enterprise that is incorporated offshore is located in China. However, there are no further detailed rules or precedents
governing the procedures and specific criteria for determining “de facto management body.” Although our board of directors
and management are located in the PRC, it is unclear if the PRC tax authorities will determine that we should be classified as a PRC “resident
enterprise.”
If we are deemed as a PRC “resident enterprise,”
we will be subject to PRC enterprise income tax on our worldwide income at a uniform tax rate of 25%, although dividends distributed to
us from our existing PRC subsidiary and any other PRC subsidiary which we may establish from time to time could be exempt from the PRC
dividend withholding tax due to our PRC “resident recipient” status. This could have a material and adverse effect on our
overall effective tax rate, our income tax expenses and our net income. Furthermore, dividends, if any, paid to our shareholders may be
decreased as a result of the decrease in distributable profits. In addition, if we were considered a PRC “resident enterprise”,
any dividends we pay to our non-PRC investors, and the gains realized from the transfer of our common stock may be considered income derived
from sources within the PRC and 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). It is unclear whether holders of our common stock
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. This could have a material and adverse effect on the value of your investment in us and the price of our
common stock.
Changes in international trade policies, trade
dispute or the emergence of a trade war, may have a material adverse effect on our business.
Political events, international trade disputes, and
other business interruptions could harm or disrupt international commerce and the global economy, and could have a material adverse effect
on us and our customers, service providers and other partners.
International trade disputes could result in tariffs
and other protectionist measures that could adversely affect our business. Tariffs could increase the cost of the goods and products which
could affect consumers’ discretionary spending levels and therefore adversely impact our business. In addition, political uncertainty
surrounding international trade disputes and the potential of the escalation to trade war and global recession could have a negative effect
on consumer confidence, which could adversely affect our business.
U.S. regulatory bodies may be limited in their
ability to conduct investigations or inspections of our operations in China.
Any disclosure of documents or information located
in China by foreign agencies may be subject to jurisdiction constraints and must comply with China’s state secrecy laws, which broadly
define the scope of “state secrets” to include matters involving economic interests and technologies. There is no guarantee
that requests from U.S. federal or state regulators or agencies to investigate or inspect our operations will be honored by us, by entities
who provide services to us or with whom we associate, without violating PRC legal requirements, especially as those entities are located
in China.
13
The PRC Securities Law was promulgated in December
1998 and was subsequently revised in October 2005, June 2013, August 2014 and December 2019. According to Article 177 of the PRC Securities
Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation
or evidence collection activities within the territory of the PRC. While there is no detailed interpretation regarding the rule implementation
under Article 177, it will be difficult for an overseas securities regulator to conduct investigation or evidence collection activities
in China.
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.
The recent joint statement by the SEC and PCAOB,
proposed rule changes submitted by Nasdaq, and the 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 registration statement. In the event it is later
determined that the PCAOB is unable to inspect or investigate completely the Company’s auditor, then such lack of inspection could
cause trading in the Company’s securities to be prohibited under the HFCAA, and ultimately result in a determination by a securities
exchange to delist the Company’s securities.
On April 21, 2020, SEC Chairman Jay Clayton and PCAOB
Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing
in companies based in or have 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 minimum offering size requirement for companies primarily operating in “Restrictive Market”, (ii) adopt
a new requirement relating to the qualification of management or board of director 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 auditors.
On May 20, 2020, the U.S. Senate passed the Holding
Foreign Companies Accountable Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the
PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is
unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a
national securities exchange or in the over the counter trading market in the U.S. On December 2, 2020, the U.S. House of Representatives
approved the Holding Foreign Companies Accountable Act. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed
into law.
On March 24, 2021, the SEC announced that it had adopted
interim final amendments to implement congressionally mandated submission and disclosure requirements of the Act. The interim final amendments
will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report
issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable
to inspect or investigate completely because of a position taken by an authority in that jurisdiction. The SEC will implement a process
for identifying such a registrant and any such identified registrant will be required to submit documentation to the SEC establishing
that it is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in the registrant’s
annual report regarding the audit arrangements of, and governmental influence on, such a registrant.
On June 22, 2021, the U.S. Senate
passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”), which, if enacted, would amend the HFCAA and
require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB
inspections for two consecutive years instead of three.
On September 22, 2021, the PCAOB adopted a final rule
implementing the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether the
PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a
position taken by one or more authorities in that jurisdiction.
On December 2, 2021, the SEC issued amendments to
finalize rules implementing the submission and disclosure requirements in the HFCAA. The rules apply to registrants that the SEC identifies
as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction
and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.
14
Pursuant to the HFCAA, the PCOAB
issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered
public accounting firms headquartered in: (1) mainland China of the People’s Republic of China, because a position taken by one
or more authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position
taken by one or more authorities in Hong Kong. In addition the PCOAB’s report identified the specific registered public accounting
firms which are subject to these determinations. Our registered public accounting firm, Simon & Edward, LLP, is not headquartered
in mainland China or Hong Kong and was not identified in this report as a firm subject to the PCAOB’s determination.
On August 26, 2022, the China
Securities Regulatory Commission, or CSRC, the Ministry of Finance of the PRC, and the PCAOB signed a Statement of Protocol, or the Protocol,
governing inspections and investigations of audit firms based in mainland China and Hong Kong. Pursuant to the Protocol, the PCAOB shall
have independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information
to the SEC.
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, the 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 firms’ audit procedures or quality control procedures as compared
to auditors outside of China that are subject to the PCAOB inspections, which could cause existing and potential investors in their stock
to lose confidence in their audit procedures and reported financial information and the quality of their financial statements.
Our auditor, Simon & Edward, LLP (“S&E”),
the independent registered public accounting firm that issues the audit report included elsewhere in this Form 10-K as an auditor registered
with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess our auditor’s
compliance with the applicable professional standards. S&E is headquartered in the United States and is subject to inspection by the
PCAOB on a regular basis.
While the Company’s auditor is based in the
U.S. and is registered with PCAOB and subject to PCAOB inspection, in the event it is later determined that the PCAOB is unable to inspect
or investigate completely the Company’s auditor because of a position taken by an authority in a foreign jurisdiction, then such
lack of inspection could cause trading in the Company’s securities to be prohibited under the Holding Foreign Companies Accountable
Act, and ultimately result in a determination by a securities exchange to delist the Company’s securities. In addition, the recent
developments would add uncertainties to our registration statement and we cannot assure you whether regulatory authorities would apply
additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control
procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit
of our financial statements. It remains unclear what the SEC’s implementation process related to the above rules will entail or
what further actions the SEC or the PCAOB will take to address these issues and what impact those actions will have on U.S. companies
that have significant operations in the PRC and have securities listed on a U.S. stock exchange (including a national securities exchange
or over-the-counter stock market). In addition, the above amendments and any additional actions, proceedings, or new rules resulting from
these efforts to increase U.S. regulatory access to audit information could create some uncertainty for investors, the market price of
our common stock could be adversely affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement
or being required to engage a new audit firm, which would require significant expense and management time.
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 registration statement, we
have paid and will continue to pay in the future, social insurance or housing fund contributions for all of our employees, and we have
been in compliance with the requirements of relevant PRC regulations. If in the future we are determined by local authorities to fail
to make adequate or sufficient contributions to any employee benefits as required by relevant PRC regulations, due to changes in regulations
and requirement, we may face late fees or fines in relation to the underpaid employee benefits. As a result, our financial condition and
results of operations may be materially and adversely affected.
15
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 Regulations on Mergers
and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in August 2006
and amended in 2009, 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 MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic
enterprise. For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction in which a
foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves
factors that impact or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic
enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the SCNPC effective
in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds (i.e., during
the previous fiscal year, (i) the total global turnover of all operators participating in the transaction exceeds RMB10 billion and at
least two of these operators each had a turnover of more than RMB400 million within China, or (ii) the total turnover within China of
all the operators participating in the concentration exceeded RMB 2 billion, and at least two of these operators each had a turnover of
more than RMB 400 million within China) must be cleared by MOFCOM before they can be completed.
Moreover, the Anti-Monopoly
Law requires that MOFCOM shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition,
the security review rules issued by 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 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 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.
The M&A Rules require an overseas special
purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals
to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose
vehicle’s securities on an overseas stock exchange.
Our PRC legal counsel, Zhejiang TaoTeng, has advised
us that, the Company and its operating entity are full compliance with the M&A Rules in China. As of the date of this Form 10-K, we
have not received any notification of non-compliance. In the future, we may further grow our business by acquiring 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 Ministry of Commerce or its local counterparts may delay or
inhibit our ability to complete such transactions. Our ability to expand our business or maintain or expand our market share through future
acquisitions would be materially and adversely affected.
You may experience
difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management
named in the registration statement based on foreign laws.
We conduct substantially
all of our operations in China and substantially all of our assets are located in China. In addition, all our senior executive officers
reside within China for a significant portion of the time and all of them are PRC nationals. As a result, it may be difficult for you
to effect service of process upon us or those persons inside mainland China. It may also be difficult for you to enforce in U.S. courts
judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers
and directors as none of them currently resides in the United States or has substantial assets located in the United States. In addition,
there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts against us or such persons
predicated upon the civil liability provisions of the securities laws of the United States or any state.
The recognition and enforcement
of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance
with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made
or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of written arrangement with the
United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil
Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment
violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and
on what basis a PRC court would enforce a judgment rendered by a court in the United States.
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We face uncertainty with respect to indirect
transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On February 3, 2015, the
SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises,
or SAT Bulletin 7. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of taxable assets through offshore
transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings
and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor
and transferee (or other person who is obligated to pay for the transfer) of taxable assets, as such persons need to determine whether
their transactions are subject to these rules and whether any withholding obligation applies.
On October 17, 2017, the
SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income
Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. The SAT Bulletin 37 further clarifies the practice
and procedure of the withholding of non-resident enterprise income tax.
Where a non-resident enterprise
transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an “Indirect Transfer”,
the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such
Indirect Transfer to the relevant tax authority. 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 pays 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. Both the transferor and the transferee may be subject to penalties under
PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
We face uncertainties as to
the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring
and sale of our offshore investments. Our Company may be subject to filing obligations or taxed if our Company is transferor in such transactions,
and may be subject to withholding obligations if our Company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin
37. For transfer of shares in our Company by investors who are non-PRC resident enterprises, our PRC subsidiary may be requested to assist
in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with
SAT Bulletin 7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these
circulars, or to establish that our Company should not be taxed under these circulars, which may have a material adverse effect on our
financial condition and results of operations.
Risks Relating to Our Company and Our Industry
We rely entirely on the operations of our subsidiaries
in the PRC. Any successes or failures of our subsidiaries’ operations will directly impact our financial condition and may cause
your investment to be either positively or negatively impacted. Many very large and well-funded companies have or are entering into
various aspects of the project development and business consulting services in cultural industry that we intend serve or that they are
offering services that indirectly compete with our proposed management and consulting services. These companies will be able to offer
services that will directly compete with our business strategy. These factors could result in declining revenue, or inability to grow
our business.
Numerous world class companies
have entered into various aspects of our market. There currently are a number of companies worldwide that have already occupied a big
portion of the market in which we intend to operate. As a small, early-stage company, it is uncertain if and how we will be able to compete
with the new competitors and products that are being announced and deployed. While we believe that we currently have a competitive advantage
because of our experienced management team and marketing strategy. However, we cannot give any assurance that we will in fact be able
to successfully compete with the existing or new competitors in this mature and evolving marketplace.
We rely substantially on our President. We may
be adversely affected if we lose his services or the services of other key personnel or are unable to attract and retain additional personnel.
Our success is substantially
dependent on the efforts of our senior management, particularly Mr. Xizhen Ye, our President. The loss of the services of Mr. Ye or other
members of our senior management may significantly delay or prevent the achievement of our business objectives. If we lose the services
of, or do not successfully recruit, key sales and marketing, technical and corporate personnel, the growth of our business could be substantially
impaired. At present, we do not maintain key man insurance for any of our senior management.
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The requirements of being a public company may
strain our resources, divert our management’s attention and affect our ability to attract and retain qualified board members.
As a public company, we are subject to the reporting
requirements of the Exchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank
Wall Street Reform and Consumer Protection Act, and other applicable securities rules and regulations. Compliance with these rules and
regulations have increased our legal and financial compliance costs, made some activities more difficult, time-consuming or costly and
increased demand on our systems and resources. Among other things, the Exchange Act requires that we file annual, quarterly and current
reports with respect to our business and results of operations and maintain effective disclosure controls and procedures and internal
controls over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal
controls over financial reporting to meet this standard, significant resources and management oversight may be required. As a result,
management’s attention may be diverted from other business concerns, which could harm our business and results of operations. We
may need to hire more employees to comply with these requirements in the future, which will increase our costs and expenses.
We may require additional capital to support
growth, and such capital might not be available on terms acceptable to us, if at all. This could hamper our growth and adversely affect
our business.
We intend to continue to make investments to support
our business growth and may require additional funds to respond to business challenges, including the need to recruit more experienced
specialist in culture field or enhance our platform, improve our operating infrastructure or acquire complementary businesses and technologies.
Accordingly, we may need to engage in public or private equity, equity-linked or debt financings to secure additional funds. If we raise
additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant
dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common
stock. Any debt financing that we secure in the future could involve restrictive covenants relating to our capital raising activities
and other financial and operational matters, including the ability to pay dividends. This may make it more difficult for us to obtain
additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing
on terms favorable to us, if at all. If we are unable to obtain adequate financing on terms satisfactory to us when we require it, our
ability to continue to support our business growth and respond to business challenges could be significantly impaired, and our business
could be adversely affected.
We may have difficulty establishing adequate management, legal and
financial controls in the PRC.
The PRC historically has been deficient in Western-style
management and financial reporting concepts and practices, as well as in modern banking and other control systems. We may have difficulty
in hiring and retaining a sufficient number of locally-qualified employees to work in the PRC who are capable of satisfying the obligations
of a U.S. public reporting company. As a result of these factors, we may experience difficulty in establishing adequate management, legal
and financial controls (including internal controls over financial reporting), collecting financial data and preparing financial statements,
books of account and corporate records and instituting business practices in the PRC that meet U.S. standards as in effect from time
to time.
Risks Relating to the Company’s Securities
We may, in the future, issue additional shares
of our common stock, which may have a dilutive effect on our stockholders.
Our Certificate of Incorporation authorizes the issuance
of 550,000,000 shares of common stock, of which 79,108,925 shares are issued and outstanding, as of the date of this filing. The future
issuance of our common shares may result in substantial dilution in the percentage of our common shares held by our then existing stockholders.
We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions
or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect
on any trading market for our common stock.
We may issue shares of preferred stock in the
future that may adversely impact your rights as holders of our common stock.
Our Certificate of Incorporation
authorizes us to issue up to 50,000,000 shares of preferred stock with no share issued and outstanding as of the date of this filing.
Accordingly, our board of directors will have the authority to fix and determine the relative rights and preferences of preferred shares,
as well as the authority to issue such shares, without further stockholder approval.
Our preferred stock does not have any dividend, conversion,
liquidation, or other rights or preferences, including redemption or sinking fund provisions. However, our board of directors could authorize
the issuance of a series of preferred stock that would grant to holders preferred rights to our assets upon liquidation, the right to
receive dividends before dividends are declared to holders of our common stock, and the right to the redemption of such preferred shares,
together with a premium, prior to the redemption of the common stock. To the extent that we do issue such additional shares of preferred
stock, your rights as holders of common stock could be impaired thereby, including, without limitation, dilution of your ownership interests
in us. In addition, shares of preferred stock could be issued with terms calculated to delay or prevent a change in control or make removal
of management more difficult, which may not be in your interest as holders of common stock.
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We do not currently intend to pay dividends
on our common stock and consequently, your ability to achieve a return on your investment will depend on appreciation in the price of
our common stock.
We have never declared or paid any cash dividends
on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings,
if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and
the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee
that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
The costs to meet our reporting and other requirements
as a public company subject to the Exchange Act of 1934 and will be substantial, which may result in us having insufficient funds to expand
our business or even to meet routine business obligations.
As a public entity, subject to the reporting requirements
of the Exchange Act of 1934, we will continue to incur ongoing expenses associated with professional fees for accounting, legal and a
host of other expenses for annual reports and proxy statements. We estimate that these costs will range up to $100,000 per year for the
next few years and will be higher if our business volume and activity increases. As a result, we may not have sufficient funds to grow
our operations.