Item
1. Business
General
Upon consummation of the
business combination on February 6, 2018, TMSR Holding Company Limited, (formerly known as JM Global Holding Company), through
its subsidiary, China Sunlong Environmental Technology, Inc. (“China Sunlong”), initially primarily engaged in the
production and sales of solid waste recycling and comprehensive utilization equipment. After a series of acquisitions and dispositions
in 2018, the Company now expand its business into three segments: (1) solid waste recycling systems business; (2) coal and coke
wholesale business; and (3) coating materials business.
Disposition
of TJComex
On
April 2, 2018, the Company disposed of its subsidiary, TJComex International Group Corporation (“TJComex BVI”), a
British Virgin Islands corporation, in consideration of (i) its minimum contribution to the Company’s results of operation
and (ii) the unsatisfactory synergy between the TJComex BVI business and the rest of the Company’s business. The Company’s
decision to dispose TJComex BVI is to (i) improve the Company’s overall financial condition and results of operations, (ii)
reduce the complexity of the Company’s business, (iii) focus the Company’s resources on the solid waste recycling
business as well as developing environmental control business opportunities; and (iv) make it possible for the Company to pursue
acquisition opportunities for more compatible business.
Acquisition
of Wuhan HOST
On
May 1, 2018, the Company completed the acquisition of 100% equity interest in Wuhan HOST Coating Materials Co., Ltd. (“Wuhan
HOST”), a PRC corporation engaging in the research and development, production and sale of Zinc-rich coating materials.
Wuhan HOST is the largest manufacturer of inorganic Zinc-rich resin and one-component epoxy Zinc-rich resin in China with customers
including leading enterprises in various industries such as electricity, metallurgy, machinery, chemicals, bridge and shipping.
Acquisition
of Jiangsu Ronghai
On
November 30, 2018, the Company completed the acquisition of 100% equity interest in Jiangsu Rong Hai Electric Power Fuel Co.,
Ltd. (“Rong Hai”), a PRC company incorporated in Jiangsu China, engaging in coal wholesales and sales of coke, steels,
construction materials, mechanical equipment and steel scrap.
Disposition
of Hubei Shengrong
On
December 27, 2018, the Company, disposed one of its operating subsidiaries, Hubei Shengrong Environmental Protection
and Energy Saving Technology Co., Ltd. (“Hubei Shengrong”) pursuant to that certain Equity Purchase Agreement
(the “EPA”) by and among the Company, the Company’s subsidiary Shengrong Environmental Protection
Technology (Wuhan) Co. Ltd. (“Shengrong WFOE”), Hubei Shengrong and Hopeway International Enterprises Limited
(the “Hoepway”). Pursuant to the EPA, Shengrong WFOE sold 100% equity interests in Hubei Shengrong to Hopeway
to irrevocably forfeit and cancel all the shares owned by Hopeway.
After
the acquisitions of Wuhan HOST and Jiangsu Ronghai and the dispositions of TJComex and Hubei Shengrong, the Company now has three
operating subsidiaries conducting three separate lines of business: research, development and sale of an array of
solid waste recycling systems for the mining and industrial sectors (the “solid waste recycling systems business”);
coal wholesales and sales of coke, steels, construction materials, mechanical equipment and steel scrap (the “coal and coke
wholesale business”); and the research and development, production and sale of Zinc-rich coating materials (the “coating
materials business”). The solid waste recycling systems business was carried out by Shengrong WFOE, the Company’s
indirect subsidiary. The coating materials business was carried out by the Company’s indirect subsidiary, Wuhan HOST. The
Company’s recently launched coal and coke wholesale business is carried out by Jiangsu Ronghai, the Company’s VIE
entity.
Corporate
Structure
The
following is an organizational chart setting forth our corporate structure as of the date of this Annual Report.
Industry
Overview
Solid
Waste Recycling Equipment Industry
According
to The 2018 Annual Report On The Prevention And Control Of Environmental Pollution By Large And Medium-Sized Municipal Solid Waste
published by the Ministry of Ecology And Environment of The People’s Republic of China in December 2018 , in 2017, approximately
1.31 billion tons of industrial solid waste and 40.101 million tons of Industrial hazardous waste were generated by large and
medium-sized cities in the PRC; Meanwhile , according to the status from the Ministry of Industry and Information Technology of
the PRC published on May 30, 2018, China's accumulative storage of industrial solid waste exceeds 60 billion tons, covering an
area of over 2 million hectares. In the PRC, industrial solid waste is generally handled by one of the following methods:
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●
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storage
in special facilities or sites;
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●
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disposal
in landfills, incineration or related means; and
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●
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recycling
or comprehensive utilization, such as the process utilized by Shengrong, consisting of extracting or converting valuable raw materials
from industrial solid waste;
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Storage
is the most popular method in China which is widely used in all over the country. Approximately 95% of industrial solid waste
in the PRC is stored in special facilities and sites, including warehouses for mining slags or tails.
However,
the cost of storage, disposal and incineration of industrial solid wastes is high. It is estimated by the Ministry of Environmental
Protection of China that during the next several years, the expense for environmental protection will increase by approximately
RMB 200 billion annually, with total expenses for environmental protection from 2013 to 2023 expected to be RMB 1.7 trillion,
twice the total expenses for environmental protection from 2002 to 2012. In additional, storage and disposal of industrial waste
creates numerous challenges because significant land mass is required and disposal causes pollution to the environment.
Shengrong
WFOE is addressing this significant unmet need by provide end users in these markets with a clean alternative to traditional waste
disposal by significantly reducing of solid waste discharge into the environment and enables such users to extract value from
valuable metals and other industrial waste materials.
Solid
waste recycling equipment manufacturers typically situated in the upstream supply chain. In China, a broad of range of solid waste
processing and recycling equipment hit the market in recent years including solid waste pretreatment equipment, hazardous waste
recycling equipment and solid waste incinerators.
Although
solid waste recycling equipment industry has an excellent growth potential, it is still a small-scale industry with few full-fledged
players. Solid waste recycling and utilization, unlike many western countries, is a relatively new concept in China. As a result,
most solid waste recycling equipment manufacturers are currently in their development stage with rudimentary production capabilities.
We believe few of them has the capacity to produce a full set of solid waste recycling equipment covering all the industrial needs.
These manufacturers are small and medium enterprises plagued by lack of technical support and creativity. Some equipment, such
as landfill leachate treatment equipment, large-scale incineration plant, and online environmental monitoring system must be imported
almost exclusively from other countries. Because of their lack of research and development capabilities, most solid waste recycling
equipment manufacturers have to engage in joint venture with foreign companies. For example, more than 80% of Chinese incineration
plant manufacturers have no choice but to partner with foreign companies in order to manufacture their products. Given that these
solid waste recycling equipment manufacturers are low-end manufacturers, they frequently operate at lower profit margin than those
in the western countries.
As
more mandatory energy conservation and emission reduction target-setting policies on the horizon, we believe there will be an
increasing demand for high-quality and technologically-advanced solid waste recycling equipment in China, and competition in the
solid waste recycling equipment industry will continue to intensify. Solid waste recycling equipment sales will compete not only
on price, but also on quality, technology, service and brand.
Chinese
Coating Trading Market
According
to the preliminary statistics of the bureau of statistics, in 2017, the annual output of 1,380 industrial enterprises above designated
size in the coating industry reached 20.364,000 tons, up 12.38% year on year, exceeding the expected output. The main business
income of 2,057 industrial enterprises above designated size reached 417.289 billion yuan, up 5.0% year on year. The total output
of coatings industry, the main business revenue growth since 2016, continued to grow, in the case of a part of the upstream raw
material prices continue to rise still maintained a good growth relative to the chemical industry, in "much starker choices-and
graver consequences-in" period, the decisive phase of the well-off society, all kinds of engineering, manufacturing is still
a huge demand for coating, will be a period of time in the future continue to maintain high growth.
The
main products of Wuhan Host are anticorrosive coatings and water-based anticorrosive coatings. Heavy anticorrosive coating has
excellent acid resistance, corrosion resistance, moisture and heat resistance, at the same time, high solid content, low volatile
organic, environmentally friendly; the water-based coating has the advantages of good salt spray resistance, good fullness and
glossiness, excellent decorative properties, safety, health and environmental protection. Accord with the development direction
of Chinese coating.
Chinese
Coal Trading Market
Global
coal is still the main energy source. According to the International Energy Agency's Global Coal Market Report (2018-2103) on
February 25, 2019, global demand for coal will remain stable in the next five years. China will remain the world's biggest consumer
of coal. In particular, the clean and efficient development of China's coal industry, as well as the strengthening of nitrogen
oxides, sulfur dioxide and soot emission control, has made coal once again a very attractive energy source. In addition, due to
its affordable price, abundant reserves and convenient transportation, coal remains the main energy source in many other countries
besides China. Therefore, the coal market in China remains strong.
Our
Business
Our
Products and Services
Shengrong
WFOE sells the following five types of products as well as technology support services for the customers:
Secondary
Tailings Comprehensive Utilization System
The
secondary tailings comprehensive utilization system is designed for the second stage of recycling of mining tailings, including
secondary ilmenite tailings and low grade silicon ore, following the first stage of removing heavy metals containing silicon,
calcium, aluminum, magnesium tailings elements. Each individual system is customized to meet the needs of the end user, based
on the physical and chemical characteristics of the secondary tailings, the processing power involved, the positioning of the
final product and other factors. The system recycles the secondary tailings into new construction and wall materials.
Non-metallic
Mineral Impurity Purification System
The
non-metallic mineral impurity purification system is an integrated system with efficient permanent magnet sorting equipment used
for non-metallic mineral impurity removal or significant reduction of non-metallic mineral content of heavy metals. This system
improves the quality of products and expands the scope of the application of products. The system can be used to recycle a variety
of non-metallic mineral, including silicon ore, micro silica, high-phosphorus soil and other minerals. Each individual system
is customized to meet the needs of the end user, based on the processing power involved, the mineral resource properties and other
factors.
Refractory
Low-Grade Ore Comprehensive Recovery System
The
refractory low-grade ore comprehensive recovery system is integrated with efficient permanent magnet sorting equipment. This system
uses low-grade refractory processes to physically separate the metal ore components, thereby achieving comprehensive utilization
of mineral resources and reduce the amount of ore. This process generates significant savings in the cost of production of mineral
recovery and can be used for a variety of low-grade hematite, limonite, native rutile ore and other refractory comprehensive sorting
recycling metal ores. Each individual system is customized to meet the needs of the end user, based on the processing power involved,
the mineral resource properties and other factors.
Permanent
Tailings Sorting and Recycling System
The
permanent tailings sorting and recycling system is designed for the first stage of recycling of mining tailings. The system recovers
valuable metals from various mining tailings, including but not limited to manganese tailings, copper tailings, red mud and other
aluminum dross tailings. Each individual system is customized to meet the needs of the end user, based on the physical and chemical
characteristics of the secondary tailings, the processing power involved, the positioning of the final product and other factors.
Industrial
solid waste recycling sorting system
The
industrial solid waste recycling sorting system involves integrated sorting for industrial solid waste, including but not limited
to petrochemicals, iron, steel and nonferrous metals, generating valuable recycled resources and reducing solid waste emissions.
Each individual system is customized to meet the needs of the end user, based on the solid waste treatment capacity and other
factors.
On-Site
training service
For
each type of system Shengrong WFOE sells, Shengrong WFOE also provided on-site training service to its customers due to the
complex nature of its products. Failure to operate these systems properly could significantly hinder their effectiveness. As
a result, this on-site training service serves as a necessary support to Shengrong WFOE’s customers and help them lower
the maintenance cost.
Wuhan
Host produces and sells its own anti-corrosion and anti-corrosion coatings, which are applicable to the surface anti-corrosion,
waterproof and decoration of concrete and steel components. They are widely used in the fields of ships, Bridges, water conservancy
and hydropower projects, wind power generation, mining machinery manufacturing, petroleum, petrochemical and metallurgy, port
construction, light industry, locomotive and vehicle, etc. Below is its main products and its respect usage:
Products
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Usage
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Water-borne
epoxy anti-rust paint
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Corrosion
protection on steel surface
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Epoxy
zinc rich primer
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Used
as basic anticorrosive primer for steel structure and equipment surface in mining, derrick, shipbuilding, port and wharf,
steel structure, bridge, iron tower, petroleum pipeline, chemical industry, metallurgy and other industries. It can also be
used as a primer for maintenance and as an anticorrosive primer on galvanized sheet surfaces
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Solvent-free
epoxy bituminous anticorrosive paint
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Used
for bottom, water ballast tank, wharf steel column, offshore oil drilling platform, hydraulic steel gate, mine steel support,
buried pipes, municipal construction of water diversion water pipe, gas cabinets, industrial loop water system, industrial
wastewater treatment, metal anti-corrosion, heat pipe protection layer of waterproof anti-corrosion and other corrosion environment,
including steel and wood products, cement products and components for long-term anti-corrosion waterproof
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Permeable
epoxy polysiloxane anticorrosive and waterproof material
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Used
for waterproofing of concrete walls, basements, toilets and baths of new and old buildings for industry and civil use;
Concrete
protection, repair of seepage and anti-seepage of urban roads and Bridges, anti-collision walls, sidewalks in parks, workshops,
floors, underground garages, swimming pools, sports fields, tunnels, airports, DAMS and seaports
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Cold
spraying zinc
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Excellent
cathodic protection and shielding for steel.It is easy to apply, and can be sprayed, brushed or rolled. It is the best material
to replace traditional hot dip zinc, hot dip galvanizing and hot spray zinc (aluminum).It is applicable to ship, steel bridge,
steel roof frame, steel grid frame, power facilities, pipelines, storage tanks and other heavy anti-corrosion fields
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Jiangsu
Ronghai was established in 2009. For the last ten years, Jiangsu Ronghai maintained its marketing position by cultivating an experienced
management team equipped with industrial know-how and well-rounded coal sales team. As a veteran in the Chinese coal trading industry,
Jiangsu Ronghai has a sales team with lengthy experience in coal trading, deep understanding of the market, coal products tailored
to its customers’ demand. Currently, Jiangsu Ronghai mainly focuses on the sales, storage, transportation, and processing
of steam coal. Because of its proximity to Rugao Port, a port known for its busy coal trade, Jiangsu Ronghai is able to keep its
transportation cost low and allocate its capital to develop a strong coal processing capacity with processing equipment and professional
personnel. The principal product of Jiangsu Ronghai is steam coal. In the second half of 2019, Jiangsu Ronghai expects to expand
its business into iron ore trading and refined processing, as well as refined coal and coking coal business.
Jiangsu
Ronghai has a reliable channel of procuring steam coal, large warehouse space for storage, and loyal customers. One of its major
customers is Nantong Linan Industrial Trading Co., ltd., a local manufacturing heavyweight. Since its inception, Jiangsu Ronghai
has accumulated a growing reputation in the coal industry. In 2016, Jiangsu Ronghai was awarded "Nantong City most reputable
company in the coal industry" by Nantong Coal Industry Association.
Our
Customers
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1.
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Shengrong
WFOE’s Customers
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Currently
Shengrong WFOE sells all of its products domestically in China. Depending on the nature of the product and the utilization of
the product Shengrong WFOE sells its products to end users or distributors. Shengrong’s end users are primarily in the mining,
metal and clean technology industries.
Shengrong
WFOE has a diverse end user base to sell our products to end users. Since September 2018, Shengrong WFOE has entered into multiple
equipment purchase contracts with serval customers pursuant to which Shengrong WFOE will provide different types of products and
technology support service to our customers.
Shengrong
WFOE believes that the loss of any of our customers, or a material change in our relationship with any such customer, would materially
impact our business and results of operations. To mitigate such risk and continue to develop our business, Shengrong WFOE has
been actively seeking new customers and has been able to generate equipment sales revenue through such efforts. In addition, Shengrong
WFOE has been continuously expanding its technology service business segment. Since early 2018, Shengrong WFOE has been providing
technology development and consulting services to a wide range of customers, including private companies such as Fushan Fuyou
Investment Co., Ltd., Shanghai Jinbo Chemistry and Industry Machinery Center and Quanzhou Fengpeng Environmental Protection Technology
Co., Ltd.. Shengrong WFOE is actively looking to expand its business for more distributors and customers and technology supproting
services tangential to the sale of Shengrong WFOE’s products.
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2.
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Wuhan
HOST’s customers
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Wuhan
HOST produces and sells anti-corrosion waterproof coating materials, applicable to the concrete and the surface of the steel constructions.
Its products are widely used in ships, bridges, water reservoir, wind power generation station, mining machinery, ports, construction
vehicles, and many other fields. Wuhan Host’s major customers are Shannxi Jiuzhou Xinyuan Shiye Co., Ltd., Zhongye Energy-Saving
Environmental Protection Co., Ltd., and Beijing Ligao Lide Engineering Technology Co., Ltd.,
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3.
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Jiangsu
Ronghai’s customers
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As
of December 31, 2018, 50% of the coal Jiangsu Ronghai procured and processed were sold directly to Nantong Linan Industry and
Commerce Co., Ltd. for its production of acetate fiber plant.
Our
Suppliers
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1.
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Shengrong WFOE’s supplier
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Shengrong WFOE have three main suppliers, i.e. Hubei Shengrong, Wuhan Yinggema Technology Development
Co., Ltd. and Wuhan Taiyinghe Technology Development Co., Ltd .
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2.
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Wuhan Host’s suppliers
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Wuhan Host’s main
suppliers are Xiamen Zhonghe Shangmao Co., Ltd., EverZinc(Hunan) Co., Ltd., Hubei Sanmu Chemical Co., Ltd. and Wuhan Changqing
Chemical Co., Ltd..
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3.
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Jiangsu Ronghai’s suppliers
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Jiangsu Ronghai’s
top five suppliers are Nantong Linan Industry & Commerce Co., Ltd., Xinpu Chemistry (Taixing) Co., Ltd., Rugao Gangwu Group
Co., Ltd., Zhengzhou Jiarui Supply Chain Co., Ltd., and Inner Mongolia Tian De Shun Coal Co., Ltd..
Production
Shengrong
WFOE
Shengrong
WFOE currently is not involved in any production.
Wuhan
Host
Coating
production process can be divided into six phases: feeding, dispersion, grinding, paint, filtering, and packaging.
Feeding
- according to the different types of coating, the corresponding film-forming materials, solvents, fillers, additives will be
added into dispersion kettle in accordance with certain proportion and sequence.
Dispersion
- in order to make the particles such as pigment and filler evenly and fully mixed into the paint slurry, the dispersion kettle
is used to stir and disperse the paint slurry.
Grinding
– to transfer the mixed paint slurry through the pipe to the grinding machine for grinding and keep grinding the mixed paint
slurry to required fineness.
Paint
adjustment – to add the evenly stirred paint into the paint adjustment tank and adjust the paint to the required viscosity
and color.
Filter
- to put the color adjusted paint through filtering machine to become coatings
Packaging
-- the filtered coatings are directly loaded into metal drums in different specifications through the packaging machine and transported
to the warehouse for airtight storage.
Jiangsu
Ronghai
Jiangsu
Ronghai uses two tiers membrane filtering system to screen the coal of different specifications, and mix different types of raw
coals to produce final coal products. Through our high tech machinery, we manipulate the level of sulfur content, water content,
ash content, and other different properties of coal in order to meet our customers’ requirements.
Research
and Development and Our Technology
Hubei Shengrong, is a
pioneer in China for manufacturing zero-emission manganese tailings recycling equipment. This achievement was made possible through
Hubei Shengrong’s own technology known as high efficiency permanent magnet machine and comprehensive utilization technology
for selecting weak magnetic micro-particle mineral industrial waste residue
.
When Shengrong WFOE sold Hubei Shengrong to
Hopeway in December 2018 pursuant to the EPA, Hubei Shengrong assigned all the intellectual property rights including the “Shengrong”
trademark, patent, know-how etc. incident to the Shengrong WFOE’s business to Shengrong WFOE.
The “Shengrong”
brand has been gaining traction in the PRC mining and industrial recycling industry since it began selling its products on a large
scale in 2016 by introducing innovative solutions to the mining and industrial sector in the PRC. Shengrong WFOE’s research
and development team currently consists of seven members as of March 31, 2019, including two members of our senior management
team that are recognized as industry experts in China. Shengrong WFOE’s engineering team works closely with Shengrong WFOE’s
customers and distributors in order to understand the requirements of the end users of Shengrong WFOE’s products, and develop
products that are tailored to the needs of such end users. Shengrong WFOE offers proprietary “green” technology to
enable end users to save operating cost in the removal of solid mining and industrial wastes. In addition, products sold by Shengrong
WFOE also allows end users to collect certain usable resources like metal residues during the recycling process.
Our in-house technology
was listed on the “catalogue for advanced applicable technical on comprehensive utilization of mineral resource” issued
by Ministry of Land and Resource of the People’s Republic of China in October 2014. We are also a pioneer in Titanium dioxide
pigment black tailings acid hydrolysis separating and recycling system using waste catalyst magnetic separating system in Chinese
titanium dioxide pigment production industry, which has the capacity to occupy more than 95% of catalytic cracking unit Chinese
market share. According to the Scientific Technology Novelty Retrieval Report (“STNRR”) provided by Hubei Academy
of Science and Technical Information in April 2016, Our in-house technology for the recovery of the ilmenite concentrate from
Titanium Dioxide acid hydrolysis slag using the axial sorting method for inner surface of permanent magnetic cylinder was confirmed
to be novel in the world. STNRR is widely considered as a technical documents provided by a Chinese science and technology academy
to appraise the novelty of a technology in the world. We also maintained a leading position in the development of microsilica
ultrapure extracting technology, primary rutile separation and purification technology. Management believes that our unique technology
is superior to other recycling systems available in the PRC and global markets because the high efficiency permanent magnetic
separating and comprehensive utilization system is a pure physical process. Pure physical process can prevent the creation of
secondary pollution and save energy. The management also believes we have more experience in market application and technology
implementation than its peers.
Wuhan
Host focus on research and development, heavy-duty coating not only trained 8 core team, bought drying apparatus, abrasion tester,
chromatograph, such as a number of experimental apparatus, has also established a set of more scientific research and development
system, pay attention to independent research and development in at the same time, through the cooperation development and the
introduction of digestion, strengthen the advantage of a company in the industry, weakening the dependence of the company to research
and development personnel, to ensure the continuity of research and development of products of the company.
Intellectual
Property
Shengrong
WFOE relies on a combination of patents, trademarks, domain names and confidentiality agreements to protect our intellectual property.
Our R&D processes are based on technology developed primarily in-house by engineering personnel.
With
respect to proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on, among
other things, trade secret protection and confidentiality agreements to safeguard our interests. All of our research and development
personnel have entered into confidentiality and proprietary information agreements with us. These agreements address intellectual
property protection issues and require our associates to assign to us all of the inventions, designs and technologies they develop
during the course of employment with us. We are not aware of any material infringement of our intellectual property rights.
Patents
As
of March, 2019, Shengrong WFOE has one utility model patents registered with the State Intellectual Property Office of the PRC,
and two patents registered with the United States Patent and Trademark Office.
The
following table provides the name, patent number, type of patents, issuance date, validity term, and expiration date of each of
Shengrong WFOE’s registered patents.
Certificate No.
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Patent content
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Type
|
|
Patent No.
|
|
Application Date
(mm-dd-yy)
|
|
Issuance Date
(mm-dd-yy)
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Term
|
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7017018
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Mobile magnetic separation system
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utility model
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ZL2017 2 1183838.4
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09/14/2017
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02/23/2018
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10 years
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US008746457B2
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Method and Device for Axial Separation by The Inner Surface of a Permanent Megnetic arched groove
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N/A
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US8,746,
457 B2
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03/30/2010
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06/10/2014
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June 10, 2014 to Oct 30, 2030, subject to any patent term adjustments or terminal disclaimers
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US008746458B2
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Axial Sporting Method and Device with Permanent-Magnet Drum Eccentric Inner Surface
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N/A
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US8,746,
458 B2
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03/30/2010
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06/10/2014
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June 10, 2014 to Oct 30, 2030, subject to any patent term adjustments or terminal disclaimers
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Shengrong
WFOE is also in the process of applying an invent patent for a mobile magnetic separation system with the National Intellectual
Property Administration of the PRC, which is expected to complete the patent registration by the end of this year.
As
of March, 2019, Wuhan Host has seven invention patents registered with the State Intellectual Property Office of the PRC.
The
following table provides the name, patent number, type of patents, issuance date, validity term, and expiration date of each of
Wuhan HOST’s registered patents.
Certificate
No.
|
|
Patent
content
|
|
Type
|
|
Patent
No.
|
|
Application
Date
(dd-mm-yy)
|
|
Issuance
Date
(dd-mm-yy)
|
|
Term
|
2931521
|
|
The
invention relates to a waterborne UV silicone polyurethane anticorrosive coating and a preparation method thereof
|
|
invention
|
|
ZL2016
1 0235536.0
|
|
15/04/2016
|
|
02/23/2018
|
|
20
years
|
2927001
|
|
The
invention relates to a epoxy polysiloxane coating and its preparation method
|
|
invention
|
|
ZL2016
1 0312732.3
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|
12/05/2016
|
|
22/05/2018
|
|
20
years
|
2803467
|
|
The
invention relates to a solvent-free self-leveling paint modified by renewable vegetable oil and its preparation method
|
|
invention
|
|
ZL2016
1 0235413.7
|
|
15/04/2016
|
|
18/05/2018
|
|
20
years
|
2788781
|
|
The
invention relates to an aqueous coating containing waste mineral residue and its preparation method
|
|
invention
|
|
ZL2016
1 0235415.6
|
|
15/04/2016
|
|
02/02/2018
|
|
20
years
|
2825260
|
|
The
invention relates to a preparation method of acrylic polysiloxane aqueous emulsion
|
|
invention
|
|
ZL2016
1 0235178.3
|
|
15/04/2016
|
|
23/01/2018
|
|
20
years
|
2955098
|
|
The
invention relates to a bisphenol-type fluorinated glycidyl ether, its preparation method and the application
|
|
invention
|
|
ZL2016
1 0235619.X
|
|
15/04/2016
|
|
23/02/2018
|
|
20
years
|
3213537
|
|
The
invention relates to a water - based polysiloxane resin and its preparation method
|
|
invention
|
|
ZL2016
1 0315742.2
|
|
12/05/2016
|
|
08/06/2018
|
|
20
years
|
Trademarks
As
of March , 2019, Shengrong WFOE has been granted four trademarks, which are currently registered in China.
Certificate
No.
|
|
Trademark
|
|
Approved
goods
|
6576227
|
|
|
|
category
7: washer, slag screen (machine), ore sand processor, flotation machine, magnetic separator, ore washer, ore contamination
precipitation, mine select machine, waste treatment equipment, and waste treatment machine (machine).
|
6617166
|
|
|
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category
6: undressed or half-processed cast iron, ferrotitanium, manganese powder, ferrosilicon, packaging and tinsel for packaging,
metal in powder form, zinc powder, sheet metal and plate metals, pig iron or half forging iron, and undressed or half-processed
common metal.
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5566978
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category
19: furnace ballast (building materials);Luminous panel; stone binder; stone, concrete or marble works of art; non-metallic
monuments; The slate.
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5566977
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category
19: gypsum; gypsum board; furnace ballast (building materials);refractory materials; luminous panel; stone binder; stone,
concrete or marble works of art; non-metallic commemorative plaque; the slate.
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As
of March, 2019, Wuhan Institute of Modern Industrial Technology licensed Wuhan Host the following trademark, which is currently
registered in China.
Certificate
No.
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Trademark
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Approved
goods
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6163589
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category
2: the paint; vehicle chassis coating; paint thinner; coating (paint);fire retardant paint; primer; waterproof powder (coating);metal
anti-rust preparation; preservatives.
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Competition
Competition
for Shengrong WFOE ’s business
To
date, the Shengrong WFOE sales have been exclusively to customers and end users located in the PRC, and as a result, our competitors
are PRC domestic companies. We believe that there a number of competitive factors within our industry, including the following:
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Pricing
. Flexibility
to control pricing of products and the future ability to use economies of scale to secure competitive pricing advantages;
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Technology
. Self-owned
patents making us have ability to provide end users with systems that efficiently dispose of solid wastes, using a limited amount
of energy consumption and operating costs; and
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Barriers
to entry
. Technical knowledge, industry reputation, local market knowledgeand established relationships with suppliers
and distributors and end users to support the development and sale of commercially viable systems.
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Competition
among Fluid Catalytic Cracking
(‘FCC”
) system providers in China can be characterized as niche market.
Our primary competitor for these systems is Qingdao Huicheng Environmental Protection Technology Co., Ltd. We believe that our
systems are superior for various reasons, including the fact that our proprietary processing does not result in the high cost
re-disposal of waste water and waste acid involved in the use of chemical methods used by our competitor.
Competition
among providers of low grade hematite separation systems in China can be characterized as niche market. Our primary competitors
for these systems are Ganzhou Jinhuan Magnetic Separation Equipment Co., Ltd., which is a supplier, producer, manufacturer of
high gradient magnetic separators (HGMS) and wet high intensity magnetic separators (WHIMS). It designs, develops, manufactures
and markets magnetic separation equipment for beneficiating weakly magnetic minerals, and for purifying non-metallic minerals.),
Shenyang Longji Electromagnetic Science and Technology Co., Ltd., which is a supplier of steam condensed water iron removing filter,
condensed water iron removing filter, high temperature condensed water iron removing filter), Yueyang Dalishen Electromagnetic
Mechanical and Electrical Co., Ltd. and Guangzhou Nonferrous Metals Research Institute. Shengrong WFOE believes it competes favorably
with them because it has a series of self-owned unique patents in China which have already been utilized in the production of
the environmental protection equipment. Some of Shengrong WFOE’s patents were also registered in the U .S.
We believe that our technology are superior because our proprietary processing method does not result in the high cost electromagnetic
high gradient magnetic separation process with hematite involved in the use of chemical methods used by our competitor.
Based
on collective extensive experience in the industry, Shengrong WOFE management believes that it is one of the leading enterprise
in China in the design and sale of solid waste recycling systems for the mining and industrial sectors in the PRC. However, there
can be no assurance that our initial competitive advantage will be retained and that one or more competitors will not develop
systems that are equal or superior to ours or are better priced than our systems.
Competition
for Wuhan Host’s business
According
to the preliminary statistics of the Bureau of Statistics, in 2017, the annual output of 1,380 industrial enterprises above designated
size in the coating industry reached 20.364,000 tons, a 12.38% year on year increase, exceeding the expected output. The main
business income of 2,057 industrial enterprises above designated size reached 417.289 billion yuan, up 5.0% year on year. The
total output of coatings industry, the main business revenue growth since 2016, continued to grow, in the case of a part of the
upstream raw material prices continue to rise still maintained a good growth relative to the chemical industry, in "much
starker choices-and graver consequences-in" period, the decisive phase of the well-off society, all kinds of engineering,
manufacturing is still a huge demand for coating, will be a period of time in the future continue to maintain high growth.
After
2016, the pressure of environmental protection has increased but not decreased. The severe pressure of environmental protection
has led to the upgrading of products, industries and production lines, and the overall cost has increased rapidly within a short
time. Although the environmental protection pressure high strength in recent one or two years to paint coating enterprise caused
a certain economic loss, but overall, these losses are worth it, is also must, under high pressure, forcing coating, coating enterprise
seek survival, prompting investment environment friendly coatings products and coating technology and equipment research and development,
is advantageous to the industry to develop in the direction of high-end in green.
According
to the ecological civilization construction and green development road map formulated at the 19th CPC national congress, the requirements
of green development will certainly promote coating enterprises to accelerate the pace of product transformation to green and
environment-friendly direction. The transformation process will bring new development space and opportunities to enterprises,
and China's coating industry will usher in a new development period.
Wuhan
HOST always focus on the coating industry, new materials technology accumulation, product innovation, industrial chain synergy
and brand core competitive advantages, such as with the client's leading enterprises, brand enterprises established long-term
stable cooperative relations, no matter from the enterprise scale and comprehensive strength, the company is still in the domestic
industry leader.
Wuhan
HOST adheres to market-oriented, based on the main industry, vigorously innovate, improve the level of research and development,
and share new technology with customers to bring market appreciation. It has not only trained the company's own scientific research
team, but also established a set of scientific research and development system. While focusing on independent research and development,
it has enhanced the company's advantages in the industry through cooperative development and introduction and digestion.
Competition
for Jiangsu Ronghai
The
local competition is fierce. Our principal competitor is Nantong Huagang Materials Trading Co., Ltd.. However, as we have strengths
in processing, transportation and reputation, we have been maintaining a favorable position against our competitor and earn loyalty
from our largest customer.
Environmental
Matters
The
Environmental Protection Law, promulgated by the National People’s Congress on December 26, 1989, is the primary law for
environmental protection in China. The law establishes basic principles for coordinated advancement of economic growth, social
progress and environmental protection, and defines the rights and duties of governments at all levels. Local environmental protection
bureaus may set stricter local standards than the national standards and enterprises are required to comply with the stricter
of the two sets of standards. Due to the nature of our business, we may produce certain amounts of waste water and solid waste
materials during the course of our production. We believe that we are in compliance in all material respects with applicable PRC
laws and regulations. All of our products in all material respects meet the relevant environmental requirements under PRC laws
and during the three years ended December 31, 2018, 2017 and 2016, we were not subject to any fines or legal action involving
non-compliance with any relevant environmental regulation, nor are we aware of any threatened or pending action, including by
any environmental regulatory authority.
Wuhan
Host received Letter of Acceptance Opinions on Environmental Protection for The Completion of The 4000t/a New Industrial Coating
Material Production Project of Wuhan Host Coating Material Co., LTD., issued by the Administrative Examination and Approval Bureau
of E Zhou Gedian Economic and Technological Development Zone on June 27, 2017.As of December 31, 2018, Wuhan Host was not subject
to any fines or legal action involving non-compliance with any relevant environmental regulation, nor are we aware of any threatened
or pending action, including by any environmental regulatory authority.
As
of December 31, 2018, Jiangsu Ronghai was not subject to any fines or legal action involving non-compliance with any relevant
environmental regulation, nor are we aware of any threatened or pending action, including by any environmental regulatory authority.
Governmental
Regulations
Business
license
Any
company that conducts business in the PRC must have a business license that covers a particular type of work. Our business license
covers our present business of manufacturing, sale and lease of environment protection equipment, development of environment protection
technologies and related technology and consulting services. Prior to expanding our business beyond that of our business license,
we are required to apply and receive approval from the PRC government.
Employment
laws
We
are subject to laws and regulations governing our relationship with our employees, including: wage and hour requirements, working
and safety conditions, citizenship requirements, work permits and travel restrictions. These include local labor laws and regulations,
which may require substantial resources for compliance. China’s National Labor Law, which became effective on January 1,
1995, and amended on August 27, 2009, and China’s National Labor Contract Law, which became effective on January 1, 2008,
and amended on December 28, 2012, permit workers in both state and private enterprises in China to bargain collectively. The National
Labor Law and the National Labor Contract Law provide for collective contracts to be developed through collaboration between the
labor union (or worker representatives in the absence of a union) and management that specify such matters as working conditions,
wage scales, and hours of work. The laws also permit workers and employers in all types of enterprises to sign individual contracts,
which are to be drawn up in accordance with the collective contract.
Intellectual
property protection in China
Patent.
The
PRC has domestic laws for the protection of copyrights, patents, trademarks and trade secrets. The PRC is also signatory to some
of the world’s major intellectual property conventions, including:
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Convention
establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
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Paris
Convention for the Protection of Industrial Property (March 19, 1985);
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Patent
Cooperation Treaty (January 1, 1994); and
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The
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).
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Patents
in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended
versions of the China Patent Law and its Implementing Regulations came into effect in 1993, 2001 and 2009, respectively.
The
PRC is signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has
duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the other countries,
a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial
designs).
The
Patent Law covers three kinds of patents — patents for inventions, utility models and designs. The Chinese patent system
adopts the principle of first to file, which means that a patent may be granted only to the person who first files an application.
Consistent with international practice, the PRC allows the patenting of inventions or utility models that possess the characteristics
of novelty, inventiveness and practical applicability only. For a design to be patentable it cannot be identical with, or similar
to, any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has been
publicly used in the country, and should not be in conflict with any prior right of another.
Copyright
. Copyright
in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and
regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark
. Registered
trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with
the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark
which has already been registered or given preliminary examination and approval for use in the same or similar category of commodities
or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable
ten-year period, unless otherwise revoked. The duration of a trademark is 10 years from the date of registration.
Domain
names
. Domain name registrations are handled through domain name service agencies established under the relevant
regulations, and applicants become domain name holders upon successful registration.
Regulations
on Tax
PRC
Corporate Income Tax
The
PRC corporate income tax, or CIT, is calculated based on the taxable income determined under the applicable CIT Law and its implementation
rules, which became effective on January 1, 2008 and amended on February 24, 2017. The CIT Law imposes a uniform corporate income
tax rate of 25% on all resident enterprises in China, including foreign-invested enterprises.
Uncertainties
exist with respect to how the CIT Law applies to the tax residence status of The Company and our offshore subsidiaries. Under
the CIT Law, an enterprise established outside of China with a “de facto management body” within China is considered
a “resident enterprise,” which means that it is treated in a manner similar to a Chinese enterprise for corporate
income tax purposes. Although the implementation rules of the CIT Law define “de facto management body” as a managing
body that exercises substantive and overall management and control over the production and business, personnel, accounting books
and assets of an enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued
by the State Administration of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled
offshore incorporated enterprise, defined as an enterprise that is incorporated under the laws of a foreign country or territory
and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although the Company does not have a
PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated
enterprise within the meaning of Circular 82, in the absence of guidance specifically applicable to us, we have applied the guidance
set forth in Circular 82 to evaluate the tax residence status of The Company and our subsidiaries organized outside the PRC.
According
to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having
a “de facto management body” in China and will be subject to PRC corporate income tax on its worldwide income only
if all of the following criteria are met:
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the
primary location of the day-to-day operational management is in the PRC;
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decisions
relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or
personnel in the PRC;
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the
enterprise’s primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are
located or maintained in the PRC; and
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50%
or more of voting board members or senior executives habitually reside in the PRC.
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We
do not believe that we meet any of the conditions outlined in the immediately preceding paragraph.
We
believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status
of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation
of the term “de facto management body.” As all of our management members are based in China, it remains unclear how
the tax residency rule will apply to our case. If the PRC tax authorities determine that we or any of our subsidiaries outside
of China is a PRC resident enterprise for PRC enterprise income tax purposes, then we or such subsidiary could be subject to PRC
tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject
to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident
enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our ordinary shares may be subject
to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject
to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC
shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and
the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment
in our ordinary shares.
Value-Added
Tax and Business 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 May and December 2013 and April 2014, the Ministry of Finance and the State Administration of
Taxation promulgated Circular 37, Circular 106 and Circular 43 to further expand the scope of services which are to be subject
to Value-Added Tax, or VAT, instead of business tax. Pursuant to these tax rules, from August 1, 2013, VAT will be imposed to
replace the business tax in certain service industries, including technology services and advertising services, on a nationwide
basis. The VAT rate shall be 17% for sale or importation of goods by a taxpayer. But, unlike business tax, a taxpayer is allowed
to offset the qualified input VAT paid on taxable purchases against the output VAT chargeable on the revenue from services provided.
Regulations
Relating to Foreign Exchange and Dividend Distribution
Foreign
Exchange Regulation
The
principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under
the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related
foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural
requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated
loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency
loans to our PRC subsidiaries.
In
November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign
Direct Investment. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment
expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors
in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders
no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different
provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions
on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013,
which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall
be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the
PRC based on the registration information provided by SAFE and its branches.
We
typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will
apply to obtain the relevant approvals of SAFE and other PRC government authorities as necessary.
SAFE
Circular 37
SAFE
promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment
and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced
the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37
requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control
of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets
or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special
purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes
with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer
or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose
vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited
from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities,
and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
evasion of foreign exchange controls.
We
have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation. However,
we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control
over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE Circular
37. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner
pursuant to SAFE Circular 37 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 may subject such beneficial owners or our PRC subsidiaries to fines and
legal sanctions. Failure to register or amend the registration may also limit our ability to contribute additional capital to
our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds from disposal of
our PRC subsidiaries, or we may be penalized by SAFE.
Share
Option Rules
Under
the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange
matters involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from
SAFE or its authorized branch. Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas
non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with
respect to offshore special purpose companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration
for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules,
issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas stock
exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC
agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary,
to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants,
and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale
of shares or interests and funds transfers. We will make efforts to comply with these requirements upon completion of our initial
public offering.
Regulation
of Dividend Distribution
The
principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company
Law of the PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Chinese-foreign
Equity Joint Venture Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises
may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and
regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves
at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital.
A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained
from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Item
1A. Risk Factors
An
investment in our shares of common stock involves a high degree of risk. You should carefully consider the following risk factors,
together with the other information contained in this prospectus, before you decide to buy any shares. Any of the following risks
could cause our business, results of operations and financial condition to suffer materially, causing the market price of our
shares of common stock to decline, in which event you may lose part or all of your investment in our shares of common stock. Additional
risks and uncertainties not currently known to us or that we currently do not deem material may also become important factors
that may materially and adversely affect our business.
Risks
Related to Our Business and Operations
Our
revenues are highly dependent on a small number of customers, and we will likely continue to be dependent on a small number of
customers.
Two
of Company’s customers, Wuhan Zhirong and Panzhihua Jingsheng, accounted for 34.3% and 22.0%, respectively, of our total
revenues for the year ended December 31, 2018. Since these two customers are Hubei Shengrong’s, we will be substantially
dependent on revenues generated by our other smaller customers through our sales efforts starting from the beginning of 2019.
Therefore, we are, and will likely continue to be, dependent on a small number of customers, and the loss of any such customer
would materially and adversely affect our business, operating results and financial condition. Furthermore, as a result of our
reliance on a limited number of customers, we could face pricing and other competitive pressures which may have a material adverse
effect on our business, operating results and financial condition.
A
significant part of Jiangsu Ronghai’s revenues is also derived from a small number of customers. Jiangsu Ronghai expects
a small number of customers will continue to generate a substantial portion of our revenues for the foreseeable future. From 2009
to December 2018, Nantong Linan Industrial Trading Co. Ltd. accounts for 50% of the company's total sales. The loss of Nantong
Linan, or the change of the contractual terms of the contract entered between Jiangsu Ronghai and Nantong Linan or any significant
dispute with Nantong Linan could materially adversely affect its financial condition and its results of operations.
If
one or more of Jiangsu Ronghai’s customers does not perform under one or more contracts with it and Jiangsu Ronghai is not
able to find a replacement contract, or if a customer exercises certain rights to terminate the contract, Jiangsu Ronghai could
suffer a loss of revenues that could materially adversely affect its business, financial condition and results of operations.
If
the Company is unable to collect its accounts receivable on a timely basis, the Company’s results of operations and cash
flows could be adversely affected.
The
Company’s business depends on its ability to successfully obtain timely payment from its customers, especially its two major
customers, namely Wuhan Zhirong and Panzhihua Jingsheng, of the amounts they owe. Even though we have disposed Hubei Shengrong,
so did the accounts receivable balance of Hubei Shengrong. In the past, our major customers had records of failing to make full
payment on time. The Company maintains allowances against its receivables that it believes are adequate to reserve for potentially
uncollectible amounts. However, actual losses on customer balances could differ from those that the Company currently anticipates
and, as a result, it may need to adjust its allowances. In addition, there is no guarantee that the Company will accurately assess
the creditworthiness of its customers. Macroeconomic conditions could also result in financial difficulties for its customers,
and as a result could cause them to delay payments, request modifications to their payment arrangements that could increase the
Company’s receivables balance, or not pay their obligations to the Company. Timely collection of customers’ balances
also depends on the company’s ability to complete its contractual commitments and bill and collect its invoiced revenues.
If the Company is unable to meet its contractual commitments, it might experience delays in collection of and/or be unable to
collect its customer balances, and if this occurs, its results of operations and cash flows may be adversely affected.
Future
bad debt losses may exceed the allowance for doubtful accounts.
The
Company has
established an allowance
for possible losses expected in
connection with its account receivables. In establishing the allowance for such losses, the Company considered historical
experiences, the microeconomic environment, trends in the construction, decorative and paint materials industry, expected
collectability of amounts receivable that were past due, and the expected collectability of overdue receivable.
The
determination of the amount of allowance for account receivable is subjective; although the method for determining the amount
of the allowance uses criteria such as the microeconomic environment and historical experiences. Given the Company customers’
past repayment performances, specifically Wuhan KYX and Wuhan Zhirong, these criteria may not be adequate predictors of whether
the payments of The Company’s account receivable will be fully returned per credit terms. Accordingly, the Company cannot
offer assurances that these estimates ultimately will prove correct or that the allowance will be sufficient to protect against
losses that ultimately may occur. If the allowance proves to be inadequate, the Company will need to make additional provisions
to the allowance, which is accounted for as charges to income, which would adversely impact results of operations and financial
condition. Any increase in the allowance could have an adverse effect, which could be material, on its financial condition and
results of operations.
Our
operating subsidiaries, Shengrong WFOE, Wuhan Host and Jiangsu Ronghai all have limited operating histories, which make it difficult
to evaluate their businesses and prospects.
Shengrong
WFOE commenced operations in March 2016 and has a limited operating history. Prior to the year end of 2018, the Company had limited
operations and was focused primarily on research and development. Shengrong WFOE did not generate any sales revenue for the year
ended December 31, 2018, but entered into several sales agreements with new customers.
We
may not be able to achieve similar results or grow at the same rate as Hubei Shengrong has in the past. It is also difficult to
our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in new and rapidly
evolving markets such as the industrial and mining recycling industry may be exposed. We will continue to encounter risks and
difficulties that companies at a similar stage of development frequently experience, including the potential failure to:
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obtain
sufficient working capital and increase its registered capital to support expansion of our industrial and mining recycling
business;
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comply
with any changes in the laws and regulations of the PRC or local province that may affect our operations;
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expand
our customer base;
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maintain
adequate control of default risks and expenses allowing us to realize anticipated revenue growth;
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implement
our growth strategies and plans and adapt and modify them as needed;
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integrate
any future business combinations; and
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anticipate
and adapt to changing conditions in the Chinese industrial and mining recycling industry resulting from changes in government
regulations, mergers and Business Combinations involving our competitors, and other significant competitive and market dynamics.
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If
we are unable to address any or all of the foregoing risks, our business may be materially and adversely affected.
Similarly,
Jiangsu Ronghai started operation in May 2009 and also have a limited operations history. While Jiangsu Ronghai generated $18.31
million in revenue in 2017 and $17.47 million in revenue in 2018, respectively. But the growth rate in history cannot be indicative
of future performance. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced
by early stage companies in evolving industries such as the coal products and alternative energy industries in China. Jiangsu
Ronghai’s limited history for selling steam coal may not serve as an adequate basis to judge our future prospects and results
of operations. Our operations are subject to all of the risks, challenges, complications and delays frequently encountered in
connection with the operation of any new business, as well as those risks that are specific to the coal trading industry. Investors
should evaluate us in light of the problems and uncertainties frequently encountered by companies attempting to develop markets
for new products and technologies. Despite our best efforts, we may never overcome these obstacles.
Changes
policies and regulations, as well as local environmental requirements on exploiting and using coal or its products, are likely
to have an impact on the coal market, which will affect the company's earnings.
Shengrong WFOE is dependent on Hubei
Shengrong as one of its major supplier. If we can’t find other supplier to replace Hubei Shengrong, we could encounter supply
shortages and/or incur higher costs.
In December 2018, Hubei
Shengrong was disposed by the Company. According to the planning requirements of local government in 2018, manufacture enterprises
were requested to move away from the city center. Therefore, Hubei Shengrong has to close the existing plant, relocate and build
a new plant, which is expected to take 7-8 years; and in the meantime, Hubei Shengrong may not be able to have normal production.
Currently, Shengrong
WFOE sells recycling machinery products manufactured by Hubei Shengrong. We currently don’t know when Hubei Shengrong starts
to move and stop production. We may not find new suppliers to provide qualified recycling machinery products to meet our clients
demand in time.
Although we believe that alternative supply sources are available, there can be no assurance that we will
continue to be able to identify or negotiate with such sources on terms that are commercially reasonable. If Hubei Shengrong is
unable to fulfill their obligations under their contracts or we are unable to identify alternative sources, we could encounter
supply shortages and incur higher costs, each of which could have a material adverse effect on our results of operations.
Competition
in the industrial and mining recycling industry is likely to grow and could cause us to lose market share and revenues in the
future.
We
believes that the industrial and mining recycling industry is an emerging market in China. we may face growing competition in
the industrial and mining recycling industry, and We believe that the industrial and mining recycling industry is expected to
become more competitive as this industry matures and begins to consolidate. We will compete with several companies in the purification
and recycling of industrial waste residue by the permanent magnet device and technology. Some of these competitors will likely
have substantially greater financial, marketing and other resources than us. As a result, we could lose market share and its revenues
could decline, thereby adversely affecting our earnings and potential for growth. While we believe that it will be able to successfully
compete in this area as a result of its proprietary technology, there is no assurance that it will be able to hire and retain
the necessary employees and compete successfully.
As
the government starts to impose stricter policies on Environmental Protection, the mining recycling market gets bigger. The competition
could become increasingly fierce in the near future. Furthermore, the Company’s technology has been industrialized which
is relatively mature, which is a not pure brand new technology.
Our
solid waste recycling systems business requires highly qualified personnel, and if we are unable to hire or retain qualified personnel,
then it may not be able to grow effectively.
Our
business’ success depends upon its ability to attract and retain highly qualified personnel. Expansion of our solid waste
recycling systems business may require additional managers and employees with relevant industry experience, and its success will
be highly dependent on its ability to attract and retain skilled management personnel and other employees. We may not be able
to attract or retain highly qualified personnel. In addition, competition for skilled personnel is significant in China. This
competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees. We may incur
additional expenses to recruit and retain qualified replacements and its businesses may be disrupted and its financial condition
and results of operations may be materially and adversely affected. In addition, key managers may join a competitor or form a
competing company. An operating company may not be able to successfully enforce any contractual rights with its management team,
in particular in China, where all of these individuals reside.
Discontinuation
of preferential tax treatment our PRC subsidiaries currently enjoys may result in additional compliance obligations and costs
so as to materially and adversely impact the company’s net income.
From
2013 through 2016, local tax authorities granted Hubei Shengrong the preferential income tax rate of 15% because Hubei Shengrong
was entitled to the preferential rate as a “high-tech enterprise.” The discontinuation of such preferential tax treatment
may materially and adversely affect our results of operations. In December 2016, local tax authorities renewed Hubei’s preferential
tax treatment through 2019. Wuhan Host also entitles to the preferential tax treatment through 2019. During the effective period
of high-tech enterprise certificate held by Hubei Shengrong and Wuhan Host, there won’t be any risk that the treatment could
be revoked, unless they choose to liquate or dissolve or related laws and regulated be modified or invalid by government authorities.
Shengrong WFOE and its subsidiary, Jiangsu Rong Hai, none of which acquired or will be able to be recognized as high-tech company
in recent years and the enterprise income tax rate applied to these companies are 25%. But, since the patents, which are unique
and advanced in China, owned by Hubei Shengrong is in the process of the transfer to Shengrong WFOE, Shengrong WFOE has faith
in being recognized as a high-tech enterprise and should be able to renew the certificate in future
.
If
Shengrong WFOE and Wuhan Host fail to retain certain of their key personnel and attract and retain additional qualified personnel,
neither Shengrong WFOE nor Wuhan Host might be able to remain competitive, continue to expand its technology or pursue growth.
Shengrong
WFOE’s future success depends upon the continued service of certain of its executive officers and other key research and
development personnel, such as Ms. Jianzhen Li and Mr. Xiaonian Zhang who possess longstanding industry relationships and technical
knowledge of Shengrong WFOE’s products and operations. Although we believe that our relationship with these individuals
is positive, there can be no assurance that the services of these individuals will continue to be available to us in the future.
There can be no assurance that these persons will agree to continue to be employed by us after the expiration dates of their current
contracts.
Similarly,
Wuhan Host’s success depends in large part on its ability to attract and retain highly qualified management, administrative,
manufacturing, sales, and research and development personnel. Due to the specialized nature of its business, it may be difficult
to locate and hire qualified personnel. The loss of services of one of its executive officers or other key personnel, or failure
to attract and retain other executive officers or key personnel could have a material adverse effect on our business, operating
results and financial condition. Although Wuhan Host has been successful in planning for and retaining highly capable and qualified
successor management in the past, there can be no assurance that it will be able to do so in the future.
The
Company may not be able to achieve the full amount of synergies that are anticipated, or achieve the synergies on the schedule
anticipated, from the acquisitions of both Wuhan Host and Jiangsu Rong Hai
.
Although
The Company currently expect to achieve synergies from the Wuhan HOST acquisition of approximately $7.0 million during fiscal
2018, the inclusion of these expected synergy targets should not be viewed as a representation that The Company will in fact achieve
these synergies by the end of fiscal 2018, or at all. To the extent the Company fails to achieve these synergies, the Company’s
results of operations may be impacted, and any such impact may be material.
The
Company has identified various synergies including corporate and division overhead savings, brand enhancement, vendor funds, marketing
and advertising cost reduction and operational efficiencies. Actual synergies, the expenses and cash required to realize the synergies
and the sources of the synergies could differ materially from these estimates, and the Company cannot assure you that it will
achieve the full amount of synergies on the schedule anticipated, or at all, or that these synergy programs will not have other
adverse effects on our business. In light of these significant uncertainties, you should not place undue reliance on the Company’s
estimated synergies.
Failure
to manage Wuhan HOST and Jiangsu Ronghai effectively since its acquisition could materially impact our business
.
The
Company has recently experienced a period of rapid growth in its operations. In particular, it has significantly increased the
size of its customer base due to the acquisition of both Wuhan HOST and Jiangsu Ronghai. The Company anticipates that it will
continue to significantly expand its operations and headcount in the near term. However, recent growth has placed, and future
growth will place, a significant strain on the Company’s management, administrative, operational and financial infrastructure.
The Company’s success will depend in part on its ability to manage both entities effectively. To manage the recent and expected
growth of its operations and personnel, The Company will need to continue to improve its operational, financial and management
controls and its reporting systems and procedures. Failure to effectively manage Wuhan HOST and Jiangsu Rong Hai could result
in difficulty or delays in deploying the Company’s services to customers, declines in quality or customer satisfaction,
increases in costs, difficulties in introducing new features or other operational difficulties. Any of these difficulties could
adversely impact the Company’s business performance and results of operations.
Wuhan
Host expects to incur substantial expenditures in the foreseeable future and may require additional capital to support its business
growth. This capital might not be available on terms favorable to us or at all.
In
the expansion of Wuhan Host's business, the company may need external financing. If the debt capital ratio and equity capital
ratio cannot be reasonably arranged, the comprehensive capital cost of the company will rise sharply, resulting in the shrinking
of the company's value, and the company may be seriously insolvent.
Wuhan
Host particularly expects to incur substantial expenditures in the foreseeable future in connection with the following:
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expansion
of sales and marketing efforts;
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expansion
of manufacturing capacity;
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funding
research, development and clinical activities related to our existing products and product
platform;
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funding
research, development and clinical activities related to new products;
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pursuing
and maintaining appropriate regulatory clearances and approvals for our existing products
and any new products that we may develop; and
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preparing,
filing and prosecuting patent applications, and maintaining and enforcing our intellectual
property rights and position.
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In
addition, Wuhan Host general and administrative expense may continue to increase due to the additional operational and reporting
costs associated with our expanded operations and being a public company.
Wuhan
Host anticipates that its principal sources of funds in the future will be revenue generated from the sale of its products. Wuhan
Host will need to generate significant additional revenue to achieve and maintain profitability, and even if it achieves profitability,
it cannot be sure that it will remain profitable for any substantial period of time. Its failure to become and remain profitable
could impair our ability to raise capital, expand our business, maintain our research and development efforts or continue to fund
our operations.
It
is also possible that Wuhan Host may allocate significant amounts of capital toward products, technologies or geographies for
which market demand is lower than anticipated and, as a result, Wuhan Host may subsequently abandon such efforts. If we are unable
to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects
that are not successful, our ability to continue to support our business growth and to respond to business challenges could be
significantly limited, and we may even be required to scale back our operations.
Residential
and non-residential construction activity is cyclical and influenced by many factors, and any reduction in the activity in one
or both of these markets could have a material adverse effect on the business of Wuhan Host.
The
results of operations of Wuhan Host can vary materially in response to market conditions and changes in the demand for its products.
Historically, demand for Wuhan’s products has been closely tied to residential construction, non-residential construction,
and infrastructure activity in PRC, particularly Hubei province. Wuhan Host’s success and future growth prospects depend,
to a significant extent, on conditions in these markets and the degree to which these markets are strong in the future.
The
Chinese construction industry and related markets are cyclical and have in the past been, and may in the future be, materially
and adversely affected by general economic and global financial market conditions. These factors impact not only Wuhan Host’s
business, but those of its customers and suppliers as well. This influence is true with respect to macroeconomic factors within
PRC.
The
markets in the construction industry in which Wuhan Host operates are also subject to other more specific factors. Residential
construction activity levels are influenced by and sensitive to a number of factors, including mortgage availability, the cost
of financing a home (in particular, mortgage terms and interest rates), unemployment levels, household formation rates, gross
domestic product, residential vacancy and foreclosure rates, demand for second homes, existing housing prices, rental prices,
housing inventory levels, building mix between single- and multi-family homes, consumer confidence, seasonal weather factors,
the available labor pool and government regulation, policy and incentives. Non-residential construction activity is primarily
driven by levels of business investment, availability of credit and interest rates, as well as many of the factors that impact
residential construction activity levels.
Wuhan
Host cannot control the foregoing factors and, although construction activity and related spending levels have increased in recent
years, there is still uncertainty regarding whether the growth in construction market will be sustained, and there can be no assurances
that there will not be any future downturns. There can be no assurances regarding whether more recent growth in these markets
can be sustained or if demand will gradually decrease. If construction activity in these markets, and more generally, does not
continue to recover, or if there are future downturns, whether locally, regionally or nationally, our business, financial condition
and results of operations could be materially and adversely affected.
Its
dependence on key customers with whom Wuhan Host does not have long-term contracts and consolidation within its customers’
industries could have a material adverse effect on Wuhan Host’s operation.
Wuhan
Host’s business is dependent on certain key customers. In 2018 and 2017, Jiuzhou Xinyuan, its largest customer accounted
for 13.3% and 0.23% of Wuhan Host’s net sales, respectively. As is customary in the coating industry, Wuhan Host did not
enter into long-term contracts with many of its customers. As a result, its customers could stop purchasing its products, reduce
their purchase levels or request reduced pricing structures at any time. Wuhan Host may therefore need to adapt our manufacturing,
pricing and marketing strategies in response to a customer who may seek concessions in return for its continued or increased business.
A loss of one or more customers or a meaningful reduction in their purchases from Wuhan Host or could have a material adverse
effect on its business, financial condition and results of operations.
Changes
in market interest rates could adversely impact Wuhan Host
Wuhan
Host may need additional loans or borrowings to fund its operations. The change of interest rate may make the company face the
risk of not being able to pay the principal and interest on time due to the rise of interest rate, which may lead to bankruptcy
and liquidation of the company due to insolvency. Wuhan Host’s earnings are impacted by changing interest rates. Changes
in interest rates affect the demand for new loans, the credit profile of existing loans, the rates received on loans and securities,
and rates paid on deposits and borrowings. These impacts may negatively impact Wuhan Host’s ability to attract deposits,
make loans, and achieve satisfactory interest rate spreads, which could adversely affect our financial condition or results of
operations.
Interest
rates may be affected by many factors beyond our control, including general and economic conditions and the monetary and fiscal
policies of various governmental and regulatory authorities. Market volatility in interest rates can be difficult to predict,
as unexpected interest rate changes may result in a sudden impact while anticipated changes in interest rates generally impact
the mortgage rate market prior to the actual rate change. Exposure to interest rate risk is managed by monitoring the
repricing frequency of our rate-sensitive assets and rate-sensitive liabilities over any given period. Although we believe the
current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates could potentially have an
adverse effect on our business, financial condition and results of operations.
Wuhan
Host business depends upon the maintenance of its proprietary technologies and information.
Wuhan
Host depends on its proprietary technologies and information, many of which are no longer subject to patent protection. Wuhan
Host relies principally upon trade secret and patent laws to protect its proprietary technologies. It regularly enters into confidentiality
agreements with its key employees, customers, potential customers and other third parties and limit access to and distribution
of its trade secrets and other proprietary information. However, these measures may not be adequate to prevent misappropriation
of its technologies or to assure that its competitors will not independently develop technologies that are substantially equivalent
or superior to our technologies. In addition, the laws of PRC in which we operate may not protect Wuhan Host’s proprietary
rights to the same extent as the laws of the United States. Wuhan Host is also subject to the risk of adverse claims and litigation
alleging infringement of intellectual property rights.
Its
efforts to develop new products and services or enhance existing products and services involve substantial research, development
and marketing expenses, and the resulting new or enhanced products or services may not generate sufficient revenues to justify
such expenses.
Wuhan
Host’s future success will depend in part on its ability to anticipate and respond to changing technologies and customer
requirements by enhancing its existing products and services. It will need to develop and introduce, on a timely and cost-effective
basis, new products, features and services that address the needs of its customer base. As a result of these efforts, Wuhan Host
may be required to expend substantial research, development and marketing resources, and the time and expense required to develop
a new product or service or enhance an existing product or service are difficult to predict. It cannot assure that it will succeed
in developing, introducing and marketing new products or services or product or service enhancements. In addition, it cannot be
certain that any new or enhanced product or service will generate sufficient revenues to justify the expenses and resources devoted
to this product development and enhancement effort.
Jiangsu
Ronghai’s business and results of operations are dependent on the PRC coal markets, which may be cyclical.
As
the revenue is substantially derived from the sale of steam coal, Jiangsu Ronghai’s business and operating results are substantially
dependent on the domestic supply of steam coal. The PRC coal market is cyclical and exhibits fluctuation in supply and demand
from year to year and is subject to numerous factors beyond our control, including, but not limited to, economic conditions in
the PRC, global economic conditions, and fluctuations in industries with high demand for coal, such as the utilities and steel
industries. Fluctuations in supply and demand for coal affects coal prices which, in turn, may have an adverse effect on our operating
and financial performance. The demand for coal is primarily affected by overall economic development and the demand for coal from
the electricity generation, steel and construction industries. The supply of coal, on the other hand, is primarily affected by
the geographic location of the coal supplies, the volume of coal produced by domestic and international coal suppliers, and the
quality and price of competing sources of coal. Alternative fuels such as natural gas and oil, alternative energy sources such
as hydroelectric power and nuclear power, and international shipping costs also impact the market demand for coal. Excess demand
for coal may increase coal prices, which would have an adverse effect on the cost of goods sold which would, in turn, cause a
short-term decline in our profitability if we are unable to increase the price of our steam coal to our customers. Local government
may regulate residential winter heating price and thus causing our residential heating customers not be able to bear high steam
coal price. As a result, Jiangsu Ronghai may not be able to increase its steam coal price in response to increased coal price
or, Jiangsu Ronghai may have to decrease our steam coal price when it renews contracts with such customers. As a result, Jiangsu
Ronghai may not able to keep its gross margin.
Our
results of operations are subject, to a significant extent, to economic, political and legal developments in the PRC
.
Jiangsu
Ronghai expects that a majority of coal sales will be made to customers based in the PRC. Accordingly, the economic, political
and social conditions, as well as government policies, of the PRC may affect our business. The PRC economy differs from the economies
of most developed countries in many respects, including: (i) structure; (ii) level of government involvement; (iii) level of development;
(iv) growth rate; (v) control of foreign exchange and (vi) allocation of resources. The PRC economy has been transitioning from
a planned economy to a more market-oriented economy. For the past two decades, the PRC government has implemented economic reform
measures emphasising the utilisation of market forces in the development of the PRC economy. Changes in the PRC’s political,
economic and social conditions, laws, regulations and policies could materially and adversely affect our business and results
of operations. In addition, the PRC government indirectly influences coal prices through its regulation of power tariffs and its
control over allocation of the transportation capacity of the national rail system. Any significant downturn in coal prices in
the PRC could materially and adversely affect our business and results of operations. Additionally, the PRC government could adopt
new policies that could shift demand away from coal to other energy sources. Any significant decline in demand for, or over-supply
of, coal could materially and adversely affect our revenues from coal export sales.
Competition
could put downward pressure on coal prices and, as a result, materially and adversely affect our revenues and profitability.
Jiangsu
Ronghai competes with numerous other domestic and foreign coal producers for domestic sales. Overcapacity and increased production
within the domestic coal industry, and decelerating steel demand in Asia have at times, and could in the future, materially reduce
coal prices and therefore materially reduce our revenues and profitability. Potential changes to international trade agreements,
trade policies, trade concessions or other political and economic arrangements may benefit coal producers operating in countries
other than China. We may not be able to compete on the basis of price or other factors with companies that in the future benefit
from favorable foreign trade policies or other arrangements. In addition, our ability to ship our coal to international customers
depends on port capacity, which is limited. Increased competition within the coal industry for international sales could result
in us not being able to obtain throughput capacity at port facilities, or the rates for such throughput capacity increasing to
a point where it is not economically feasible to export our coal.
The
domestic coal industry has experienced consolidation in recent years, including consolidation among some of our major competitors.
In addition, substantial overcapacity exists in the coal industry and several other large coal companies have also filed, and
others may file, bankruptcy proceedings which could enable them to lower their productions costs and thereby reduce the price
for coal. Consolidation in the coal industry or current or future bankruptcy proceedings of our coal competitors could adversely
affect our competitive position.
In
addition to competing with other coal producers, Jiangsu Ronghai competes generally with producers of other fuels, such as natural
gas. Natural gas pricing has declined significantly in recent years. The decline in the price of natural gas has caused demand
for coal to decrease and adversely affected the price of our coal. Sustained periods of low natural gas prices have also contributed
to utilities phasing out or closing existing coal-fired power plants and continued low prices could reduce or eliminate construction
of any new coal-fired power plants. This trend has, and could continue to have, a material adverse effect on demand and prices
for our coal. Moreover, the construction of new pipelines and other natural gas distribution channels may increase competition
within regional markets and thereby decrease the demand for and price of our coal.
Risks
Related to Our Corporate Structure
The
failure to comply with PRC regulations relating to mergers and acquisition of domestic enterprises by offshore special purpose
vehicles may subject the company to severe fines or penalties and create other regulatory uncertainties regarding the company’s
corporate structure.
On
August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the China Securities Regulatory Commission (“CSRC”),
the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation (“SAT”),
the State Administration for Industry and Commerce (the “SAIC”), and the State Administration of Foreign Exchange
(“SAFE”), jointly promulgated regulations entitled the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises
by Foreign Investors (the “M&A Rules”), which took effect as of September 8, 2006, and as amended on June 22,
2009. This regulation, among other things, has certain provisions that require offshore companies formed for the purpose of acquiring
PRC domestic companies and controlled directly or indirectly by PRC individuals and companies which are the related parties with
the PRC domestic companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions and to obtain the approval
of the CSRC prior to publicly listing special purpose vehicles’ securities on an overseas stock market. On September 21,
2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted
for obtaining CSRC approval.
The
application of the M&A Rules with respect to the company’s corporate structure remains unclear, with no current consensus
existing among leading PRC law firms regarding the scope and applicability of the M&A Rules. We believe that the MOFCOM and
CSRC approvals under the M&A Rules are not required in the context of the Acquisition because WFOE was incorporated as wholly
owned foreign investment enterprise with the approval of local department of commerce. However, we cannot be certain that the
relevant PRC government agencies, including the CSRC and MOFCOM, would reach the same conclusion, and we cannot be certain that
MOFCOM or the CSRC will not deem that the Acquisition circumvents the M&A Rules, and other rules and notices, or that prior
MOFCOM or CSRC approval is required for overseas financing.
If
the CSRC, MOFCOM, or another PRC regulatory agency subsequently determines that CSRC, MOFCOM or other approval was required for
the Acquisition or the restructuring of Hubei Shengrong, or if prior CSRC approval for overseas financings is required and not
obtained, the company may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory agencies.
In such event, these regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our operating
privileges in the PRC, delay or restrict the repatriation of the proceeds from overseas financings into the PRC, restrict or prohibit
payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial
condition, results of operations, reputation and prospects, as well as the trading price of our shares of common stock. The CSRC
or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel overseas
financings, to restructure the company’s corporate structure, or to seek regulatory approvals that may be difficult or costly
to obtain.
The
M&A Rules, along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant
government authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will
affect our acquisition strategy.
PRC
regulations relating to investments in offshore companies by PRC residents may subject The Company’s PRC-resident beneficial
owners or its PRC subsidiaries to liability or penalties, limit our ability to inject capital into its PRC subsidiaries or limit
its PRC subsidiaries’ ability to increase their registered capital or distribute profits.
SAFE
promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment
and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced
the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37
requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control
of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets
or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special
purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes
with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer
or exchange, merger, division or other material event. In the event that a PRC resident 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.
SAFE
promulgated the Notice of SAFE on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct
Investment, or SAFE Circular 13, on February 13, 2015, which was effective on June 1, 2015. SAFE Circular 13 cancels two administrative
approval items: foreign exchange registration under domestic direct investment and foreign exchange registration under overseas
direct investment, instead. Banks shall directly examine and handle foreign exchange registration under domestic direct investment
and foreign exchange registration under overseas direct investment, and SAFE and its branch shall indirectly regulate the foreign
exchange registration of direct investment through banks.
Ms.
Jiazhen Li and Mr. Xiaonian Zhang have completed registration under SAFE Circular 37 when they are the majority beneficiary owners
of the Company. But, after the reorganization of Hubei Shengrong, they becoming the indirect shareholders of the The Company via
a co-owned BVICo, such shareholding structure change of the The Company has not completed the modification registered with local
SAFE according to Circular 37. However, The Company may not be aware of the identities of all of its beneficial owners who are
PRC residents. The Company does not have control over its beneficial owners and cannot assure you that all of its PRC-resident
beneficial owners will comply with SAFE Circular 37, SAFE Circular 13 and subsequent implementation rules. The failure of its
beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular
37, SAFE Circular 13 and subsequent implementation rules, or the failure of future beneficial owners of The Company who are PRC
residents to comply with the registration procedures set forth in SAFE Circular 37, SAFE Circular 13 and subsequent implementation
rules, may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Furthermore, since SAFE Circular
37 and SAFE Circular 13 was recently promulgated and it is unclear how this regulation, and any future regulation concerning offshore
or cross-border transactions, will be interpreted, amended and implemented by the relevant PRC government authorities, The Company
cannot predict how these regulations will affect its business operations or future strategy. Failure to register or comply with
relevant requirements may also limit its ability to contribute additional capital to its PRC subsidiaries and limit its PRC subsidiaries’
ability to distribute dividends to The Company. These risks may have a material adverse effect on its business, financial condition
and results of operations.
If
either Wuhan Host or Jiangsu Rong Hai fails to maintain the requisite registered capital, licenses and approvals required under
PRC law, our business, financial condition and results of operations may be materially and adversely affected.
Foreign
investment is highly regulated by the PRC government and local authorities. Both Wuhan HOST and Jiangsu Ronghai are required to
obtain and maintain certain licenses or approvals from different regulatory authorities in order to operate its current business.
These licenses and approvals will be essential to the operation of their businesses. If either Wuhan HOST or Jiangsu Ronghai fails
to obtain or maintain any of the required licenses or approvals for its business, we may be subject to various penalties, such
as fines and the discontinuation or restriction of its operations. Any such disruption in the business operations of Wuhan HOST
or Jiangsu Ronghai could materially and adversely affect our business, financial condition and results of operations.
Risks
Related to Doing Business in China
A
slowdown of the Chinese economy or adverse changes in economic and political policies of the PRC government could negatively impact
China’s overall economic growth, which could materially adversely affect our business.
After
the Business Combination, we are now a holding company and all of the combined company’s operations will be entirely conducted
in the PRC. Although the PRC economy has grown in recent years, the pace of growth has slowed, and even that rate of growth may
not continue. The annual rate of growth in the PRC declined from 6.9% in 2017 to 6.6% in 2018. According to a recent State Information
of China forecast, China’s economic growth rate in 2019 will slow to 6.2%, its lowest since 1990. A slowdown in overall
economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the
demand for the combined company’s products and may have a materially adverse effect on its business.
China’s
economy differs from the economies of most other countries in many respects, including the amount of government involvement in
the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation
of resources. While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across
different periods, regions and economic sectors.
The
PRC government also exercises significant control over China’s economic growth by allocating resources, controlling the
payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular
industries or companies. Any actions and policies adopted by the PRC government could negatively impact the Chinese economy or
the economy of the region the combined company serves, which could materially adversely affect the combined company’s business.
Substantial
uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations
could have a significant impact upon the business the combined company may be able to conduct in the PRC and accordingly on the
results of its operations and financial condition.
The
combined company’s business operations may be adversely affected by the current and future political environment in the
PRC. The Chinese government exerts substantial influence and control over the manner in which the combined company must conduct
its business activities. The combined company’s ability to operate in China may be adversely affected by changes in Chinese
laws and regulations. Under the current government leadership, the government of the PRC has been pursuing economic reform policies
that encourage private economic activities and greater economic decentralization. However, the government of the PRC may not continue
to pursue these policies, or may significantly alter these policies from time to time without notice.
There
are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited
to, the laws and regulations governing the combined company’s business, or the enforcement and performance of the combined
company’s arrangements with borrowers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings.
Only after 1979 did the Chinese government begin to promulgate a comprehensive system of laws that regulate economic affairs in
general, deal with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and
trade, as well as encourage foreign investment in China. Although the influence of the law has been increasing, China has not
developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of
economic activities in China. Also, because these laws and regulations are relatively new, and because of the limited volume of
published cases and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant
uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
In addition, there have been constant changes and amendments of laws and regulations over the past 30 years in order to keep up
with the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws
and regulations and decide contractual disputes and issues, their inexperience in adjudicating new business and new polices or
regulations in certain less developed areas causes uncertainty and may affect the combined company’s business. Consequently,
neither we nor Hubei Shengrong and TJComex can predict the future direction of Chinese legislative activities with respect to
either businesses with foreign investment or the effectiveness on enforcement of laws and regulations in China. The uncertainties,
including new laws and regulations and changes of existing laws, as well as judicial interpretation by inexperienced officials
in the agencies and courts in certain areas, may cause possible problems to foreign investors.
Both
Wuhan HOST and Jiangsu Ronghai’s businesses are subject to extensive regulation and supervision by state, provincial and
local government authorities, which may interfere with the way the combined company conducts its business and may negatively impact
its financial results.
Both
Wuhan HOST and Jiangsu Ronghai are subject to extensive and complex state, provincial and local laws, rules and regulations with
regard to their loan operations, capital structure, maximum interest rates, allowance for loan losses, among other things, as
set out in “Business — Government Regulations.” These laws, rules and regulations are issued by different central
government ministries and departments, provincial and local governments and are enforced by different local authorities in Hubei
Province, the city of Wuhan and the city of Suzhou. As a result of the complexity, uncertainties and constant changes in these
laws, rules and regulation, including changes in interpretation and implementation of such, both Wuhan HOST and Jiangsu Ronghai’s
business activities and growth may be adversely affected if they do not respond to the changes in a timely manner or are found
to be in violation of the applicable laws, regulations and policies as a result of a different position from theirs taken by the
competent authority in the interpretation of such applicable laws, regulations and policies. If Wuhan HOST and Jiangsu Ronghai
are found to be not in compliance with these laws and regulations, they may be subject to sanctions by regulatory authorities,
monetary penalties and/or reputation damage, which could have a material adverse effect on the combined company’s business
operations and profitability.
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.
We have not made adequate employee benefit payments. We may be required to make up the contributions for these plans as well as
to pay late fees and fines, the amount payable of which shall be determined in accordance with 110% of the amount paid by us in
the preceding month. 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.
You
may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions against
us or our management, in China, based upon United States laws, including the U.S. federal securities laws, or other foreign laws.
We
are a company incorporated in Nevada. After the Business Combination, substantially all of our operations will be conducted
in China, and substantially all of our assets will be located in China. All of our current and proposed directors and officers
reside in China, and substantially all of the assets of those persons are located outside of the United States. As a result, Allbright
Law, our counsel as to PRC law, has advised us that it may be difficult for a shareholder to effect service of process within
the United States upon these persons, or to enforce judgments against us which are obtained in United States courts, including
judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United
States.
Allbright
Law has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures
Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law
based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions.
China does not have any treaties or other form of reciprocity with the United States providing for the reciprocal recognition
and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce
a foreign judgment against us or our directors or officers if they decide that the judgment violates the basic principles of PRC
laws, national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would
enforce a judgment rendered by a court in the United States.
Allbright
Law has also advised us that in the event shareholders originate an action against a company without domicile in China for disputes
related to contracts or other property interests, the PRC courts may accept a cause of action if (a) the disputed contract is
concluded or performed in the PRC or the disputed subject matter is located in the PRC, (b) the company (as defendant) has properties
that can be seized within the PRC, (c) the company has a representative organization within the PRC, or (d) the parties chose
to submit to the jurisdiction of the PRC courts in the contract on the condition that such submission does not violate the requirements
of jurisdiction under the PRC Civil Procedures Law. The action may be initiated by the shareholder by filing a complaint with
the PRC courts. The PRC courts would determine whether to accept the complaint in accordance with the PRC Civil Procedures Law.
The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf
of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in such an action
unless such foreign country restricts the rights of PRC citizens and companies.
Our
ability to pay dividends may be restricted due to foreign exchange control and other regulations of China.
As
an offshore holding company, we will rely principally on dividends from our subsidiary in China, WFOE, for our cash requirements.
Under the applicable PRC laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated
profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise
in China is required to set aside a portion of its after-tax profit to fund specific reserve funds prior to payment of dividends.
In particular, at least 10% of its after-tax profits based on PRC accounting standards each year is required to be set aside towards
its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not
distributable as cash dividends.
Furthermore,
WFOE’s ability to pay dividends may be restricted due to foreign exchange control policies and the availability of its cash
balance. Substantially all of the Operating Companies’ operations are conducted in China and all of the revenue we recognize,
through WFOE will be denominated in RMB. RMB is subject to exchange control regulation in China, and, as a result, WFOE may be
unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert
RMB into U.S. dollars.
The
lack of dividends or other payments from WFOE may limit our ability to make investments or Business Combinations that could be
beneficial to our business, pay dividends or otherwise fund, and conduct our business. Our funds may not be readily available
to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects
or our ability to meet our cash obligations. Accordingly, if we do not receive dividends from WFOE, our liquidity and financial
condition will be materially and adversely affected.
Dividends
payable to our foreign investors and gains on the sale of our shares of common stock by our foreign investors may become subject
to tax by the PRC.
Under
the Enterprise Income Tax Law and its implementation regulations issued by the State Council of the PRC, a 10% PRC withholding
tax is applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place
of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with
such establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any
gain realized on the transfer of shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any
reduction or exemption set forth in relevant tax treaties, if such gain is regarded as income derived from sources within the
PRC. If we are deemed a PRC resident enterprise, dividends paid on our shares, and any gain realized from the transfer of our
shares, would be treated as income derived from sources within the PRC and would as a result be subject to PRC taxation. Furthermore,
if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized
on the transfer shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption
set forth in applicable tax treaties. It is unclear whether we or any of our subsidiaries established outside of China are considered
a PRC resident enterprise, holders of shares would be able to claim the benefit of income tax treaties or agreements entered into
between China and other countries or areas. If dividends payable to our non-PRC investors, or gains from the transfer of our shares
by such investors are subject to PRC tax, the value of your investment in our shares may decline significantly.
Our
global income may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect
on our results of operations.
Under
the PRC Enterprise Income Tax Law, or the New EIT Law, and its amendment and implementation rules, which became effective in January
2008, an enterprise established outside of the PRC with a “de facto management body” located within the PRC is considered
a PRC resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation
rules define the term “de facto management bodies” as “establishments that carry out substantial and overall
management and control over the manufacturing and business operations, personnel and human resources, finance and treasury, and
Business Combination and disposition of properties and other assets of an enterprise.” On April 22, 2009, the State Administration
of Taxation (the “SAT”), issued a circular, or SAT Circular 82, which provides certain specific criteria for determining
whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in
China. Although the SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups,
not those controlled by PRC individuals or foreigners, the determining criteria set forth in the SAT Circular 82 may reflect the
SAT’s general position on how the “de facto management body” text should be applied in determining the resident
status of all offshore enterprises for the purpose of PRC tax, regardless of whether they are controlled by PRC enterprises or
individuals. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises,
it is possible that the PRC tax authorities could reach a different conclusion. In such case, we may be considered a PRC resident
enterprise and may therefore be subject to the 25% enterprise income tax on our global income, which could significantly increase
our tax burden and materially and adversely affect our cash flow and profitability. In addition to the uncertainty regarding how
the new PRC resident enterprise classification for tax purposes may apply, it is also possible that the rules may change in the
future, possibly with retroactive effect.
We
and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises by
their non-PRC holding companies.
On
February 3, 2015, the State Administration of Taxation issued an Announcement on Several Issues Concerning Enterprise Income Tax
on Income Arising from Indirect Transfers of Property by Non-PRC Resident Enterprises, or Announcement 7, with the same effective
date. Under Announcement 7, an “indirect transfer” refers to a transaction where a non-resident enterprise transfers
its equity interest and other similar interest in an offshore holding company, which directly or indirectly holds Chinese taxable
assets (the assets of an “establishment or place” situated in China; real property situated in China and equity interest
in Chinese resident enterprises) and any indirect transfer without reasonable commercial purposes are subject to the PRC taxation.
In addition, Announcement 7 specifies the conditions under which an indirect transfer is deemed to lack a reasonable commercial
purpose which include: (1) 75% or more of the value of the offshore holding company’s equity is derived from Chinese taxable
assets, (2) anytime in the year prior to the occurrence of the indirect transfer of Chinese taxable assets, 90% or more of the
total assets (excluding cash) of the offshore holding company are direct or indirect investment in China, or 90% or more of the
revenue of the offshore holding company was sourced from China; (3) the functions performed and risks assumed by the offshore
holding company(ies), although incorporated in an offshore jurisdiction to conform to the corporate law requirements there, are
insufficient to substantiate their corporate existence and (4) the foreign income tax payable in respect of the indirect transfer
is lower than the Chinese tax which would otherwise be payable in respect of the direct transfer if such transfer were treated
as a direct transfer. As a result, gains derived from such indirect transfer will be subject to PRC enterprise income tax, currently
at a rate of 10%.
Announcement
7 grants a safe harbor under certain qualifying circumstances, including transfers in the public securities market and certain
intragroup restricting transactions, however, there is uncertainty as to the implementation of Announcement 7. For example, Announcement
7 requires the buyer to withhold the applicable taxes without specifying how to obtain the information necessary to calculate
taxes and when the applicable tax shall be submitted. Announcement 7 may be determined by the tax authorities to be applicable
to our offshore restructuring transactions or sale of the shares of our offshore subsidiaries where non-resident enterprises,
being the transferors, were involved. Though Announcement 7 does not impose a mandatory obligation of filing the report of taxable
events, the transferring party shall be subject to PRC withholding tax if the certain tax filing conditions are met. Non-filing
may result in an administrative penalty varying from 50% to 300% of unpaid taxes. As a result, we and our non-resident enterprises
in such transactions may become at risk of being subject to taxation under Announcement 7, and may be required to expend valuable
resources to comply with Announcement 7 or to establish that we and our non-resident enterprises should not be taxed under Announcement
7, for any restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial
condition and results of operations.
Enhanced
scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may
pursue in the future.
The
PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in
particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular
59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in
Circular 698, which became effective in February 2015.
Under
Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests
of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the
non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered
to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect
transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise
transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value,
the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
In
February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced
a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not
only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through
the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular
698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the
purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor
and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise
conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests
of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly
owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form”
principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial
purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident
enterprise.
We
face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other
transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities
may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and
request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become
at risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required
to expend valuable resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our non-resident
enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and
results of operations.
The
PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable
capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although
we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future
that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income
Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular
698 and Circular 7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse
effect on our financial condition and results of operations.
Restrictions
on currency exchange may limit our ability to utilize our revenue effectively.
Substantially
all of our revenue is denominated in Renminbi. The Renminbi is currently convertible under the “current account,”
which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,”
which includes foreign direct investment and loans. Currently, our PRC subsidiaries, which are wholly-foreign owned enterprises,
may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to
us, without the approval of SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities
may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant
amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit
our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign
currencies to our shareholders. Foreign exchange transactions under the capital account remain subject to limitations and require
approvals from, or registration with, SAFE or banks and other relevant PRC governmental authorities. This could affect our ability
to obtain foreign currency through debt or equity financing for all of our PRC subsidiaries.
Fluctuations
in the foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.
The
value of the RMB against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things,
changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005,
the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. Under this policy, the RMB is permitted
to fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar
peg, the RMB appreciated more than 20% against the U.S. dollar over three years. From July 2008 until June 2010, however, the
RMB traded stably within a narrow range against the U.S. dollar. On June 20, 2010, the PBOC announced that the PRC government
would reform the RMB exchange rate regime and increase the flexibility of the exchange rate. Since June 2010, the RMB has appreciated
more than 10% against the U.S. dollar. In April 2012, the PRC government announced it would allow greater RMB exchange rate fluctuation.
On August 11, 12 and 13, 2015, the PRC government successively set the central parity rate for the RMB more than 3% lower in the
aggregate than that of August 10, 2015 and announced that it will begin taking into account previous day’s trading in setting
the central parity rate. In 2015, the yuan experienced a 4.88% drop in value, and on January 4, 2016 the PRC government set the
U.S. dollar-Chinese yuan currency pair to a reference rate of 6.5%, the lowest rate in 4.5 years, on January 6, 2017, the reference
rate was 0.9% up-regulated by the PRC government. However, it is difficult to predict how market forces or PRC or U.S. government
policy may impact the exchange rate between the RMB and the U.S. dollar in the future. As significant international pressure remains
on the PRC government to adopt a more flexible currency policy, greater fluctuation of the RMB against the U.S. dollar could result.
Our
revenues and costs are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in
the RMB. Any significant fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect
our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on our shares in U.S.
dollars. Fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation
losses for financial reporting purposes.
If
any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in U.S. dollars than
the U.S. dollar amount that you will actually ultimately receive.
If
you are a U.S. holder of our shares of common stock, you will be taxed on the U.S. dollar value of your dividends, if any, at
the time you receive them, even if you actually receive a smaller amount of U.S. dollars when the payment is in fact converted
into U.S. dollars. Specifically, if a dividend is declared and paid in a foreign currency such as the RMB, the amount of the dividend
distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the payments made in the foreign
currency, determined at the spot rate of the foreign currency to the U.S. dollar on the date the dividend distribution is includible
in your income, regardless of whether the payment is in fact converted into U.S. dollars. Thus, if the value of the foreign currency
decreases before you actually convert the currency into U.S. dollars, you will be taxed on a larger amount in U.S. dollars than
the U.S. dollar amount that you will actually ultimately receive.
Future
inflation in China may inhibit economic activity and adversely affect the combined company’s operations.
The
Chinese economy has experienced periods of rapid expansion in recent years which can lead to high rates of inflation or deflation.
This has caused the PRC government to, from time to time, enact various corrective measures designed to restrict the availability
of credit or regulate growth and contain inflation. High inflation may in the future cause the PRC government to once again impose
controls on credit and/or prices, or to take other action, which could inhibit economic activity in China. Any action on the part
of the PRC government that seeks to control credit and/or prices may adversely affect the combined company’s business operations.
PRC
laws and regulations have established more complex procedures for certain acquisitions of Chinese companies by foreign investors,
which could make it more difficult for the combined company to pursue growth through acquisitions in China.
Further
to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly
Law of the PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors promulgated by MOFCOM or the MOFCOM Security Review Rules, was issued in August 2011, which established
additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors
more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change of
control transaction in which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM be obtained
in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic
companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review
and or security review.
The
MOFCOM Security Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State
Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated
on February 3, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by
foreign investors is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign
investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect
investments, leases, loans, control through agreements control or offshore transactions.
Further,
if the business of any target company that the combined company seek to acquire falls into the scope of security review, the combined
company may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through
any contractual agreements. The combined company may grow its business in part by acquiring other companies operating in its industry.
Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required
approval processes, including approval from MOFCOM, may delay or inhibit its ability to complete such transactions, which could
affect its ability to maintain or expand its market share.
In
addition, SAFE promulgated the Circular on the Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular
19, on June 1, 2015. Under Circular 19, registered capital of a foreign-invested company settled in RMB converted from foreign
currencies may only be used within the business scope approved by the applicable governmental authority and the equity investments
in the PRC made by the foreign-invested company shall be subject to the relevant laws and regulations about the foreign-invested
company’s reinvestment in the PRC. In addition, foreign-invested companies cannot use such capital to make the investments
on securities, and cannot use such capital to issue the entrusted RMB loans (except approved in its business scope), repay the
RMB loans between the enterprises and the ones which have been transferred to the third party. Circular 19 may significantly limit
our ability to effectively use the proceeds from future financing activities as the Chinese subsidiaries may not convert the funds
received from us in foreign currencies into RMB, which may adversely affect their liquidity and our ability to fund and expand
our business in the PRC.
SAFE
issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts (“Circular
16”), on June 9, 2016, which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC
may also convert their foreign debts from foreign currency to RMB on self-discretionary basis. Circular 16 provides an integrated
standard for conversion of foreign exchange under capital account items (including but not limited to foreign currency capital
and foreign debts) on self-discretionary basis which applies to all enterprises registered in the PRC. Circular 16 reiterates
the principle that RMB converted from foreign currency-denominated capital of a company may not be directly or indirectly used
for purpose beyond its business scope or prohibited by PRC Laws or regulations, while such converted RMB shall not be provide
as loans to its non-affiliated entities. As Circular 16 is newly issued and SAFE has not provided detailed guidelines with respect
to its interpretation or implementation, it is uncertain how these rules will be interpreted and implemented.
Failure
to comply with the United States Foreign Corrupt Practices Act and Chinese anti-corruption laws could subject us to penalties
and other adverse consequences.
As
our shares are listed on Nasdaq, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits
United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining
or retaining business. Non-U.S. companies, including some that may compete with us, may not be subject to these prohibitions.
In addition, in 2012, the central government of the PRC commenced a far-reaching campaign against corruption. That ongoing campaign
involves aggressive enforcement of existing Chinese anti-corruption laws. Corruption, extortion, bribery, pay-offs, theft and
other fraudulent practices may occur from time-to-time in the PRC. Our employees or other agents may engage in such conduct for
which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer
severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results
of operations.
SEC
administrative proceedings against the China affiliates of multi-national accounting firms, and/or any related adverse regulatory
development in the PRC, may result in our financial statements being determined to not be in compliance with the requirements
of the Exchange Act of 1934, as amended, or the Exchange Act.
In
December 2012, the SEC brought administrative proceedings against five major accounting firms in China alleging that they had
refused to produce audit work papers and other documents related to certain other China-based companies under investigation by
the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending
four of these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective
unless and until reviewed and approved by the SEC. On February 12, 2014, four of these PRC-based accounting firms appealed to
the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a
fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires
the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the
Chinese Securities Regulatory Commission. If the firms do not follow these procedures, the SEC could restart the administrative
proceedings.
In
the event that the SEC restarts the administrative proceedings or initiates new proceedings against other firms, depending upon
the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain
auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance
with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against
these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of
our shares may be adversely affected.
If
our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we
were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements,
our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination
could ultimately lead to our delisting from Nasdaq or deregistration from the SEC, or both, which would substantially reduce or
effectively terminate the trading of our shares in the United States.
Our
management team is unfamiliar with United States securities laws, they may have to expend time and resources becoming familiar
with such laws, which could lead to various regulatory issues.
Our
current management team are not familiar with United States securities laws. Given the complexity of United States securities
laws, our management team may have to expend time and resources becoming familiar with such laws. This could be expensive and
time-consuming and could lead to various regulatory issues, which may adversely affect our operations.
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 and our
reputation and could result in a loss of your investment in our shares, especially if such matter cannot be addressed and resolved
favorably.
U.S.
public companies that have substantially all of their operations in China 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, 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 and our business.
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 the Company. This situation may be a major distraction
to our management. If such allegations are not proven to be groundless, our company and business operations will be severely hampered
and your investment in our stock could be rendered worthless.
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.
Our
reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the
SEC under the Securities Act and the Exchange Act. Our SEC filings and other disclosure and public pronouncements are not subject
to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are
not subject to the review by CSRC, 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 review of our company, our SEC reports, other filings or any of our other public pronouncements.
Risks
Related to Our Securities
The
market price for our common stock may be volatile.
The
market price for our common stock may be volatile and subject to wide fluctuations due to factors such as:
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the
perception of U.S. investors and regulators of U.S. listed Chinese companies;
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actual
or anticipated fluctuations in our quarterly operating results;
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changes
in financial estimates by securities research analysts;
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negative
publicity, studies or reports;
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conditions
in Chinese credit markets;
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changes
in the economic performance or market valuations of other microcredit companies;
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announcements
by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
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addition
or departure of key personnel;
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fluctuations
of exchange rates between RMB and the U.S. dollar; and
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general
economic or political conditions in China.
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In
addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock.
Volatility
in our common stock price may subject us to securities litigation.
The
market for our common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share
price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have
often initiated securities class action litigation against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs
and liabilities and could divert management’s attention and resources.
There
is no guarantee that our warrants will ever be in the money, and they may expire worthless and the terms of our warrants may be
amended.
The
exercise price for our warrants is $2.88 per one-half of one share ($5.75 per whole share), subject to adjustment. Warrants may
be exercised only for a whole number of the Company’s common stock. No fractional shares will be issued upon exercise of
the warrants. There is no guarantee that the warrants will ever be in the money prior to their expiration, and they may expire
worthless.
A
market for the Company’s securities may not continue, which would adversely affect the liquidity and price of our securities.
The
price of the Company’s securities may fluctuate significantly due to the market’s reaction and general market and
economic conditions. An active trading market for our securities may never develop or, if developed, it may not be sustained.
In addition, the price of the Company’s securities can vary due to general economic conditions and forecasts, our general
business condition and the release of our financial reports. Additionally, if the Company’s securities are not listed on,
or become delisted from, the Nasdaq Capital Market for any reason, and are quoted on the OTC Bulletin Board, an inter-dealer automated
quotation system for equity securities that is not a national securities exchange, the liquidity and price of our securities may
be more limited than if we were quoted or listed on the Nasdaq Capital Market or another national securities exchange. You may
be unable to sell your securities unless a market can be established or sustained.
The
market price of the Company’s securities may be volatile.
Factors
affecting the trading price of the Company’s securities may include:
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actual
or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to
be similar to us;
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changes
in the market’s expectations about our operating results;
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success
of competitors;
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our
operating results failing to meet the expectation of securities analysts or investors in a particular period;
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changes
in financial estimates and recommendations by securities analysts concerning the Company or the lending market in general;
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operating
and stock price performance of other companies that investors deem comparable to the Company;
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our
ability to market new and enhanced services on a timely basis;
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changes
in laws and regulations affecting our business;
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commencement
of, or involvement in, litigation involving the Company;
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the
Company’s ability to access the capital markets as needed;
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changes
in the Company’s capital structure, such as future issuances of securities or the incurrence of additional debt;
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the
volume of common stock available for public sale;
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any
major change in our board or management;
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sales
of substantial amounts of shares of common stock by our directors, executive officers or significant shareholders or the perception
that such sales could occur; and
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general
economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and
acts of war or terrorism.
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market and industry factors may materially harm the market price of the Company’s securities irrespective of our operating
performance. The stock market in general, and the Nasdaq Capital Market in particular, have experienced price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading
prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market
for retail stocks or the stocks of other companies which investors perceive to be similar to the Company could depress our stock
price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our
securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing
in the future.
We
have not registered the shares of common stock issuable upon exercise of the warrants under the Securities Act or any state securities
laws at this time, and such registration may not be in place when an investor desires to exercise warrants, thus precluding such
investor from being able to exercise its warrants and causing such warrants to expire worthless
.
We
have not registered the shares of common stock issuable upon exercise of the warrants under the Securities Act or any state securities
laws at this time. However, under the terms of the warrant agreement, we have agreed to use our best efforts to file a registration
statement under the Securities Act covering such shares and maintain a current prospectus relating to the common stock issuable
upon exercise of the warrants, and to use our best efforts to take such action as is necessary to register or qualify for sale,
in those states in which the warrants were initially offered by us, the shares issuable upon exercise of the warrants, to the
extent an exemption is not available. We cannot assure you that we will be able to do so. If the shares issuable upon exercise
of the warrants are not registered under the Securities Act, we will be required to permit holders to exercise their warrants
on a cashless basis under the circumstances specified in the warrant agreement. However, except as specified in the warrant agreement,
in no event will we be required to issue cash, securities or other compensation in exchange for the warrants if we are unable
to register or qualify the shares underlying the warrants under the Securities Act or applicable state securities laws. If the
issuance of the shares upon exercise of the warrants is not so registered or qualified, the warrant holder will not be entitled
to exercise such warrant and such warrant may have no value and expire worthless. In such event, holders who acquired their warrants
as part of a purchase of units will have paid the full unit purchase price solely for the shares of common stock included in the
units. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to register
or qualify the underlying shares of common stock for sale under all applicable state securities laws.
Warrants
will become exercisable for the Company’s shares of common stocks, which would increase the number of shares eligible for
future resale in the public market and result in dilution to our shareholders.
Each
warrant entitles the holder thereof to purchase one-half of one shares of common stock at a price of $2.88 per half share ($5.75
per whole share), subject to adjustment. Warrants may be exercised only for a whole number of the Company’s share of common
stock. No fractional shares will be issued upon exercise of warrants. To the extent such warrants are exercised, additional shares
of common stocks will be issued, which will result in dilution to the then existing holders of shares of common stock of the Company
and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the
public market could adversely affect the market price of our shares of common stock.
We
may amend the terms of the warrants in a manner that may be adverse to holders with the approval by the holders of at least 90%
of the then outstanding warrants.
Our
warrants are issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant
agent, and us. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder
to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least 90% of the then
outstanding warrants to make any change that adversely affects the interests of the registered holders. Accordingly, we may amend
the terms of the warrants in a manner adverse to a holder if holders of at least 90% of the then outstanding warrants approve
of such amendment. Although our ability to amend the terms of the warrants with the consent of at least 90% of the then outstanding
warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of
the warrants, shorten the exercise period or decrease the number of shares of our common stock purchasable upon exercise of a
warrant. Our sponsor owns warrants equal to 61.9% of our issued and outstanding warrants. Accordingly, our sponsor may exert a
substantial and decisive influence on actions relating to a vote to amend the terms of the warrants, as set forth above.
We
may redeem your unexpired warrants prior to their exercise at a time that is disadvantageous to you, thereby making your warrants
worthless.
We
have the ability to redeem outstanding warrants (excluding any placement warrants held by our sponsor or its permitted transferees)
at any time after they become exercisable and prior to their expiration, at $0.01 per warrant, provided that the last reported
sales price (or the closing bid price of our common stock in the event the shares of our common stock are not traded on any specific
trading day) of the common stock equals or exceeds $12.00 per share for any 20 trading days within a 30 trading-day period ending
on the third business day prior to the date we send proper notice of such redemption, provided that on the date we give notice
of redemption and during the entire period thereafter until the time we redeem the warrants, we have an effective registration
statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants and a current prospectus
relating to them is available. If and when the warrants become redeemable by us, we may exercise our redemption right even if
we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption
of the outstanding warrants could force you: (i) to exercise your warrants and pay the exercise price therefor at a time when
it may be disadvantageous for you to do so, (ii) to sell your warrants at the then-current market price when you might otherwise
wish to hold your warrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrants are called
for redemption, is likely to be substantially less than the market value of your warrants.
Our
management’s ability to require holders of our warrants to exercise such warrants on a cashless basis will cause holders
to receive fewer shares of common stock upon their exercise of the warrants than they would have received had they been able to
exercise their warrants for cash.
If
we call our public warrants for redemption, our management will have the option to require any holder that wishes to exercise
its warrant (including any warrants held by our sponsor, officers, directors or their permitted transferees) to do so on a “cashless
basis.” If our management chooses to require holders to exercise their warrants on a cashless basis, the number of shares
of common stock received by a holder upon exercise will be fewer than it would have been had such holder exercised his warrant
for cash. This will have the effect of reducing the potential “upside” of the holder’s investment in our company.
As
an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements. Such reduced
disclosure may make our common stock less attractive to investors
.
For
as long as we remain an “emerging growth company” as defined in the JOBS Act, we will elect to take advantage of certain
exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth
companies”, including, but not limited to, not being required to comply with the auditor attestation requirements of Section
404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy
statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder
approval of any golden parachute payments not previously approved. Because of these lessened regulatory requirements, our stockholders
would be left without information or rights available to stockholders of more mature companies. If some investors find our common
stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more
volatile.
Our
status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital when we need
to do it.
Because
of the exemptions from various reporting requirements provided to us as an “emerging growth company”, we may be less
attractive to investors and it may be difficult for us to raise additional capital as and when we need it. If we are unable to
raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely
affected.
We
will incur increased costs and demands upon management as a result of complying with the laws and regulations that affect public
companies, which could materially adversely affect our results of operations, financial condition, business and prospects.
As
a public company and particularly after we cease to be an “emerging growth company,” we will incur significant legal,
accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting
and corporate governance requirements. These requirements include compliance with Section 404(b) and other provisions of the Sarbanes-Oxley
Act, as well as Section 14 rules implemented by the SEC and NASDAQ. In addition, our management team will also have to adapt to
the requirements of being a public company. We expect that compliance with these rules and regulations will substantially increase
our legal and financial compliance costs and will make some activities more time-consuming and costly.
The
increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require
us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements
divert our management’s attention from other business concerns, they could have a material adverse effect on our results
of operations, financial condition, business and prospects.
The
elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and
the existence of indemnification of our directors, officers and employees under Nevada law may result in substantial
expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our
certificate of incorporation contains provisions which eliminate the liability of our directors for monetary damages to us and
our stockholders to the maximum extent permitted under the corporate laws of Nevada. We may also provide contractual indemnification
obligations under agreements with our directors, officers and employees. These indemnification obligations could result in our
incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees,
which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against
directors, officers and employees for breach of their fiduciary duties, and may similarly discourage the filing of derivative
litigation by our shareholders against our directors, officers and employees even though such actions, if successful, might otherwise
benefit the Company and our shareholders.