PART
I
Our
Corporate History and Background
We
were incorporated on March 19, 2013 under the name “Sunrise Tours, Inc.” under the laws of the state of Nevada. We
originally intended to develop and offer special services, including 3D virtual tours for companies that would like to promote
their venues on the Internet and through electronic media. On January 20, 2016, we filed a Certificate of Amendment with the Secretary
of State of Nevada and changed our corporate name to “Luboa Group, Inc.” Concurrently with the name change, we changed
our principal business plan to developing specialized agricultural products and a carbon emission trading platform in Asia. However,
since inception, we have not engaged in active business operations and have not generated significant amount of revenue.
On
January 7, 2019, through a series of private transactions, our former officer and director, Mr. Feng Jiang acquired an aggregate
of 10,799,000 shares of common stock of the Company, representing 93.09% of the issued and outstanding share capital of the Company
on a fully-diluted basis, and accordingly became the controlling shareholder of the Company, which caused a change in control
of the Company.
Upon
the change of control of the Company, all of our then officers and directors resigned from their respective offices and Mr. Jiang
became our President, CEO, CFO, Treasurer, Secretary and Chairman of the Board of Directors.
On
April 1, 2019, we entered into the a definitive Share Exchange Agreement (the “Exchange Agreement”) with Bangtong
International and holders of all outstanding capital stock of Bangtong International, pursuant to which on June 21, 2019, we acquired
100% of the outstanding capital stock of Bangtong International, and in exchange, we issued to the former shareholders of Bangtong
International an aggregate of 100,000,000 shares of the Company’s common stock. As a result of the Reverse Acquisition,
Bangtong International became our wholly-owned subsidiary and the former shareholders of Bangtong International became the holders
of approximately 89.6% of our issued and outstanding capital stock on a fully-diluted basis. For accounting purposes, the transaction
with Bangtong International was treated as a reverse acquisition, with Bangtong International as the acquirer and the Company
as the acquired party. Unless the context suggests otherwise, when we refer in this report to business and financial information
for periods prior to the consummation of the Reverse Acquisition, we are referring to the business and financial information of
Bangtong International and its subsidiaries and consolidated entities. In connection with the Reverse Acquisition, Mr. Feng Jiang
resigned from his positions as of President, CEO, CFO, Treasurer, Secretary and Chairman of the Board of Directors. Mr. Xianyi
Hao was appointed as our new President, CEO, CFO, Treasurer, Secretary and Chairman of the Board of Directors.
As
a result of our acquisition of Bangtong International, we now own all of the issued and outstanding shares of Bangtong International,
a holding company, which in turn owns all of the equity capital of Bangtong Development and its subsidiaries.
As
of the date of this report, we have the following subsidiaries and affiliated entities:
Bangtong
International, a Seychelles holding company, was formed on May 25, 2018. Xianyi Hao is the sole director of Bangtong International.
Bangtong
Development, a Seychelles holding company, was formed on May 24, 2018. Xianyi Hao is the sole director of Bangtong Development.
Bangtong
Group, a Hong Kong holding company, was formed on May 30, 2018. The sole director of Bangtong Group is Xianyi Hao.
Jiaxing
Bangtong, a PRC company, was formed on November 5, 2018 and is engaged in the business of electronic technology development, service
and consulting. Its legal representative is Qi Wang.
Shenzhen
Bangtong, a PRC company, was formed on November 27, 2015 and is engaged in the business of electronic technology development and
e-commerce. Its legal representative is Xianyi Hao.
Jiaxing
Electronic, a PRC company, was formed on September 3, 2018 and is expected to engage in the e-commerce. Its legal representative
is Qi Wang.
Shenyang
Bangtong, a PRC company, was formed on May 23, 2018 and is expected to engage in the logistics business with warehousing and delivery
capabilities. Its legal representative is Ming Zhao.
Hegang
Bangtong is a PRC trading company. We expect that Hegang Bangtong’s business will focus on our inventory procurement from
Russia and other European countries. Hegang Bangtong was formed on July 13, 2018 and its legal representative is Xianyi Hao.
As
described below in more detail, through our variable interest entities in PRC (“VIEs”), including Shenzhen Bangtong
and its subsidiaries, Jiaxing Electronic, Shenyang Bangtong and Hegang Bangtong, which have contractual arrangements with Jiaxing
Bangtong, we are a startup company developing our e-commerce business.
Our
Corporate Structure
Foreign
ownership of Internet-based businesses is subject to significant restrictions under current PRC laws and regulations. We, as a
Nevada corporation and our subsidiaries, including Bangtong International, Bangtong Development, Bangtong Group and Jiaxing Bangtong,
are all restricted from holding licenses that are necessary for our online e-commerce business in China. To comply with these
restrictions, our consolidated VIEs, Shenzhen Bangtong and its subsidiaries directly operate our business. We have entered into
contractual arrangements with our VIE and its shareholders. Through these arrangements, we exercise effective control over the
operations of these entities and receive the economic benefits of these entities. As a result of these contractual arrangements,
under U.S. GAAP, we are considered the primary beneficiary of Shenzhen Bangtong and thus consolidate its results in our consolidated
financial statements.
The
following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiaries, the VIEs
and the shareholders of the VIEs.
Agreements
that provide us with effective control over Shenzhen Bangtong and its subsidiaries:
Loan
Agreement. On November 6, 2018, Jiaxing Bangtong and each shareholder of Shenzhen Bangtong entered into a loan agreement.
Pursuant to the loan agreements, Jiaxing Bangtong agreed to provide an aggregate of RMB11,930,000 of loan to the shareholders
of Shenzhen Bangtong solely for the purpose of capital contribution. The shareholders of Shenzhen Bangtong should cause Shenzhen
Bangtong at the request of Jiaxing Bangtong to, execute contracts on business cooperation with Jiaxing Bangtong and provide Jiaxing
Bangtong with all the information on its business operations and financial condition. In addition, at the request of Jiaxing Bangtong
or a party designated by Jiaxing Bangtong, the shareholders of Shenzhen Bangtong should cause Shenzhen Bangtong to appoint any
persons designated by Jiaxing Bangtong as directors and/or executive director of Shenzhen Bangtong. The shareholders also agreed
not to sell, transfer or dispose of any equity interests in Shenzhen Bangtong or allow the encumbrance on these equity interests.
The shareholders can only repay the loan by the transfer of all their equity interests in Shenzhen Bangtong to Jiaxing Bangtong
or its designated persons. The amount of RMB11,930,000 was transferred to Shenzhen Bangtong in July 2018.
Equity
Interest Pledge Agreement. On November 6, 2018, Jiaxing Bangtong and Shenzhen Bangtong and each shareholder of Shenzhen Bangtong
entered into an equity interest pledge agreement. Pursuant to the equity interest pledge agreements, each shareholder of Shenzhen
Bangtong agreed to pledge 100% equity interests in Shenzhen Bangtong to Jiaxing Bangtong to guarantee their and Shenzhen Bangtong’s
performance of their obligations under the contractual arrangements including the exclusive business cooperation agreement, the
exclusive option agreement, the loan agreement and the power of attorney. In the event of a breach by Shenzhen Bangtong or its
shareholders of their contractual obligations under these agreements, Jiaxing Bangtong, as pledgee, will have the right to dispose
of the pledged equity interests in Shenzhen Bangtong. The shareholders of Shenzhen Bangtong also undertake that, during the term
of the equity interest pledge agreements, they will not dispose of the pledged equity interests or create or allow any encumbrance
on the pledged equity interests. During the term of the equity pledge agreements, Jiaxing Bangtong also has the right to receive
all of the dividends distributed on the pledged equity interests. The Company has completed the registration of the equity interest
pledges with the relevant office of the administration for industry and commerce in accordance with the PRC Property Rights Law.
Power
of Attorney. On November 6, 2018, each shareholder of Shenzhen Bangtong granted irrevocable and exclusive power of attorney
to Jiaxing Bangtong as his/her attorney-in-fact to exercise all shareholder rights, including, but not limited to, attending shareholders
meeting of Shenzhen Bangtong, voting on their behalf on all matters of Shenzhen Bangtong, disposing of all or part of the shareholder’s
equity interest in Shenzhen Bangtong, approving the amendments to Shenzhen Bangtong’s articles of association and electing,
appointing or removing legal representative, directors, supervisors and executive officers of Shenzhen Bangtong. Each power of
attorney will remain in force for so long as the shareholder remains a shareholder of Shenzhen Bangtong. Each shareholder has
waived all the rights which have been authorized to Jiaxing Bangtong under each power of attorney.
Spouse
Consent Letters. Pursuant to the spouse consent letters dated November 6, 2018, each spouse of the shareholders of Shenzhen
Bangtong, if any, confirmed that his/her spouse can perform the obligations under the contractual arrangements and has sole discretion
to amend and terminate the contractual arrangements. Each spouse agreed that the equity interest in Shenzhen Bangtong held by
and registered in the name of his/her spouse will be disposed of pursuant to the equity interest pledge agreement, the exclusive
option agreement and the power of attorney. In addition, in the event that each spouse obtains any equity interest in Shenzhen
Bangtong held by his/her spouse for any reason, he/she agreed to be bound by the contractual arrangements.
Agreement
that allows us to receive economic benefits from Shenzhen Bangtong:
Exclusive
Business Cooperation Agreement. On November 6, 2018, Jiaxing Bangtong and Shenzhen Bangtong entered into an exclusive business
cooperation agreement. Under the agreement, Jiaxing Bangtong has the exclusive right to provide Shenzhen Bangtong with comprehensive
technical support, consulting services and other related services. Without Jiaxing Bangtong’s prior written consent, Shenzhen
Bangtong may not accept any same or similar services provided by any third party and may not establish same or similar cooperation
relationships with any third party regarding the matters contemplated by this agreement. Shenzhen Bangtong agreed to pay Jiaxing
Bangtong an annual service fee, at an amount to be determined by the parties by considering, among other things, the complexity
of the services, the time that may be spent for providing such services, the value and specific content of the service provided,
the market price of the same types of services, and the operating condition of Shenzhen Bangtong. In addition, Jiaxing Bangtong
will own the exclusive intellectual property rights created as a result of the performance of this agreement. This agreement will
remain effective until terminated unilaterally by Jiaxing Bangtong or otherwise upon the expiration of the operation term of a
party according to this agreement.
Agreement
that provides us with the option to purchase the equity interest in Shenzhen Bangtong:
Exclusive
Option Agreement. On November 6, 2018, Jiaxing Bangtong, Shenzhen Bangtong and each shareholder of Shenzhen Bangtong entered
into an exclusive option agreement. Pursuant to the exclusive option agreement, each shareholder of Shenzhen Bangtong irrevocably
grants Jiaxing Bangtong an exclusive option to purchase, or have its designated person to purchase, at its discretion, to the
extent permitted under PRC law, all or part of the shareholder’s equity interests in Shenzhen Bangtong. In addition, the
purchase price should be the amount of registered capital, which may be subject to fair value adjustments if required by the PRC
laws. Without the prior written consent of Jiaxing Bangtong, the shareholders of Shenzhen Bangtong and Shenzhen Bangtong may not
amend Shenzhen Bangtong’s articles of association, increase or decrease the registered capital, dispose of its assets or
business, create any encumbrance on its assets or business, incur any debts or guarantee liabilities, enter into any material
contracts, merger with or acquire any other persons or make any investments, provide any loans for any third parties or distribute
dividends to the shareholders. Each shareholder of Shenzhen Bangtong agrees that, without the prior written consent of Jiaxing
Bangtong, he/she will not dispose of his/her equity interests in Shenzhen Bangtong or create or allow any encumbrance on the equity
interests. Each exclusive option agreement will remain effective until all equity interests have been transferred or assigned
in accordance with the agreement.
The
chart below presents our corporate structure as of the date of this report:
Our
principal executive offices are located at Room 202-1, Building #21 of Intelligence and Wealth Center, Jiaxing, Zhejiang Province,
China, 314000. The telephone number at our principal executive office is +86-537-82239727.
Our
Products and Services
We
are a startup e-commerce company with substantially all of our operations in China. Most of our subsidiaries and VIEs were formed
in 2018. We officially launched our e-commerce platform, Ingtona(英格多纳) in fall 2019, which was formerly
developed under the name of Ingertona. Through our platform, we currently offer a range of consumer products sourced from both
China and abroad as well as services relating to the franchise of our offline adult products store.
Our
E-Commerce Platform
On
October 26, 2018, Jiaxing Bangtong entered into a strategic cooperation contract with Beijing Xietongtianxia Technology Co., Ltd.
(“Beijing Xietong”), pursuant to which Beijing Xietong agreed to act as Jiaxing Bangtong’s strategic consultant
for Jiaxing Bangtong’s business, including but not limited to providing technical support to Jiaxing Bangtong’s development
and operation of its e-commerce platform. Upon the expiration of this contract, Jiaxing Bangtong terminated the cooperation with
Beijing Xietong, and instead, shifted to developing the e-commerce platform on its own. In the second half of 2019, our e-commerce
platform, Ingtona, completed initial development. Our Ingtona platform includes the following principal components:
1.
Website—www.Ingtona.com. We launched the website in September 2019. The PC-based website provides a user-friendly and intuitive
interface that allows consumers to conveniently search for, find and purchase products. The website features adult products, overseas
products and smart robots. It displays product information, such as description, specification, pictures, price, sales volume,
applicable delivery expenses and customer review. Customers can conveniently browse and search for products by keywords and can
sort product listings by keywords, sales volume and price. A customer needs to create an account on our website to place orders
and purchase products. Various kinds of online payment methods are offered to customers at the time of checkout, such as WeChat
Pay, AliPay and UnionPay. Customers can log into their accounts to check the status of their orders. The website currently displays
more than 200 adult products and over 5000 imported items that span health, dietary supplements, maternity and baby care products,
cosmetics, snacks, soft drinks, household supplies, toys and clothes from the United Kingdom, Germany, Japan, Australia, South
Korea, Canada, the United States, Norway, Denmark, New Zealand and other countries. In addition, it contains smart robots sold
directly by Chinese and foreign makers.
2.
Mobile app—Our mobile application, Ingtona (英格多纳), will allow consumers to conveniently search
and purchase displayed products on their mobile devices. Our mobile application offers similar features as our PC-based website.
We rolled out our mobile application in October 2019.
3.
WeChat public account—Customers can also access our e-commerce platform through our WeChat public account. Product offerings
on the “Shopping Mall” section of our WeChat public account synchronize with those on our website and are also classified
into three large categories: overseas items, smart robots and adult products. The “Partners” section of our WeChat
public account allows parties to conveniently contact us who are interested in setting up their own stores and selling displayed
products that will be directly sourced from manufacturers. We started our WeChat public account in September 2019.
The
Business Model of our E-Commerce Platform
Registered
users of our Ingtona e-commerce platform can be divided into two categories – third-party merchants and customers. Third-party
merchants, including enterprise merchants and individual merchants, sell various merchandise products on the platform, and customers
purchase these products using the same platform. Leveraging our multifaceted e-commerce platform, we plan to offer both online
marketplace and online direct sales to our online customers.
In
our online marketplace business, third-party merchants may establish online stores to offer products to customers over our online
marketplace. We will charge service fees on our merchants for our services, such as webpage maintenance, WeChat account access,
and certain promotion activities. We intend to charge commission based on a percentage of transaction value generated on our online
marketplace. In addition, we plan to provide marketing and advertisement services to our third-party merchants. Prices for advertisements
on our platform network will be fixed under contracts between us and the third-party merchants. The prices will depend on the
display locations, the number of time slots and the display size. We intend to review our prices periodically and make adjustments
as necessary in light of market conditions.
In
our online direct sales business, we plan to acquire products from suppliers and sell them directly to customers. Before ourselves
can provide all fulfillment and delivery services, we may rely partially on independent couriers to deliver products. Sometimes
suppliers in our direct sales operation may deliver products to our customers themselves. Third-party sellers on our marketplace
may also use their own logistics network or other third-party couriers to deliver products.
Our
Offline Adult Products Franchise—”Enjoy Color Space (悦色空间)”
We
not only offer a diverse collection of adult products on our e-commerce platform, but also run our own and franchised offline
unmanned stores that retail adult products by automatic vending machines. Three franchisees have joined us and opened three such
stores in China since September 2019. Merchants registered on our website can apply to franchise with us. New franchisees are
required to pay an initial fee for a franchise license and once a franchise store begins operations, franchisees are required
to pay us annual royalty. We may charge reduced or waive royalties for the first few franchisees. We provide franchisees with
the vending machines, products (including return/exchange services), franchise designs, site selection assistance, ongoing trainings,
marketing support and access to our e-commerce platform. Generally, an investment of RMB100,000~150,000 is needed to open such
a store, and we currently offer different franchise packages for varying levels of investment.
Our
Growth Strategies
The
existing product offerings on our e-commerce platform are decided based on the proven popularity of purchasing these items on
the internet. We plan to continuously add products and categories that appeal to our customers to our platform. In addition, we
plan to expand our offerings of smart robots and intend to offer latest products in the AI smart product market sold directly
by manufacturers.
With
respect to our offline adult products franchise, we plan to open such stores across China through both franchise and our own investment.
Sales
and Marketing
We
plan to engage various marketing channels to expand our business to more merchants and customers. In order to attract more third-party
merchants, we intend to waive platform user fees in the initial stage of platform operation. To enhance the awareness of our e-commerce
platform, we intend to launch various advertising campaigns through a variety of media. We will join the offline e-commerce organizations,
hold app promotion meetings and invite merchants to promote our brand image. In addition, we intend to provide various incentives
to our customers to increase their spending and loyalty, and we will send online messages to our customers periodically with product
recommendations or promotions.
We
also intend to offer a personalized e-commerce experience to our customers by delivering targeted product recommendations based
on customers’ browsing and purchase histories.
In
addition to the online marketing activities, we will also utilize offline activities to attract more customers and promote our
brand recognition. For example, according to customer purchasing behavior and preferences, we will divide them into different
“communities” and organize parties, group tours and other social gatherings in which our registered merchants may
act as sponsors by providing goods or services to the event. We may charge certain commission on products sold by our registered
merchants in such activities.
Our
Competition
The
e-commerce industry in China is intensely competitive. The online commerce market is rapidly evolving and intensely competitive,
and we expect the competition to intensify in the future. Our current or potential competitors include “Little Red Book
(Xiao Hong Shu)” and “Foreign Port (Yang Ma Tou)”.
We
anticipate that the e-commerce market will continually evolve and will continue to experience rapid technological change, evolving
industry standards, shifting customer requirements, and frequent innovation. We must continually innovate to remain competitive.
We believe that the principal competitive factors in our industry are:
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brand
recognition and reputation;
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product
quality and selection;
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Convenience
and pricing;
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fulfillment
capabilities; and
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customer
service.
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In
respect of our offline adult products franchise business, this market is fast-growing in China. Our current or potential competitors
in this segment include “Hefei Liangjiao” and “Beijing Juse Adult (www.X.com.cn).” We believe that
we can compete in this market based on our superior business model and product sourcing.
Many
of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than us. In addition, online retailers may be acquired by, receive
investments from or enter into other commercial relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Some of our competitors may be able to secure merchandise from vendors on
terms that are more favorable, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing
or inventory availability policies and devote substantially more resources to website and systems development than our company.
Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. There can
be no assurance that we will be able to compete successfully against current and future competitors, and competitive pressures
faced by us may have a material adverse effect on our financial condition, operational results, business, and prospects. In addition,
new and enhanced technologies may increase the competition in the online retail industry. New competitive business models may
appear, for example based on new forms of social media or social commerce.
Our
Intellectual Property
We
believe that trademarks, copyrights, patents, domain names, know-how, proprietary technologies, and similar intellectual property
will be critical to our success. We intend to rely on intellectual properties laws and confidentiality and non-compete agreements
with our employees and others to protect our proprietary rights. Currently, we have three software copyright certificates relating
to our “Ingtona e-commerce operating system V2.0.” We also have a registered domain name (www.Ingtona.com).
Regulation
Online
commerce in China is subject to a number of laws and regulations. This section summarizes material PRC regulations relevant to
our business and operations in China and the key provisions of such regulations.
Regulations
Relating to Foreign Investment
Investment
activities in the PRC by foreign investors are mainly governed by the Guidance Catalog of Industries for Foreign Investment (2017
revision), or the Catalog, which was promulgated jointly by the Ministry of Commerce and the National Development and Reform Commission
on June 28, 2017 and entered into force on July 28, 2017. The Catalog divides industries into four categories in terms of foreign
investment, which are “encouraged,” “restricted,” and “prohibited,” and all industries that
are not listed under one of these categories are deemed to be “permitted.” Establishment of wholly foreign-owned enterprises
is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint
ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition,
foreign investment in restricted category projects is subject to government approvals. Foreign investors are not allowed to invest
in industries in the prohibited category. Industries not listed in the Catalog are generally open to foreign investment unless
specifically restricted by other PRC regulations.
In
June 2019, MOFCOM and NDRC promulgated the Special Management Measures (Negative List) for the Access of Foreign Investment, or
the Negative List, effective July 30, 2019. Foreign investment in value-added telecommunication business (excluding e-commerce
business, domestic multi-party communications services, store and forward services and call center services) falls within the
Negative List.
On
March 15, 2019, the Standing Committee of the National People’s Congress enacted the Foreign Investment Law of PRC, which
took effect on January 1, 2020, replacing the Law of the People’s Republic of China on China-Foreign Equity Joint Ventures,
the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, and the Law of the People’s Republic
of China on China-Foreign Contractual Joint Ventures. On December 26, 2019, the Regulation on the Implementation of the Foreign
Investment Law of the PRC, was issued by the State Council and came into force on January 1, 2020. According to the Foreign Investment
Law, foreign investment shall enjoy pre-entry national treatment, except for those foreign invested entities that operate in industries
deemed to be either “restricted” or “prohibited” in the “negative list.” Foreign invested
entities operating in foreign “restricted” or “prohibited” industries require entry clearance and other
approvals. However, the new law does not comment on the concept of “de facto control” or contractual arrangements
with VIEs, although it has a catch-all provision under definition of “foreign investment” to include investments made
by foreign investors in China through means stipulated by laws or administrative regulations or other methods prescribed by the
State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions to provide for contractual
arrangements as a form of foreign investment. See “Risk Factors—Risks Relating to our Commercial Relationship with
VIEs—Our contractual arrangement with VIEs may be affected by the newly enacted Foreign Investment Law.”
Regulations
Relating to Value-Added Telecommunication Services
Among
all of the applicable laws and regulations, the Telecommunication Regulations of the People’s Republic of China, or the
Telecom Regulations, promulgated by the PRC State Council on September 25, 2000 and amended on July 29, 2014 and February 6, 2016,
respectively, is the primary governing law, and sets out the general framework for the provision of telecommunications services
by domestic PRC companies. Under the Telecom Regulations, telecommunications service providers are required to procure operating
licenses prior to their commencement of operations. The Telecom Regulations distinguish “basic telecommunications services”
from “value-added telecommunication services”. Value-added telecommunication services are defined as telecommunications
and information services provided through public networks. The Telecom Catalogue was issued as an attachment to the Telecom Regulations
to categorize telecommunications services as either basic or value-added. In February 2003 and December 2015, the Telecom Catalogue
was updated, respectively, categorizing online data and transaction processing, information services, among others, as value-added
telecommunication services.
The
Administrative Measures on Telecommunications Business Operating License, promulgated by the Ministry of Industry and Information
Technology in 2009 and amended in July 2017, which set forth more specific provisions regarding the types of licenses required
to operate value-added telecommunication services, the qualifications and procedures for obtaining such licenses and the administration
and supervision of such licenses. Under these regulations, a commercial operator of value-added telecommunication services must
first obtain a license from the Ministry of Industry and Information Technology or its provincial level counterparts, otherwise
such operator might be subject to sanctions including corrective orders and warnings from the competent administration authority,
fines and confiscation of illegal gains and, in the case of significant infringements, the websites may be ordered to close.
In
addition, the administration of mobile Internet application, or App, information services are strengthened through the Regulations
for Administration of Mobile Internet Application Information Services, or the MIAIS Regulations, which became effective on August
1, 2016. The MIAIS Regulations were enacted to regulate App, App providers (including App owners or operators) and online App
stores. Information service providers that utilize Apps are required to obtain relevant qualifications pursuant to PRC laws and
regulations.
The
MIAIS Regulations impose certain duties on App providers, including: (i) verifying real identities with the registered users through
mobile phone numbers; (ii) establishing and improving the mechanism for user information security protection; (iii) establishing
and improving the verification and management mechanism for the information content; adopting proper sanctions and measures relating
to the release of illegal information content; (iv) protecting and safeguarding users’ “rights to know and rights
to choose” during installation or use; (v) respecting and protecting intellectual property rights of others; and (vi) keeping
records of user log information for 60 days.
Regulations
Relating to E-Commerce
In
May 2010, the State Administration of Industry and Commerce adopted the Interim Measures for the Administration of Online Commodities
Trading and Relevant Services, which took effective in July 2010. Under these measures, enterprises or other operators which engage
in online commodities trading and other services and have been registered with the State Administration of Industry and Commerce
or its local branches must make the information stated in their business license available to the public or provide a link to
their business license on their website. Online distributors must adopt measures to ensure safe online transactions, protect online
shoppers’ rights and prevent the sale of counterfeit goods. Information on products and transactions released by online
distributors must be authentic, accurate, complete and sufficient.
In
January 2014, the State Administration of Industry and Commerce promulgated the Administrative Measures for Online Trading, which
terminated the above interim measures and became effective in March 2014. The Administrative Measures for Online Trading further
strengthen the protection of consumers and impose more stringent requirements and obligations on online business operators and
third-party online marketplace operators. For example, online business operators are required to issue invoices to consumers for
online products and services. Consumers are generally entitled to return products purchased from online business operators within
seven days upon receipt, without giving any reason. Online business operators and third-party online marketplace operators are
prohibited from collecting any information on consumers and business operators, or disclosing, selling or providing any such information
to any third party, or sending commercial electronic messages to consumers, without their consent. Fictitious transactions, deletion
of adverse comments and technical attacks on competitors’ websites are prohibited as well. In addition, third-party online
marketplace operators are required to examine and verify the identifications of the online business operators and set up and keep
relevant records for at least two years. Moreover, any third-party online marketplace operator that simultaneously engages in
online trading for products and services should clearly distinguish itself from other online business operators on the marketplace
platform.
In
March 2016, the State Administration of Taxation, the Ministry of Finance and the General Administration of Customs jointly issued
the Circular on Tax Policy for Cross-Border E-commerce Retail Imports, which took effect in April 2016. Pursuant to this circular,
goods imported through the cross-border e-commerce retail are subject to tariff, import value-added tax, or VAT, and consumption
tax based on the types of goods. Individuals purchasing any goods imported through cross-border e-commerce retail are taxpayers,
and e-commerce companies, companies operating e-commerce transaction platforms or logistic companies are required to withhold
the taxes.
On
August 31, 2018, the Standing Committee of the National People’s Congress promulgated the E-Commerce Law, which became effective
on January 1, 2019. Pursuant to the E-Commerce Law, an e-commerce platform operator shall (i) collect, verify and register the
truthful information submitted by the merchants that apply to sell products or provide services on its platform, including the
identities, addresses, contacts and licenses, establish registration archives and update such information on a regular basis;
(ii) submit the identification information of the merchants on its platform to market regulatory administrative department as
required and remind the merchants to complete the registration with market regulatory administrative department; (iii) submit
identification information and tax-related information to tax authorities as required in accordance with the laws and regulations
regarding the administration of tax collection and remind the individual merchants to complete the tax registration; (iv) record
and retain the information of the products and information on its platform and the sales information for no less than 3 years;
(v) display the platform service agreement and the transaction rules or links to such information on the homepage of the platform;
(vi) display the noticeable labels regarding the products or services provided by the platform operator itself on its platform,
and take liabilities for such products and services; (vii) establish a credit evaluation system, display the credit evaluation
rules, provide consumers with accesses to make comments on the products and services provided on its platform, and restrain from
deleting such comments; and (viii) establish intellectual property protection rules, and take necessary measures when any intellectual
property holder notify the platform operator that his intellectual property rights have been infringed. An e-commerce platform
operator shall take joint liabilities with the relevant merchants on its platform and may be subject to warnings and fines up
to RMB2,000,000 where (i) it fails to take necessary measures when it knows or should have known that the products or services
provided by the merchants on its platform do not meet the personal or property safety requirements or such merchants’ other
acts may infringe on the lawful rights and interests of the consumers; or (ii) it fails to take necessary measures, such as deleting
and blocking information, disconnecting, terminating transactions and services, when it knows or should have known that the merchants
on its platform infringe any intellectual property rights of any other third party. With respect to products or services affecting
the consumers’ life and health, if an e-commerce platform operator fails to verify the merchants’ qualification or
fails to fulfill its obligations to safeguard the safety of consumers, which results in damages to the consumers, it shall take
corresponding liabilities and may be subject to warnings and fines up to RMB2,000,000.
We
are subject to these measures as a result of our online direct sales and online marketplace.
Regulations
Relating to Internet Information Security
In
1997, the Ministry of Public Security promulgated measures that prohibit use of the internet in ways which, among other things,
result in a leakage of state secrets or a spread of socially destabilizing content. If an internet information service provider
violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut
down its websites.
Internet
information in China is regulated and restricted from a national security standpoint. The Standing Committee of the National People’s
Congress has enacted the Decisions on Maintaining Internet Security on December 28, 2000 and further amended on August 27, 2009,
which may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system
of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial
information; or (v) infringe intellectual property rights.
The
PRC Cybersecurity Law was promulgated by the Standing Committee of the National People’s Congress on November 7, 2016 and
became effective on June 1, 2017. Under this regulation, network operators, including online lending information service providers,
shall comply with laws and regulations and fulfill their obligations to safeguard security of the network when conducting business
and providing services, and take all necessary measures pursuant to laws, regulations and compulsory national requirements to
safeguard the safe and stable operation of the networks, respond to network security incidents effectively, prevent illegal and
criminal activities, and maintain the integrity, confidentiality and usability of network data.
We
have, in accordance with relevant provisions on network security of the PRC, established necessary mechanisms to protect information
security, including, among others, adopting necessary network security protection technologies such as anti-virus firewalls, intrusion
detection and data encryption, keeping record of network logs, and implementing information classification framework.
Regulations
Relating to Privacy Protection
The
Several Provisions on Regulating the Market Order of Internet Information Services, issued by the Ministry of Industry and Information
Technology in December 2011, provide that, an internet information service provider may not collect any user personal information
or provide any such information to third parties without the consent of a user. An internet information service provider must
expressly inform the users of the method, content and purpose of the collection and processing of such user personal information
and may only collect such information necessary for the provision of its services. An internet information service provider is
also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal
information, online lending service providers must take immediate remedial measures and, in severe circumstances, make an immediate
report to the telecommunications regulatory authority.
In
addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the Standing Committee of the
National People’s Congress in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal
Information issued by the Ministry of Industry and Information Technology in July 2013, any collection and use of user personal
information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be
within the specified purposes, methods and scopes.
The
Guidelines jointly released by ten PRC regulatory agencies in July 2015 purport, among other things, to require service providers
to improve technology security standards, and safeguard user and transaction information. The Guidelines also prohibit service
providers from illegally selling or disclosing users’ personal information. Pursuant to the Ninth Amendment to the Criminal
Law issued by the Standing Committee of the National People’s Congress in August 2015, which became effective in November
2015, any internet service provider that fails to fulfill the obligations related to internet information security administration
as required by applicable laws and refuses to rectify upon orders is subject to criminal penalty for the result of (i) any dissemination
of illegal information in large scale; (ii) any severe effect due to the leakage of the client’s information; (iii) any
serious loss of criminal evidence; or (iv) other severe situation, and any individual or entity that (i) sells or provides personal
information to others in a way violating the applicable law, or (ii) steals or illegally obtain any personal information is subject
to criminal penalty in severe situation.
We
plan to obtain consent from users to collect and use their personal information. While we plan to take measures to protect the
personal information that we have access to, our security measures could be breached resulting in the leak of such confidential
personal information. Security breaches or unauthorized access to confidential information could also expose us to liability related
to the loss of the information, time-consuming and expensive litigation and negative publicity.
Regulations
Relating to Advertising Business
The
State Administration for Market Regulation is the government agency responsible for regulating advertising activities in the PRC.
According to PRC laws and regulations, companies that engage in advertising activities must obtain a business license from the
State Administration for Market Regulation or its local branches which specifically includes operating an advertising business
within its business scope. The business license of an advertising company is valid for the duration of its existence, unless the
license is suspended or revoked due to a violation of any relevant law or regulation. PRC advertising laws and regulations set
forth certain content requirements for advertisements in the PRC including, among other things, prohibitions on false or misleading
content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination
or infringement of the public interest. Advertisers, advertising agencies, and advertising distributors are required to ensure
that the content of the advertisements they prepare or distribute is true and in full compliance with applicable law. In providing
advertising services, advertising operators and advertising distributors must review the supporting documents provided by advertisers
for advertisements and verify that the content of the advertisements complies with applicable PRC laws and regulations. Prior
to distributing advertisements that are subject to government censorship and approval, advertising distributors are obligated
to verify that such censorship has been performed and approval has been obtained. The release or delivery of advertisements through
the internet must not impair the normal use of the network by users. The advertisements released in pop-up form on a webpage and
other forms must show the close flag prominently and ensure one-click close. Violation of these regulations may result in penalties,
including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to eliminate
the effect of illegal advertisement. In circumstances involving serious violations, the State Administration for Market Regulation
or its local branches may revoke the violators’ licenses or permits for their advertising business operations.
In
July 2016, the State Administration of Industry and Commerce issued the Interim Measures for the Administration of Internet Advertising
to regulate internet advertising activities. According to these measures, no advertisement of any medical treatment, medicines,
food for special medical purpose, medical apparatuses, pesticides, veterinary medicines, dietary supplement or other special commodities
or services subject to examination by an advertising examination authority as stipulated by laws and regulations may be published
unless the advertisement has passed such examination. In addition, no entity or individual may publish any advertisement of over-the-counter
medicines or tobacco on the internet. An internet advertisement must be identifiable and clearly identified as an “advertisement”
to the consumers. Paid search advertisements are required to be clearly distinguished from natural search results. In addition,
the following internet advertising activities are prohibited: providing or using any applications or hardware to intercept, filter,
cover, fast forward or otherwise restrict any authorized advertisement of other persons; using network pathways, network equipment
or applications to disrupt the normal data transmission of advertisements, alter or block authorized advertisements of other persons
or load advertisements without authorization; or using fraudulent statistical data, transmission effect or matrices relating to
online marketing performance to induce incorrect quotations, seek undue interests or harm the interests of others. Internet advertisement
publishers are required to verify relevant supporting documents and check the content of the advertisement and are prohibited
from publishing any advertisement with unverified content or without all the necessary qualifications. Internet information service
providers that are not involved in internet advertising business activities but simply provide information services are required
to block any attempt to publish an illegal advisement that they are aware of or should reasonably be aware of through their information
services.
Regulations
Relating to Intellectual Property
The
Standing Committee of the National People’s Congress and the State Council have promulgated comprehensive laws and regulations
to protect trademarks. The Trademark Law of the PRC (2013 revision) promulgated on August 23, 1982 and subsequently amended on
February 22, 1993, October 27, 2001 and August 30, 2013, respectively, and the Implementation Regulation of the Trademark Law
(2014 revision) issued by the State Council on August 3, 2002 and amended on April 29, 2014 are the main regulations protecting
registered trademarks. The Trademark Office under the State Administration for Industry and Commerce administrates the registration
of trademarks on a “first-to-file” basis, and grants a term of ten years to registered trademarks.
The
PRC Copyright Law, adopted in 1990 and revised in 2001, 2010 respectively, with its implementation rules adopted on August 8,
2002 and revised in 2011 and 2013, respectively, and the Regulations for the Protection of Computer Software as promulgated on
December 20, 2001 and amended in 2011 and 2013 provide protection for copyright of computer software in the PRC. Under these rules
and regulations, software owners, licensees and transferees may register their rights in software with the National Copyright
Administration Center or its local branches to obtain software copyright registration certificates. The term of protection for
copyrighted software of legal persons is fifty years and ends on December 31 of the 50th year from the date of first publishing
of the software.
The
Ministry of Industry and Information Technology promulgated the Administrative Measures on Internet Domain Name on August 24,
2017 to protect domain names. According to these measures, domain name applicants are required to duly register their domain names
with domain name registration service institutions. The applicants will become the holder of such domain names upon the completion
of the registration procedure.
We
have adopted necessary mechanisms to register, maintain and enforce intellectual property rights in China. However, we cannot
assure you that we can prevent our intellectual property from all the unauthorized use by any third party, neither can we promise
that none of our intellectual property rights would be challenged any third party.
Regulations
Relating to Employment
The
PRC Labor Law and the Labor Contract Law require that employers must execute written employment contracts with full-time employees.
All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the
PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious
violations may constitute criminal offences.
On
December 28, 2012, the PRC Labor Contract Law was amended with effect on July 1, 2013 to impose more stringent requirements on
labor dispatch. Under such law, dispatched workers are entitled to pay equal to that of full-time employees for equal work, but
the number of dispatched workers that an employer hires may not exceed a certain percentage of its total number of employees as
determined by the Ministry of Human Resources and Social Security. Additionally, dispatched workers are only permitted to engage
in temporary, auxiliary or substitute work. According to the Interim Provisions on Labor Dispatch promulgated by the Ministry
of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, the number of dispatched
workers hired by an employer shall not exceed 10% of the total number of its employees (including both directly hired employees
and dispatched workers). The Interim Provisions on Labor Dispatch require employers not in compliance with the PRC Labor Contract
Law in this regard to reduce the number of its dispatched workers to below 10% of the total number of its employees prior to March
1, 2016.
Enterprises
in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance
funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and
a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages
of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations
where they operate their businesses or where they are located. The enterprise may be ordered to pay the full amount within a deadline
if it fails to make adequate contributions to various employee benefit plans and may be subject to fines and other administrative
sanctions.
According
to the Interim Regulations on the Collection and Payment of Social Insurance Premiums, the Regulations on Work Injury
Insurance, the Regulations on Unemployment Insurance and the Trial Measures on Employee Maternity Insurance of Enterprises,
enterprises in the PRC shall provide benefit plans for their employees, which include basic pension insurance, unemployment insurance,
maternity insurance, work injury insurance and basic medical insurance. An enterprise must provide social insurance by making
social insurance registration with local social insurance agencies, and shall pay or withhold relevant social insurance premiums
for and on behalf of employees. The Law on Social Insurance of the PRC, which was promulgated by the SCNPC on October 28,
2010, became effective on July 1, 2011, and was most recently updated on December 29, 2018, has consolidated pertinent provisions
for basic pension insurance, unemployment insurance, maternity insurance, work injury insurance and basic medical insurance, and
has elaborated in detail the legal obligations and liabilities of employers who do not comply with laws and regulations on social
insurance.
According
to the Regulations on the Administration of Housing Provident Fund, which was promulgated by the State Counsel and became
effective on April 3, 1999, and was amended on March 24, 2002 and was partially revised on March 24, 2019 by the Decision of
the State Council on Revising Some Administrative Regulations (Decree No. 710 of the State Council), housing provident fund
contributions by an individual employee and housing provident fund contributions by his or her employer shall belong to the individual
employee. Registration by PRC companies with the applicable housing provident fund management center is compulsory, and a special
housing provident fund account for each of the employees shall be opened at an entrusted bank.
The
employer shall timely pay up and deposit housing provident fund contributions in full amount and late or insufficient payments
of such contributions are unlawful. The employer shall make the housing provident fund payment and deposit registrations with
the housing provident fund administration center. With respect to companies which violate the above regulations and fail to complete
housing provident fund payment and deposit registrations or open housing provident fund accounts for their employees, such companies
shall be ordered by the housing provident fund administration center to complete such procedures within a designated time limit.
Those who fail to complete their registrations within the designated period shall be levied a fine ranging from RMB 10,000 to
RMB 50,000. When companies breach these regulations and fail to pay housing provident fund contributions in full amount that are
due, the housing provident fund administration center shall order such companies to pay up within a designated period, and may
further petition a People’s Court for mandatory enforcement against those who still fail to comply after the expiry of such
period.
Regulations
Relating to Foreign Exchange
Under
the PRC Foreign Currency Administration Rules promulgated on January 29, 1996 and last amended on August 5, 2008 and various regulations
issued by the State Administration of Foreign Exchange and other relevant PRC government authorities, payment of current account
items in foreign currencies, such as trade and service payments, payment of interest and dividends can be made without prior approval
from the State Administration of Foreign Exchange by following the appropriate procedural requirements. By contrast, the conversion
of RMB into foreign currencies and remittance of the converted foreign currency outside the PRC for the purpose of capital account
items, such as direct equity investments, loans and repatriation of investment, requires prior approval from the State Administration
of Foreign Exchange or its local office.
On
February 13, 2015, the State Administration of Foreign Exchange promulgated the Circular on Simplifying and Improving the Foreign
Currency Management Policy on Direct Investment, effective from June 1, 2015, which cancels the requirement for obtaining approvals
of foreign exchange registration of foreign direct investment and overseas direct investment from the State Administration of
Foreign Exchange. The application for the registration of foreign exchange for the purpose of foreign direct investment and overseas
direct investment may be filed with qualified banks, which, under the supervision of the State Administration of Foreign Exchange,
may review the application and process the registration.
The
Circular of the State Administration of Foreign Exchange on Reforming the Management Approach regarding the Settlement of Foreign
Capital of Foreign-invested Enterprise was promulgated on March 30, 2015 and became effective on June 1, 2015. According to this
Circular, a foreign-invested enterprise may, according to its actual business needs, settle with a bank the portion of the foreign
exchange capital in its capital account for which the relevant foreign exchange bureau has confirmed monetary contribution rights
and interests (or for which the bank has registered the account-crediting of monetary contribution). For the time being, foreign-invested
enterprises are allowed to settle 100% of their foreign exchange capitals on a discretionary basis; a foreign-invested enterprise
shall truthfully use its capital for its own operational purposes within the scope of business; where an ordinary foreign-invested
enterprise makes domestic equity investment with the amount of foreign exchanges settled, the invested enterprise shall first
go through domestic re-investment registration and open a corresponding Account for Foreign Exchange Settlement Pending Payment
with the foreign exchange bureau (bank) at the place of registration. The Circular of the State Administration of Foreign Exchange
on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts was promulgated and became
effective on June 9, 2016. According to this Circular, enterprises registered in PRC may also convert their foreign debts from
foreign currency into Renminbi on self-discretionary basis. This Circular 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 self—discretionary
basis, which applies to all enterprises registered in the PRC. This Circular 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 and may not be used for investments in securities or other investment with the exception of bank financial products that
can guarantee the principal within the PRC unless otherwise specifically provided. Besides, the converted Renminbi shall not be
used to make loans for related enterprises unless it is within the business scope or to build or to purchase any real estate that
is not for the enterprise own use with the exception for the real estate enterprise.
On
January 26, 2017, the State Administration of Foreign Exchange promulgated the Circular on Further Improving Reform of Foreign
Exchange Administration and Optimizing Genuineness and Compliance Verification, which stipulates several capital control measures
with respect to the outbound remittance of profits from domestic entities to offshore entities, including (i) banks must check
whether the transaction is genuine by reviewing board resolutions regarding profit distribution, original copies of tax filing
records and audited financial statements, and (ii) domestic entities must retain income to account for previous years’ losses
before remitting any profits. Moreover, pursuant to this Circular, domestic entities must explain in detail the sources of capital
and how the capital will be used, and provide board resolutions, contracts and other proof as a part of the registration procedure
for outbound investment.
On
October 25, 2019, SAFE promulgated the Notice on Further Facilitating Cross-Board Trade and Investment, which became effective
on the same date (except for Article 8.2 thereof). The notice removed restrictions on the capital equity investment in China by
non-investment foreign-invested enterprises. In addition, restrictions on the use of funds for foreign exchange settlement of
domestic accounts for the realization of assets have been removed and restrictions on the use and foreign exchange settlement
of foreign investors’ security deposits have been relaxed. Eligible enterprises in the pilot areas are also allowed to use
revenues under capital accounts, such as capital funds, foreign debts and overseas listing revenues for domestic payments without
providing materials to the bank in advance for authenticity verification on an item by item basis, while the use of funds should
be true, in compliance with applicable rules and conforming to the current capital revenue management regulations.
Regulations
on Foreign Exchange Registration of Overseas Investment by PRC Residents
The
State Administration of Foreign Exchange issued the Circular on Relevant Issues Relating to Domestic Resident’s Investment
and Financing and Roundtrip Investment through Special Purpose Vehicles, or Circular 37, which became effective in July 2014,
to replace the Circular of the State Administration of Foreign Exchange on Issues Concerning the Regulation of Foreign Exchange
in Equity Finance and Roundtrip Investments by Domestic Residents through Offshore Special Purpose Vehicles, to regulate foreign
exchange matters in relation to the use of special purpose vehicles by PRC residents or entities to seek offshore investment and
financing or conduct round trip investment in China. Circular 37 defines a “special purpose vehicle” as an offshore
entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing
or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment”
is defined as direct investment in China by PRC residents or entities through special purpose vehicles, namely, establishing foreign-invested
enterprises to obtain the ownership, control rights and management rights. Circular 37 stipulates that, prior to making contributions
into a special purpose vehicle, PRC residents or entities be required to complete foreign exchange registration with the State
Administration of Foreign Exchange or its local branch. In addition, the State Administration of Foreign Exchange promulgated
the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February
2015, which amended Circular 37 and became effective on June 1, 2015, requiring PRC residents or entities to register with qualified
banks rather than the State Administration of Foreign Exchange in connection with their establishment or control of an offshore
entity established for the purpose of overseas investment or financing.
PRC
residents or entities who had contributed legitimate onshore or offshore interests or assets to special purpose vehicles but had
not obtained registration as required before the implementation of the Circular 37 must register their ownership interests or
control in the special purpose vehicles with qualified banks. An amendment to the registration is required if there is a material
change with respect to the special purpose vehicle registered, such as any change of basic information (including change of the
PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers
or divisions. Failure to comply with the registration procedures set forth in Circular 37 and the subsequent notice, or making
misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip
investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise,
including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation,
to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents
or entities to penalties under PRC foreign exchange administration regulations. See “Risk Factors—Risks Related to
Doing Business in China—PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident
beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary
or limit our PRC subsidiary’s ability to increase their registered capital or distribute profits.”
Regulations
on Dividend Distribution
Distribution
of dividends of foreign investment enterprises are mainly governed by the Foreign Investment Enterprise Law, issued in 1986 and
amended in 2000 and 2016, respectively, and the Implementation Rules under the Foreign Investment Enterprise Law, issued in 1990
and amended in 2001 and 2014, respectively. Under these regulations, foreign investment enterprises in the PRC may distribute
dividends only out of their accumulative profits, if any, determined in accordance with PRC accounting standards and regulations.
In addition, no less than 10% of the accumulated profits of the foreign investment enterprises in the PRC are required to be allocated
to fund certain reserve funds each year unless these reserves have reached 50% of the registered capital of the enterprises. A
PRC company is not permitted to distribute any profits until any losses from previous fiscal years have been offset. Profits retained
from prior fiscal years may be distributed together with distributable profits from the current fiscal year. Under our current
corporate structure, our Cayman Islands holding company may rely on dividend payments from E-Home WFOE, which is a wholly foreign-owned
enterprise incorporated in China, to fund any cash and financing requirements we may have. Limitation on the ability of our consolidated
VIEs to make remittance to E-Home WFOE and on the ability of E-Home WFOE to pay dividends to us could limit our ability to access
cash generated by the operations of those entities. See “Risk Factors—Risks Related to Doing Business in China—Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely
affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise
fund and conduct our business.”
Regulations
Relating to Overseas Listings
On
August 8, 2006, six PRC regulatory agencies, including MOFCOM, the SASAC, the State Administration of Taxation, the SAIC, the
CSRC and SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,
or the M&A Rules, which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rules, among other
things, require that (i) PRC entities or individuals obtain MOFCOM approval before they establish or control a SPV overseas, provided
that they intend to use the SPV to acquire their equity interests in a PRC company at the consideration of newly issued share
of the SPV, or Share Swap, and list their equity interests in the PRC company overseas by listing the SPV in an overseas market;
(ii) the SPV obtains MOFCOM’s approval before it acquires the equity interests held by the PRC entities or PRC individual
in the PRC company by Share Swap; and (iii) the SPV obtains CSRC approval before it lists overseas. See “Risk Factors—Risks
Related to Doing Business in China—We may be unable to complete a business combination transaction efficiently or on favorable
terms due to complicated merger and acquisition regulations which became effective on September 8, 2006.”
Regulations
Relating to Taxation
Dividend
Withholding Tax
In
March 2007, the National People’s Congress enacted the Enterprise Income Tax Law which became effective on January 1, 2008
and amended on February 24, 2017. According to Enterprise Income Tax Law, dividends generated after January 1, 2008 and payable
by a foreign-invested enterprise in China to its foreign enterprise investors are subject to a 10% withholding tax, unless any
such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential withholding
arrangement. Pursuant to the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest
Rates, issued on January 29, 2008 and supplemented and revised on February 29, 2008, and the Arrangement between Mainland China
and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect
to Taxes on Income, which became effective on December 8, 2006 and applicable to income derived in any year of assessment commencing
on or after April 1, 2007 in Hong Kong and in any year commencing on or after January 1, 2007 in the PRC, such withholding tax
rate may be lowered to 5% if a Hong Kong enterprise is deemed the beneficial owner of any dividend paid by a PRC subsidiary by
PRC tax authorities and holds at least 25% of the equity interest in that particular PRC subsidiary at all times within the 12-month
period immediately prior to the distribution of the dividends. Furthermore, pursuant to the Announcement on Issues concerning
“Beneficial Owners” in Tax Treaties issued on February 3, 2018 by the State Administration of Taxation, when determining
the status of “beneficial owners,” a comprehensive analysis may be conducted through materials such as articles of
association, financial statements, records of capital flows, minutes of board of directors, resolutions of board of directors,
allocation of manpower and material resources, the relevant expenses, functions and risk assumption, loan contracts, royalty contracts
or transfer contracts, patent registration certificates and copyright certificates, etc. However, even if an applicant has the
status as a “beneficiary owner,” if the competent tax authority finds necessity to apply the principal purpose test
clause in the tax treaties or the general anti-tax avoidance rules stipulated in domestic tax laws, the general anti-tax avoidance
provisions shall apply.
Enterprise
Income Tax
In
December 2007, the State Council promulgated the Implementing Rules of the Enterprise Income Tax Law, which became effective on
January 1, 2008. The Enterprise Income Tax Law and its relevant implementing rules (i) impose a uniform 25% enterprise income
tax rate, which is applicable to both foreign-invested enterprises and domestic enterprises (ii) permits companies to continue
to enjoy their existing tax incentives, subject to certain transitional phase-out rules and (iii) introduces new tax incentives,
subject to various qualification criteria.
The
Enterprise Income Tax Law also provides that enterprises organized under the laws of jurisdictions outside China with their “de
facto management bodies” located within China may be considered PRC resident enterprises and therefore be subject to PRC
enterprise income tax at the rate of 25% on their worldwide income. The implementing rules further define the term “de facto
management body” as the management body that exercises substantial and overall management and control over the production
and operations, personnel, accounts and properties of an enterprise. If an enterprise organized under the laws of jurisdiction
outside China is considered a PRC resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax
consequences could follow. First, it would be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income.
Second, a 10% withholding tax would be imposed on dividends it pays to its non-PRC enterprise shareholders and with respect to
gains derived by its non-PRC enterprise shareholders from transfer of its shares.
On
October 17, 2017, the State Administration of Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident
Enterprise Income Tax at Source, or Bulletin 37, which replaced the Notice on Strengthening Administration of Enterprise Income
Tax for Share Transfers by Non-PRC Resident Enterprises issued by the State Administration of Taxation on December 10, 2009, and
partially replaced and supplemented rules under the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets
by Non-PRC Resident Enterprises, or Bulletin 7, issued by the State Administration of Taxation on February 3, 2015. Under Bulletin
7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident
enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have
a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result,
gains derived from such indirect transfer may be subject to PRC enterprise income tax. In respect of an indirect offshore transfer
of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment and
therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate
of 25%. Where the underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident
enterprise, which is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax
at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and
the party who is obligated to make the transfer payments has the withholding obligation. Pursuant to Bulletin 37, the withholding
party shall declare and pay the withheld tax to the competent tax authority in the place where such withholding party is located
within seven days from the date of occurrence of the withholding obligation. Both Bulletin 37 and Bulletin 7 do not apply to transactions
of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public
stock exchange. See “Risk Factors—Risks Related to Doing Business in China—Under the Enterprise Income Tax Law,
we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC stockholders.”
Value-Added
Tax
In
November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added
Tax to Replace Business Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated
the Notice on Fully Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax. Pursuant to this Pilot Plan and the
relevant notice, value added tax at a rate of 6% is generally imposed, on a nationwide basis, on the revenue generated from the
provision of service in lieu of business tax in the modern service industries. Value added tax of a rate of 6% applies to revenue
derived from the provision of some modern services. Unlike business tax, a taxpayer is allowed to offset the qualified input value
added tax paid on taxable purchases against the output value added tax chargeable on the modern services provided.
Further,
on March 20, 2019, the MOF, the SAT and the General Administration of Customs jointly issued the Announcement on Policies for
Deepening the VAT Reform, or Announcement 39, to further reduce value-added tax rates. According to the Announcement 39, (i) for
general VAT payers’ sales activities or imports that are subject to VAT at an existing applicable rate of 16% or 10%, the
applicable VAT rate is adjusted to 13% or 9% respectively; (ii) for the agricultural products purchased by taxpayers to which
an existing 10% deduction rate is applicable, the deduction rate is adjusted to 9%; (iii) for the agricultural products purchased
by taxpayers for production or commissioned processing, which are subject to VAT at 13%, the input VAT will be calculated at a
10% deduction rate; (iv) for the exportation of goods or labor services that are subject to VAT at 16%, with the applicable export
refund at the same rate, the export refund rate is adjusted to 13%; and (v) for the exportation of goods or cross-border taxable
activities that are subject to VAT at 10%, with the export refund at the same rate, the export refund rate is adjusted to 9%.
The Announcement 39 came into effect on April 1, 2019 and shall prevail in case of any conflict with existing provisions.
Licenses
and Permits
The
governing law for Internet information service is the Measures for the Administration of Internet Information Services, or the
Internet Content Provider (“ICP”) Measures, which went into effect on September 25, 2000. Under the ICP Measures,
any entity that provides information to online Internet users must obtain an operating license from Ministry of Industry and Information
Technology (“MIIT”) or its local branch at the provincial level in accordance with the Telecom Regulations described
above. The ICP Measures further stipulate that entities providing online information services in areas of news, publishing, education,
medicine, health, pharmaceuticals and medical equipment must obtain permission from responsible national authorities prior to
applying for an operating license from MIIT or its local branch at the provincial or municipal level. Moreover, ICPs must display
their operating license numbers in a conspicuous location on their websites. ICPs must police their websites to remove categories
of harmful content that are broadly defined. Jiaxing Electronic obtained the ICP license in 2019, which will expire in five years
and can be renewed thereafter.
Employees
As
of the date of the report, we have a total of 25 employees, all of whom are full-time employees. The following table sets forth
the number of our full-time employees by function.
Function
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Number of Employees
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Administration
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8
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|
Technology
|
|
|
6
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|
Sales and Marketing
|
|
|
11
|
|
Total
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|
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25
|
|
Our
employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced
any work stoppages. We believe we maintain good relations with our employees.
Available
Information
The
SEC maintains a website that contains our periodic reports, such as Form 10-Ks, 10-Qs and 8-Ks and other SEC filings. The address
of the SEC’s website is www.sec.gov.
An
investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together
with all of the other information included in this report, before making an investment decision. If any of the following risks
actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment. You should read the section entitled “Special
Notes Regarding Forward-Looking Statements” above for a discussion of what types of statements are forward-looking statements,
as well as the significance of such statements in the context of this report.
Risks
Related to Our Business
The
outbreak of the coronavirus (COVID-19) has had a material adverse effect on our business, results of operations and financial
condition.
While
we are a development stage company, our business has been materially adversely affected by the outbreak of the coronavirus. The
World Health Organization labelled the coronavirus outbreak a pandemic on March 11, 2020, given the threat beyond a public health
emergency of international concern the organization had declared on January 30, 2020. Given the high public health risks associated
with the disease, governments around the world have imposed various degrees of travel and gathering restrictions and other quarantine
measures. Businesses in China have scaled back or suspended operations since the outbreak in December 2019. The coronavirus outbreak
is currently having an indeterminable adverse impact on the global economy.
All
of our operating subsidiaries are located in China. Substantially all of our employees and all of our customers are located in
China. During the first quarter of 2020, although our offline franchise stores did not close, there were not many customers visiting
the stores resulting in reduced sales; as to our e-commerce platform, the outbreak has delayed its commencement of operations.
Our employees have been working from home to mitigate the impacts of the epidemic on our operations. Since late March, our operations
have gradually returned to normal.
Given
the uncertainty of the outbreak, the spread of the coronavirus may be prolonged and worsened, and we may be forced to scale back
or even suspend our operations. As the coronavirus epidemic spreads outside China, the global economy is suffering a noticeable
slowdown. Commercial activities throughout the world have been curtailed with decreased consumer spending, business operation
disruptions, interrupted supply chain, difficulties in travel, and reduced workforces. The duration and intensity of disruptions
resulting from the coronavirus outbreak is uncertain. It is unclear as to when the outbreak will be contained, and we also cannot
predict if the impact will be short-lived or long-lasting. The extent to which the coronavirus impacts our financial results will
depend on its future developments. If the outbreak of the coronavirus is not effectively controlled in a short period of time,
our business, operating results and financial condition may be materially and adversely affected as a result of slowdown in economic
growth, operation disruptions or other factors that we cannot predict.
Our
independent registered auditors have expressed substantial doubt about our ability to continue as a going concern.
Our
audited consolidated financial statements included in this report include a paragraph that indicates that they were prepared assuming
that we would continue as a going concern. We incurred net loss of $1,607,997 and net cash used in operating activities of $1,012,785
during the fiscal year ended December 31, 2019. As of December 31, 2019, we had incurred an accumulated deficit on equity
of $771,217. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. The ability
to continue as a going concern is dependent upon generating profitable operations in the future and/or obtaining the necessary
financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. Management
plans to obtain additional funding and implement its strategic plan to allow the opportunity for the Company to continue as a
going concern; however, there can be no assurance that we will be successful in these plans or in attracting equity or alternative
financing on acceptable terms, or if at all.
We
are a startup company and face challenges often encountered by startups.
We
have encountered and will encounter risks and uncertainties frequently experienced by growing companies in rapidly changing industries,
such as the risks and uncertainties described herein. If our assumptions regarding these risks and uncertainties (which we use
to plan our business) are incorrect or change due to changes in our markets, or if we do not address these risks successfully,
our operating and financial results could differ materially from our expectations and our business could suffer.
We
may continue to incur losses in the future, and may not be able to achieve profitability, which may cause the market price of
our shares to decline.
As
a startup company, we have not generated revenue. Our current operations are small with a short history. We may be unable to achieve
our performance targets, which will impact the Company’s operating results. Our ability to achieve profitability depends
on the competitiveness of our products and services as well as our ability to control costs and to provide new products and services
to meet the market demands and attract new customers. Due to the numerous risks and uncertainties associated with the development
of our business, we cannot guarantee that we may be able to achieve profitability in the short-term or long-term.
We
have a limited operating history and face many of the risks and difficulties frequently encountered by development stage companies.
We
have had limited operations to date and have not generated any revenues. Therefore, it might be difficult to evaluate the merits
of investing in our company. Potential investors should be aware of the difficulties normally encountered by new companies and
the high rate of failure of such enterprises. The likelihood of success must be considered in light of the problems, expenses,
difficulties, complications and delays encountered in connection with the operations that we plan to undertake. These potential
problems include, but are not limited to, unanticipated problems relating to the ability to generate sufficient cash flow to operate
our business, and additional costs and expenses that may exceed current estimates. We expect to incur significant losses into
the foreseeable future. We recognize that if the effectiveness of our business plan is not forthcoming, we will not be able to
continue business operations. There is no history upon which to base any assumption as to the likelihood that we will prove successful,
and it is doubtful that we will generate any operating revenues or ever achieve profitable operations. If we are unsuccessful
in addressing these risks, our business will most likely fail.
Our
industry is highly fragmented and competitive, and increased competition could reduce our operating income.
The
e-commerce industry is highly concentrated with minimal barriers to entry and competitors can launch websites at a relatively
low cost. Our business is particularly subject to rapidly and frequently changing consumer trends and preferences. Our continued
success depends in part on our ability to anticipate and respond to these changes, and we may not be able to respond in a timely
or commercially appropriate manner to these changes. Our failure to accurately predict these trends could negatively affect our
inventory levels, sales and consumer opinion of us as a source for the latest products. We will be competing against larger companies
with central purchasing efficiencies, inventory economies of scale, and in some cases, brick-and-mortar locations. Given our small
size, we will need to compete on:
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customer
service excellence;
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selection
of our niche products;
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accessibility;
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convenience;
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price;
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order
fulfillment speed; and
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brand
recognition.
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Our
competitors may have longer operating histories, greater financial resources, greater brand recognition, larger customer bases
and significantly deeper marketing budgets, which, in turn, may result in lower margins and a decreased market share for our company.
There is no assurance that we will compete effectively against present and future competitors, and this competition may have a
material adverse effect on our financial condition, operational results, business, and prospects.
We
are dependent on the growth of e-commerce.
Our
future revenues and growth are dependent upon the continued acceptance of online purchases as the medium of choice for retail
purchases. Consumer acceptance of e-commerce is dependent upon the maintenance of reliable infrastructure to support technology
demands that increased internet usage places upon bandwidth. Government regulation may cause disruptions in service due to delays
in the development of new standards to control various levels of internet activity. Third party internet service providers may
also cause service interruptions outside of our control. Such delays could adversely affect our ability to provide adequate customer
service to our e-commerce platform users. If online usage growth declines or grows slower than expected, if consumer’s ability
to access the internet, or if the infrastructure necessary to sustain online commerce is temporarily or permanently lost, our
financial condition, operational results, business, and prospects could be materially adversely affected.
We
will require additional capital to support business growth, and this capital might not be available on acceptable terms, if at
all.
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 update our website, add to our inventory, and improve our operating infrastructure or acquire
complementary businesses and technologies. Accordingly, we will need to engage in continued equity 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 our common stock. Any debt financing we secure in the future could involve restrictive covenants relating
to our capital raising activities and other financial and operational matters, which 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 or financing on terms satisfactory
to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be
impaired, and our business may be harmed.
Actual
or perceived security vulnerabilities in mobile devices could negatively affect our business.
The
security of mobile devices and wireless networks is crucial to our business. Viruses, worms and other malicious software programs
that attack mobile devices and wireless networks have been developed and deployed. Security threats could lead some mobile subscribers
to reduce or delay their purchases of mobile content and applications in an attempt to minimize the threat. Wireless carriers
and device manufacturers may also spend more on protecting their devices and networks from attack. This could delay adoption of
new mobile devices which tend to include more features and functionalities that facilitate increased use of mobile content and
applications. In any such instance, actual or perceived security threats and the reactions to those threats could negatively affect
our results of operations.
We
depend on our third-party suppliers to service our product offerings.
Our
business model relies on third-party merchants to procure and deliver merchandise offered on our e-commerce marketplace platform.
Accordingly, our ability to meet our obligations to our customers is dependent on third-party suppliers’ procuring and timely
delivering products that comply with regulations and standards. In addition, if third-party merchants or other vendors violate
applicable laws, regulations, our code of standards and responsibilities, or implement practices regarded as unethical, unsafe,
or hazardous to the environment, it could damage our reputation, limit our growth, and negatively affect our operating results.
We
may be subject to product liability claims if people or property are injured or damaged by the products we sell.
Some
of the products we sell may expose us to product liability or food safety claims relating to personal injury or illness, death,
or environmental or property damage, and may require product recalls or other actions. Certain third parties also sell products
using our services and platform that may increase our exposure to product liability claims, through these sellers shall be responsible
for any liability arising from such claims under our agreements with these sellers. Currently, we do not have any liability insurance.
Should we carry liability insurance in the future, we cannot be certain that our coverage will be adequate for liabilities actually
incurred.
We
could be liable for fraudulent or unlawful activities of third-party sellers.
Our
e-commerce platform includes a marketplace for third-party merchants to sell products to customers. We may be unable to prevent
sellers from collecting payments, fraudulently or otherwise, when customers never receive the products they ordered or when the
products received are materially different from the sellers’ descriptions. We also may be unable to prevent sellers on our
e-commerce platform or offline franchise stores from selling unlawful, counterfeit, pirated, or stolen goods, selling goods in
an unlawful or unethical manner, violating the proprietary rights of others, or otherwise violating our policies. In addition,
to the extent any of this occurs, it could harm our business or damage our reputation and we could face civil or criminal liability
for unlawful activities by our sellers.
We
may be sanctioned by government authorities for lacking licenses or permissions to sell certain products.
We
may fail to comply with various government regulations governing the distribution of certain products which may subject us to
reprimands, sanctions, probations, fines, suspensions, or closure of business. We sell a wide range of consumer products, and
the laws and regulations relating to the import and sale of consumer products are constantly evolving and may become more stringent.
If we fail to obtain necessary licenses or approvals before selling certain products, or if we become subject to actions by enforcement
regulators, our business could be ordered to pay fines or suspend operations, which could have a material adverse effect on our
business, financial condition, and results of operations.
We
have limited control with respect to the operations of our franchisees, which could have a material negative impact on our business.
Franchisees
are independent business operators and are not our employees, and we do not exercise control over the day-to-day operations of
their stores. We will provide training and support to franchisees, and set and monitor operational standards, but the quality
of franchised stores may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully
operate stores in a manner consistent with our standards and requirements or may not hire and train qualified personnel. If franchisees
do not operate to our expectations, our image and reputation, and the image and reputation of other franchisees, may suffer materially
and system-wide sales could decline significantly, which would reduce our royalty revenues, and the impact on profitability could
be greater than the decrease in royalties and fees.
We
do not have any business insurance coverage.
Insurance
companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed
economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined
that the costs of insuring these risks and the difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. Any uninsured business disruptions or liabilities may result in substantial
costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.
If
we fail to attract and retain qualified senior executive and key technical personnel, our business will not be able to expand.
We
are dependent on the continued availability of Xianyi Hao, and the availability of new employees to implement our business plans.
The market for skilled employees is highly competitive, especially for employees in technical fields. Although we expect that
our compensation programs will be intended to attract and retain the employees required for us to be successful, there can be
no assurance that we will be able to retain the services of all our key employees or a sufficient number to execute our plans,
nor can there be any assurance we will be able to continue to attract new employees as required.
Our
personnel may voluntarily terminate their relationship with us at any time, and competition for qualified personnel, especially
software engineers, is intense. The process of locating additional personnel with the combination of skills and attributes required
to carry out our strategy could be lengthy, costly and disruptive.
If
we lose the services of key personnel or fail to replace the services of key personnel who depart, we could experience a severe
negative effect on our financial results and stock price. In addition, there is intense competition for highly qualified software
engineering and marketing personnel in the locations where we principally operate.
The
loss of the services of any key software engineering, marketing or other personnel or our failure to attract, integrate, motivate
and retain additional key employees could have a material adverse effect on our business, operating and financial results and
stock price.
We
may not be able to manage our expansion of operations effectively.
We
are in the process of developing our business in order to meet the potentially increasing demand for our future products, as well
as capture new market opportunities. Our current business operations are small with a short history. We may be unable to achieve
our performance targets, which will impact the Company’s operating results. As we continue to grow, we must continue to
improve our operational and financial systems, procedures and controls, increase service capacity and output, and expand, train
and manage our growing employee base. In order to fund our on-going operations and our future growth, we need to have sufficient
internal sources of liquidity or access to additional financing from external sources. Furthermore, our management will be required
to maintain and strengthen our relationships with our customers and other third parties. Currently, we only have 25 employees.
As a result, our continued expansion has placed, and will continue to place, significant strains on our management personnel,
systems and resources. We also will need to further strengthen our internal control and compliance functions to ensure that we
will be able to comply with our legal and contractual obligations and minimize our operational and compliance risks. Our current
and planned operations, personnel, systems, internal procedures and controls may not be adequate to support our future growth.
If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business
strategies or respond to competitive pressures.
Our
holding company structure may limit the payment of dividends.
We
have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying
dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations
depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investment. In
addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions
to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into
U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders
upon conversion of the dividend payment into U.S. dollars.
Chinese
regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese
accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits
according to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China
are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits
under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards,
we will be unable to pay any dividends.
After-tax
profits/losses with respect to the payment of dividends out of accumulated profits and the annual appropriation of after-tax profits
as calculated pursuant to PRC accounting standards and regulations do not result in significant differences as compared to after-tax
earnings as presented in our financial statements.
However,
there are certain differences between PRC accounting standards and regulations and U.S. GAAP, arising from different treatment
of items such as amortization of intangible assets and change in fair value of contingent consideration rising from business combinations.
To
the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for
the Company are located in China, the PCAOB may not be able to inspect such audit documentation and, as a result, you may be deprived
of the benefits of such inspection.
Our
independent registered public accounting firm issued an audit report on the financial statements included herein. As the auditor
of a company filing reports with the SEC and as a firm registered with the PCAOB, our auditor is required by the laws of the United
States to undergo regular inspections by the PCAOB. However, to the extent that our auditor’s work papers are or become
located in China, such work papers will not be subject to inspection by the PCAOB because the PCAOB is currently unable to conduct
inspections without the approval of the Chinese authorities. Inspections of certain other firms that the PCAOB has conducted outside
of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed
as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of our auditors’
work papers in China would make it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality
control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may consequently
lose confidence in our reported financial information and procedures and the quality of our financial statements. As a result,
our investors may be deprived of the benefits of PCAOB’s oversight of our auditors through such inspections.
If
we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we
may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock
price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed
and resolved favorably.
Recently,
U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed
so-called reverse acquisitions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial
commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around
financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny,
criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value
and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement
actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide
scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject
of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources
to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management
from growing our company.
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. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental
agency that is located in China where substantially all of our operations and business are located have conducted any due diligence
on our operations or reviewed or cleared any of our disclosure.
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. Unlike public reporting companies whose
operations are located primarily in the United States, however, substantially all of our operations are located in China. Since
substantially all of our operations and business takes place in China, it may be more difficult for the staff of the SEC to overcome
the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for
similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, 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 of the China Securities Regulatory
Commission, a PRC regulator that is tasked with 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 due diligence
on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements
has been reviewed or otherwise been scrutinized by any local regulator.
Risks
Relating to our Commercial Relationship with VIEs
PRC
laws and regulations governing our businesses and the validity of certain of our Contractual Arrangements are uncertain. If we
are found to be in violation of such PRC laws and regulations, our business may be negatively affected and we may be forced to
relinquish our interests in those operations.
We
plan to engage in e-commerce business when our platform is fully operational. The PRC government e-commerce businesses through
strict business licensing requirements and other government regulations. These laws and regulations also include limitations on
foreign ownership of PRC companies that engage in telecommunications-related businesses. Specifically, foreign investors are not
allowed to own more than 50% equity interest in any PRC company engaging in value-added telecommunications business. The primary
foreign investor must have experience and a good track record in providing value-added telecommunications services overseas.
Because
we were incorporated in Nevada, we are classified as a foreign enterprise under PRC laws and regulations, and our wholly-owned
PRC subsidiary, Jiaxing Bangtong, is a foreign-invested enterprise. Accordingly, our subsidiary is not eligible to operate a value-added
telecommunications service business in China. As a result, we plan to conduct our e-commerce business in China through our consolidated
VIEs and their affiliates. Jiaxing Bangtong has entered into the Contractual Arrangements with our consolidated VIEs and their
shareholders.
We
believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations.
Our PRC legal counsel is of the opinion that our current ownership structure, the ownership structure of our PRC subsidiary, our
consolidated VIEs and their subsidiaries, and the Contractual Arrangements among them are not in violation of existing PRC laws,
rules and regulations.
As
there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, and the Telecommunications Regulations
and the relevant regulatory measures concerning the telecommunications industry, there can be no assurance that the PRC government
authorities, such as the Ministry of Commerce or other authorities that regulate online services providers and other participants
in the telecommunications industry, would ultimately take a view that is consistent with the opinion of our PRC legal counsel
or agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or
other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC
laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities
have broad discretion in interpreting these laws and regulations.
If
our corporate structure and contractual arrangements are deemed by the Ministry of Commerce or other regulators having competent
authority to be illegal, either in whole or in part, we may lose control of our consolidated VIEs and may have to modify such
structure to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material
disruption to our business. Further, if our corporate structure and contractual arrangements are found to be in violation of any
existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such
violations, including:
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revoking
our business and operating licenses;
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levying
fines on us;
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confiscating
any of our income that they deem to be obtained through illegal operations;
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shutting
down our services;
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discontinuing
or restricting our operations in China;
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imposing
conditions or requirements with which we may not be able to comply;
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requiring
us to change our corporate structure and contractual arrangements;
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restricting
or prohibiting our use of the proceeds from overseas offerings to finance our PRC consolidated VIEs’ business and operations;
and
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taking
other regulatory or enforcement actions that could be harmful to our business.
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Furthermore,
new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate
structure and contractual arrangements. See “Risks Relating to our Commercial Relationship with VIEs— Our contractual
arrangement with VIEs may be affected by the newly enacted Foreign Investment Law.” Occurrence of any of these events could
materially and adversely affect our business and financial condition and results of operations. In addition, if the imposition
of any of these penalties or requirements to restructure our corporate structure causes us to lose the right to direct the activities
of our consolidated VIEs or our right to receive their economic benefits, we would no longer be able to consolidate the financial
results of such VIEs in our consolidated financial statements. If our corporate structure and contractual arrangements are deemed
to be illegal by relevant regulators, our business and results of operations would be materially and adversely affected and the
price of our shares may decline.
Our
arrangements with the VIEs and their shareholders may be subject to scrutiny by the PRC tax authorities. Any adjustment of related
party transaction pricing could lead to additional taxes, and therefore which could have an adverse effect on our income and expenses.
The
tax regime in China is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted
in significantly different ways. The PRC tax authorities may assert that we or our subsidiaries or VIEs or their equity holders
owe and/or are required to pay additional taxes on previous or future revenue or income. In particular, under applicable PRC laws,
rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with our VIEs,
may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC
tax authorities determine that our agreements with the VIEs and their shareholders were not entered into based on arm’s
length negotiations. As a result, they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing
adjustment. Such an adjustment may require that we pay additional PRC taxes plus applicable penalties and interest, if any.
Our
contractual arrangement with VIEs may be affected by the newly enacted Foreign Investment Law.
On
March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law or the FIL, which took effect on January
1, 2020, and replaced the existing laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the
PRC Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law, or Existing FIE Laws, together with their implementation
rules and ancillary regulations. However, uncertainties still exist in relation to interpretation and implementation of the FIL,
especially in regard to, including, among other things, the nature of VIE contractual arrangements, the promulgation schedule
of both the “negative list” under the FIL and specific rules regulating the organization form of foreign-invested
enterprises within the five-year transition period. While FIL does not define contractual arrangements as a form of foreign investment
explicitly, we cannot assure you that future laws and regulations will not provide for contractual arrangements as a form of foreign
investment. Therefore, there can be no assurance that our control over our VIEs through contractual arrangements will not be deemed
as foreign investment in the future. In the event that any possible implementing regulations of the FIL, any other future laws,
administrative regulations or provisions deem contractual arrangements as a way of foreign investment, or if any of our operations
through contractual arrangements is classified in the “restricted” or “prohibited” industry in the future
“negative list” under the FIL, our contractual arrangements may be deemed as invalid and illegal, and we may be required
to unwind the VIE contractual arrangements and/or dispose of any affected business. Also, if future laws, administrative regulations
or provisions mandate further actions to be taken with respect to existing contractual arrangements, we may face substantial uncertainties
as to whether we can complete such actions in a timely manner, or at all. Furthermore, under the FIL, foreign investors or the
foreign investment enterprise should be imposed legal liabilities for failing to report investment information in accordance with
the requirements. In addition, the FIL provides that foreign invested enterprises established according to the existing laws regulating
foreign investment may maintain their structure and corporate governance within a five-year transition period, which means that
we may be required to adjust the structure and corporate governance of certain of our PRC subsidiaries in such transition period.
Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially
and adversely affect our current corporate structure, corporate governance and business operations.
Our
contractual arrangements may not be as effective in providing control over the variable interest entities as direct ownership.
We
rely on contractual arrangements with our VIEs to operate our electronic platform in China and other businesses in which foreign
investment is restricted or prohibited. These contractual arrangements may not be as effective as direct ownership in providing
us with control over our VIEs.
If
we had direct ownership of the VIEs, we would be able to exercise our rights as an equity holder directly to effect changes in
the boards of directors of the entity, which could effect changes at the management and operational level. Under our contractual
arrangements, we would be able to change the members of the boards of directors of the entity only by exclusively exercising the
equity holders’ voting rights and would have to rely on the variable interest entity and the variable interest entity equity
holders to perform their obligations in the contractual arrangements in order to exercise our control over the variable interest
entity. The variable interest entity equity holders may have conflicts of interest with us or our shareholders, and they may not
act in the best interests of our company or may not perform their obligations under these contracts. For example, our VIEs and
their equity holders could breach their contractual arrangements with us by, among other things, failing to conduct their operations,
including maintaining our website and using our domain names and trademarks which the relevant variable interest entity has exclusive
rights to use, in an acceptable manner or taking other actions that are detrimental to our interests. Pursuant to the call option,
we may replace the equity holders of the VIEs at any time pursuant to the contractual arrangements. However, if any equity holder
is uncooperative and any dispute relating to these contracts or the replacement of the equity holders remains unresolved, we will
have to enforce our rights under the contractual arrangements through the operations of PRC law and arbitral or judicial agencies,
which may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. See “Risk Factors—Risks
Relating to our Commercial Relationship with VIEs—Any failure by our VIEs or their equity holders to perform their obligations
under the contractual arrangements would have a material adverse effect on our business, financial condition and results of operations.”
Consequently, the contractual arrangements may not be as effective in ensuring our control over the relevant portion of our business
operations as direct ownership.
Any
failure by our VIEs or their equity holders to perform their obligations under the contractual arrangements would have a material
adverse effect on our business, financial condition and results of operations.
If
our VIEs or their equity holders fail to perform their respective obligations under the contractual arrangements, we may have
to incur substantial costs and expend additional resources to enforce such arrangements. Although we have entered into exclusive
option agreements in relation to our VIEs, which provides that we may exercise an option to acquire, or nominate a person to acquire,
ownership of the equity in that entity or, in some cases, its assets, to the extent permitted by applicable PRC laws, rules and
regulations, the exercise of the option is subject to the review and approval of the relevant PRC governmental authorities. We
have also entered into an equity interest pledge agreement with respect to the VIE to secure certain obligations of such VIES
or their equity holders to us under the contractual arrangements. However, the enforcement of such agreement through arbitral
or judicial agencies may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. Moreover,
our remedies under the equity pledge agreement are primarily intended to help us collect debts owed to us by the variable interest
entity equity holders under the contractual arrangements and may not help us in acquiring the assets or equity of the variable
interest entity.
The
contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings
in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance
with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United
States. Moreover, there are very few precedents and little formal guidance as to how contractual arrangements in the context of
a VIE should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel
or court would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability
to enforce the contractual arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court
judgments within a prescribed time limit, the prevailing parties may only enforce the arbitration awards or court judgments in
PRC courts, which would require additional expense and delay. In the event we are unable to enforce the contractual arrangements,
we may not be able to exert effective control over the VIEs, and our ability to conduct our business, as well as our financial
condition and results of operations, may be materially and adversely affected.
The
shareholders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business
and financial condition.
The
equity interests of each of our VIEs are held by numerous shareholders, including Xiaoyi Hao, our Chairman and Chief Executive
Officer. These shareholders may have potential conflicts of interest with us. These shareholders may breach, or cause our VIEs
to breach, the existing contractual arrangements, which would have a material adverse effect on our ability to effectively control
our VIEs and their subsidiaries and receive economic benefits from them. For example, these shareholders may be able to cause
our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under
the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of
these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.
Currently,
we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except
that we could exercise our purchase option under the exclusive option agreements with these shareholders to request them to transfer
all of their equity interests in our VIEs to a PRC entity or individual designated by us, to the extent permitted by PRC laws.
If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings,
which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal
proceedings.
Risks
Related to Doing Business in China
Changes
in the economic and political policies of the PRC government could have a material and adverse effect on our business and operations.
We
conduct substantially all our business operations in China. Accordingly, our results of operations, financial condition and prospects
are significantly dependent on economic and political developments in China. China’s economy differs from the economies
of developed countries in many aspects, including the level of development, growth rate and degree of government control over
foreign exchange and allocation of resources. While China’s economy has experienced significant growth in the past 30 years,
the growth has been uneven across different regions and periods and among various economic sectors in China. We cannot assure
you that China’s economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that
if there is a slowdown, such slowdown will not have a negative effect on its business and results of operations.
The
PRC government exercises significant control over China. Accordingly, our results of operations, financial condition and prospects
are significantly dependent on economic and political developments in China. Certain measures adopted by the PRC government may
restrict loans to certain industries, such as changes in the statutory deposit reserve ratio and lending guidelines for commercial
banks by the People’s Bank of China. These current and future government actions could materially affect our liquidity,
access to capital, and ability to operate our business.
The
global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into
recession. Since 2012, growth of the Chinese economy has slowed down. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy but may also
have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government
control over capital investments or changes in tax regulations that are applicable to us. In addition, any stimulus measures designed
to boost the Chinese economy, may contribute to higher inflation, which could adversely affect our results of operations and financial
condition. See “—Future inflation in China may inhibit our ability to conduct business in China.”
Uncertainties
with respect to the PRC legal system could limit the legal protections available to you and us.
We
conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally
subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to FIEs. The PRC
legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential
value. Since 1979, a series of new PRC laws and regulations have 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 involve uncertainties,
which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of resources and management attention. In addition, all of our executive officers and directors
are residents of China and not of the United States, and substantially all the assets of these persons are located outside the
United States. As a result, it could be difficult for investors to effect service of process in the United States or to enforce
a judgment obtained in the United States against our Chinese operations and subsidiaries.
You
may have difficulty enforcing judgments against us.
Most
of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition,
all of our directors and officers are nationals and residents of countries other than the United States. A substantial portion
of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service
of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on
the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are
not residents in the United States and the substantial majority of whose assets are located outside of 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. Our counsel as to
PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures
Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures
Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China
does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments
with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty,
security, or the public interest. So, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the
United States.
The
PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The
PRC government has exercised and continues to exercise substantial control over the internet industry, including foreign ownership
of, and the licensing and permit requirements pertaining to, companies in the internet industry. Our ability to operate in China
may be harmed by changes in internet-related laws and regulations and these laws and regulations are relatively new and evolving,
and their interpretation and enforcement involve significant uncertainties. While we believe that our operations in China are
in material compliance with all applicable legal and regulatory requirements, new laws and regulations may be promulgated that
will regulate internet activities, including online retail. If these new laws and regulations are promulgated, additional licenses
may be required for our operations. If our operations do not comply with these new regulations at the time they become effective,
or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.
Future
inflation in China may inhibit our ability to conduct business in China.
According
to the National Bureau of Statistics of China, the annual average percent changes in the consumer price index in China for 2017,
2018 and 2019 were 1.6%, 2.1% and 2.9%, respectively. Although we have not been materially affected by inflation in the past,
we can provide no assurance that we will not be affected in the future by higher rates of inflation in China. For example, certain
operating costs and expenses, such as employee compensation and office operating expenses may increase as a result of higher inflation.
Additionally, because a substantial portion of our assets consists of cash and cash equivalents, high inflation could significantly
reduce the value and purchasing power of these assets.
Restrictions
on currency exchange may limit our ability to receive and use our sales effectively.
We
believe all of our revenues that we generate in the future will be settled in RMB, and any future restrictions on currency exchanges
may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend
or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility
of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that FIEs
may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized
to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB.
Fluctuations
in exchange rates could adversely affect our business and the value of our securities.
The
value of our ordinary shares will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between
those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the
RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any
underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value
of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated
investments we make in the future.
Since
July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes
in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future
PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange
market.
Very
limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness
of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign
currencies.
Restrictions
under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely
affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise
fund and conduct our business.
Substantially
all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to
make dividends and other payments to their offshore parent companies. PRC legal restrictions permit payments of dividends by our
PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards
and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual
after-tax profits determined in accordance with PRC generally accepted accounting principles to a statutory general reserve fund
until the amounts in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can only
be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations
on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
PRC
regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our
PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary or limit our PRC subsidiary’s
ability to increase their registered capital or distribute profits.
The
State Administration of Foreign Exchange (SAFE) promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control
on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE
Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated
by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of the SAFE in connection
with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing,
with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests,
referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the
registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease
of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event
that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC
subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from
carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability
to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements
described above could result in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further
Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015
by SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial
foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.
According
to SAFE Circular 37, our shareholders or beneficial owners, who are PRC residents, are subject to SAFE Circular 37 or other foreign
exchange administrative regulations in respect of their investment in our company. We have notified substantial beneficial owners
of ordinary shares who we know are PRC residents of their filing obligations. Nevertheless, we may not be aware of the identities
of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and there can be no assurance
that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules, and there
is no assurance that the registration under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be
completed at all. The failure of our beneficial owners who are PRC residents to register or amend their foreign exchange registrations
in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners
of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation
rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Such failure to register or comply
with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC
subsidiaries’ ability to distribute dividends to us. These risks may have a material adverse effect on our business, financial
condition and results of operations.
Furthermore,
it is uncertain how SAFE Circular 37, and any future regulation concerning offshore or cross-border transactions, will be interpreted,
amended and implemented by the relevant PRC government authorities, and we cannot predict how these regulations will affect our
business operations or future strategy. Failure to register or comply with relevant requirements may also limit our ability to
contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to
us. These risks could in the future have a material adverse effect on our business, financial condition and results of operations.
We
may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition
regulations which became effective on September 8, 2006.
On
August 9, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, promulgated the Regulation
on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006, and was subsequently
amended in 2009. This regulation, among other regulations and rules, governs the approval process of a PRC company’s participation
in an acquisition of assets or equity interests. Depending on the structure of the transaction, the regulation requires the PRC
parties to make a series of applications and supplemental applications to the government agencies for approval of acquisition
of assets or equity interests of another entity. In some instances, the application process may require a presentation of economic
data concerning the transaction, including appraisals of the target business and evaluations of the acquirer, which are designed
to allow the government to assess viability of the transaction. Government approvals will have expiration dates, by which a transaction
must be completed and reported to the government agencies. Compliance with the regulation is likely to be more time consuming
and expensive than it was in the past, and provides the government more controls over business combination of two enterprises.
As a result, conducting business combination transactions has become significantly more complicated, time consuming, and expensive.
We may not be able to negotiate a transaction that is acceptable to our stockholders or would sufficiently protect their interests
in a transaction.
The
regulation allows PRC governmental agencies to assess the economic terms of a business combination transaction. Parties to a business
combination transaction may have to submit to MOFCOM and other relevant government agencies an appraisal report, an evaluation
report, and the acquisition agreement, all of which will be a part of the application for approval, depending on the structure
of the transaction. The regulation also prohibits a transaction with an acquisition price obviously lower than the appraised value
of the PRC business or assets and in certain transaction structures, and requires consideration be paid within a defined period,
generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including
the initial consideration, contingent consideration, holdback provisions, indemnification provisions, and provisions related to
the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities
are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction
on financial terms that satisfy our investors and protect our stockholders’ economic interests.
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.
Although we have made contributions to some employee benefit plans, such as social security plans, we may have not made adequate
employee benefit payments required by PRC regulations. We may be required to make up the contributions for these plans as well
as pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial
condition and results of operations may be adversely affected.
Under
the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC stockholders.
On
March 16, 2007, the National People’s Congress of China passed the EIT Law, and on November 28, 2007, the State Council
of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside
of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning
that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules
of the EIT Law define de facto management as “substantial and overall management and control over the production and operations,
personnel, accounting, and properties” of the enterprise.
On
April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese
Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies,
or the Notice, further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled
offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese
enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior
management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops,
board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management
often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income
and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear
as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures
on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
We
may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income
tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source
income would be subject to PRC enterprise income tax at a rate of 25%. Moreover, the PRC foreign exchange control authorities,
which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities
that are treated as resident enterprises for PRC enterprise income tax purposes. It is possible that future guidance issued with
respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax
is imposed on dividends we pay to our non-PRC enterprise stockholders and with respect to gains derived by our non-PRC enterprise
stockholders from transferring our shares.
If
we were treated as a “resident enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S.
and China, and our PRC tax may not be creditable against our U.S. tax.
We
and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or
other assets attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by
non-Chinese companies.
In
October 2017, the State Administration of Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident
Enterprise Income Tax at Source, or Bulletin 37, which replaced the Notice on Strengthening Administration of Enterprise Income
Tax for Share Transfers by Non-PRC Resident Enterprises issued by the State Administration of Taxation on December 10, 2009, and
partially replaced and supplemented rules under the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets
by Non-PRC Resident Enterprises, or Bulletin 7, issued by the State Administration of Taxation on February 3, 2015. Pursuant to
Bulletin 7, an “indirect transfer” of PRC assets, including a transfer of equity interests in an unlisted non-PRC
holding company of a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct
transfer of the underlying PRC assets, if such arrangement does not have a reasonable commercial purpose and was established for
the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject
to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment
in China, immoveable properties located in China, and equity investments in PRC resident enterprises and any gains from the transfer
of such asset by a direct holder, who is a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When
determining whether there is a “reasonable commercial purpose” of the transaction arrangement, factors to be taken
into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC
taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China
or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding
PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of
existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable
assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In the case of an
indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax
filing of the PRC establishment or place of business being transferred, and may consequently be subject to PRC enterprise income
tax at a rate of 25%. Where the underlying transfer relates to immoveable properties located in China or to equity investments
in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a
PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment under applicable tax treaties or
similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Pursuant to
Bulletin 37, the withholding agent shall declare and pay the withheld tax to the competent tax authority in the place where such
withholding agent is located within 7 days from the date of occurrence of the withholding obligation, while the transferor is
required to declare and pay such tax to the competent tax authority within the statutory time limit according to Bulletin 7. Late
payment of applicable tax will subject the transferor to default interest charges. Both Bulletin 37 and Bulletin 7 do not apply
to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction
through a public stock exchange.
There
is uncertainty as to the application of Bulletin 37 or previous rules under Bulletin 7. 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,
sale of the shares in our offshore subsidiaries or investments. Our company may be subject to filing obligations or taxes if our
company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such
transactions, under Bulletin 37 and Bulletin 7. For transfer of shares in our company by investors that are non-PRC resident enterprises,
our PRC subsidiary may be requested to assist in the filing under Bulletin 37 and Bulletin 7. As a result, we may be required
to expend valuable resources to comply with Bulletin 37 and Bulletin 7 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.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments
to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the
purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China.
The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments
or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always
be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our
existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents,
or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese
anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could
negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our
Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Risks
Related to our Common Stock
Our
common stock is quoted on the OTC market, which may have an unfavorable impact on our stock price and liquidity.
Our
common stock is quoted on the OTC market. The OTC market is a significantly more limited market than the New York Stock Exchange
or NASDAQ. The quotation of our shares on the OTC market may result in a less liquid market available for existing and potential
stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term
adverse impact on our ability to raise capital in the future. We plan to list our common stock as soon as practicable. However,
we cannot assure you that we will be able to meet the initial listing standards of any stock exchange, or that we will be able
to maintain any such listing.
We
are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
The
SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market
price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock
is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes
additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers
and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to
sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers
to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.
For
any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of
a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information
on the limited market in penny stock.
There
can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common
stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the
SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction
would be in the public interest.
We
are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to “emerging
growth companies” will make our common shares less attractive to investors.
We
are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an “emerging
growth company,” we may take advantage of exemptions from various reporting requirements that are applicable to other public
companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be
an “emerging growth company” until the end of 2020, although circumstances could cause us to lose that status earlier,
including if we become a large accelerated filer or if we have issued an aggregate of $1 billion in non-convertible debt during
the preceding 3 years. We cannot predict if investors will find our common stock less attractive because we may rely on these
exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for
our common stock and the price of our common stock may be more volatile.
We
do not intend to pay dividends for the foreseeable future.
For
the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not
anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common
stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not
purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our board of directors
and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable
law and other factors our board deems relevant.
Our
largest stockholder holds a significant percentage of our outstanding voting securities and may be able to control our management
and affairs.
Zhuohong
International Development Limited, our largest stockholder, is the beneficial owner of approximately 46.1% of our outstanding
voting securities. As a result, it possesses significant influence, and can elect a majority of our board of directors and authorize
or prevent proposed significant corporate transactions. Its ownership and control may also have the effect of delaying or preventing
a future change in control, impeding a merger, consolidation, takeover, or other business combination, or discourage a potential
acquirer from making a tender offer.
Fulfilling
our obligations incident to being a public company, including with respect to the requirements of and related rules under the
Sarbanes-Oxley Act of 2002, is expensive and time-consuming, and any delays or difficulties in satisfying these obligations could
have a material adverse effect on our future results of operations and our stock price.
As
a public company, the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require us to implement various
corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. Compliance with
these public company obligations requires us to devote significant time and resources and places significant additional demands
on our finance and accounting staff and on our financial accounting and information systems. We plan to hire additional accounting
and financial staff with appropriate public company reporting experience and technical accounting knowledge. Other expenses associated
with being a public company include increased auditing, accounting and legal fees and expenses, investor relations expenses, increased
directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees,
as well as other expenses.
We
are required under the Sarbanes-Oxley Act of 2002 to document and test the effectiveness of our internal control over financial
reporting. In addition, we are required under the Exchange Act to maintain disclosure controls and procedures and internal control
over financial reporting. Any failure to maintain effective controls or implement required new or improved controls, or difficulties
encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If
we are unable to conclude that we have effective internal control over financial reporting, investors could lose confidence in
the reliability of our financial statements. This could result in a decrease in the value of our common stock. Failure to comply
with the Sarbanes-Oxley Act of 2002 could potentially subject us to sanctions or investigations by the SEC or other regulatory
authorities.
As
disclosed below under “Item 9A. Controls and Procedures”, we have identified material weaknesses in our internal control
over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial
reporting, which could harm our business and the trading price of our stock. During the preparation of our consolidated financial
statements for the year ended December 31, 2019, we and our independent registered public accounting firm, identified deficiencies
in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight
Board (PCAOB). Management determined the control deficiencies constitute material weaknesses in our internal control over financial
reporting. The existence of a material weakness could result in errors in our financial statements, cause us to fail to meet our
reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in the
trading price of our stock.
Compliance
with changing regulation of corporate governance and public disclosure will result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations,
have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public
markets and public reporting. Our management team will need to invest significant management time and financial resources to comply
with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses
and a diversion of management time and attention from revenue generating activities to compliance activities.
Provisions
in our charter documents and under Nevada law could discourage a takeover that stockholders may consider favorable.
Provisions
in our articles of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our
management. Our board of directors has the right to determine the authorized number of directors and to elect directors to fill
a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents
stockholders from being able to control the size of or fill vacancies on our board of directors. In addition, we are authorized
to issue up to 20,000,000 shares of preferred stock, in one or more classes or series as may be determined by our board of directors.
The issuance of shares of preferred stock, while providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of our outstanding voting stock.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
Not
applicable.
All
land in China is owned by the state or local governments. Individuals and companies are permitted to acquire rights to use land
or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for
a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms according to the relevant
Chinese laws. Granted land use rights are transferable and may be used as collateral for borrowings and other obligations.
Our
executive offices are located at Room 202-1, Building #21 of Intelligence and Wealth Center, Xiuzhou District, Jiaxing, Zhejiang
Province, China, 314000 which consist of 787.24 square meters, all of which are dedicated to administrative office space. We lease
our facilities pursuant to a lease agreement that our PRC subsidiary, Jiaxing Electronic entered into with Jiaxing Innovation
Park Development Co, Ltd. for a lease term commencing on October 1, 2018 and ending on September 30, 2021. Currently we pay our
rent in an amount of RMB 287,342.60 (approximately $41,775) per year. We believe that all our real property has been adequately
maintained, is generally in good condition, and is suitable and adequate for our business. We do not own or rent any other real
estate or other properties.
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
From
time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time
to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have
an adverse effect on our business, financial condition or operating results.
ITEM
4.
|
MINE
SAFETY DISCLOSURES.
|
Not
applicable.