ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSET
On January 20, 2021 (the “Closing
Date”), Beijing ALW closed on the Reverse Merger described above with Hengshui Jingzhen. As a result, Beijing ALW gained
control over Hengshui Jingzhen.
Hengshui Jingzhen is 100% beneficially
owned by a citizen of the PRC, Shuhua Liu, who also serves as our Chief Executive Officer. The contractual arrangements between
Hengshui Jingzhen and Beijing ALW enable us to exercise effective control over, and realize substantially all of the economic risks
and benefits arising from the activities of Hengshui Jingzhen. As a result, we include the financial results of Hengshui Jingzhen
in our consolidated financial statements in accordance with generally accepted accounting principles in the United States, or U.S.
GAAP, as if Hengshui Jingzhen were a wholly-owned subsidiary. However, the contractual arrangements may not be as effective in
providing operational control as direct ownership. See “Risk Factors - Risk Related to Our VIE Structure.”
For accounting purposes, the Reverse Merger
was treated as a reverse acquisition with Hengshui Jingzhen as the acquirer and Summit Network Inc. as the acquired party. When
we refer in this report to business and financial information for periods prior to the consummation of the Reverse Merger, we are
referring to the business and financial information of Hengshui Jingzhen unless the context suggests otherwise.
Without issuing any new shares in connection
with the Reverse Merger, Shuhua Liu beneficially owns 70% of the Company’s outstanding shares of common stock before and
following the closing. She also beneficially holds 100% of Hengshui Jingzhen’s outstanding equity interests.
FORM 10 DISCLOSURE
As disclosed elsewhere in this report,
on January 20, 2021, we acquired Hengshui Jingzhen in the Reverse Merger. Item 2.01(f) of Form 8-K states that if we were a shell
company immediately before the Reverse Merger as disclosed under Item 2.01 of this Current Report, then we must disclose the information
that would be required if we were filing a general form for registration of securities on Form 10.
Accordingly, we are providing below the
information that would be included in a Form 10 if we were to file a Form 10. Please note that the information provided below relates
to the combined enterprises after our combination with Hengshui Jingzhen, except that information relating to periods prior to
the date of the Reverse Merger only relates to Hengshui Jingzhen and its subsidiaries and consolidated entities unless otherwise
specifically indicated.
BUSINESS
History of Summit Networks Inc.
We were incorporated on July 8, 2014 under
the name “Summit Networks Inc.” under the laws of the state of Nevada. We originally specialized in the development
and operation of a business engaged in the distribution of glass craft products produced in China.
On May 8, 2018, we acquired Real Capital
Limited, a Hong Kong company (“Real Capital”), to seek opportunities in the food and beverage industry. On March 31,
2019, the Company entered into a Share Purchase Agreement (the “Real Capital SPA”) pursuant to which it sold its interests
in Real Capital. The closing of the Real Capital SPA occurred on April 10, 2019.
On April 9, 2019, the Company entered into
a Share Exchange Agreement (the “MoralArrival Share Exchange Agreement”) with MoralArrival Environmental and Blockchain
Technology Services Limited, a British Virgin Islands company (“MoralArrival”), and the beneficial owner of MoralArrival,
which was Shuhua Liu. The acquisition of MoralArrival was with a related party as Ms. Liu, who controls the shares of MoralArrival,
also controls The Hass Group, Inc., the Company’s largest stockholder, and it was accounted for as acquisition of entity
under common control. Under the terms of the MoralArrival Share Exchange Agreement, the Company agreed to exchange 3,000,000 shares
of its common stock for all the outstanding shares of common stock of MoralArrival. MoralArrival had no business activity as of
the date of acquisition. MoralArrival changed its name to Goodwill Motion Enterprises, Inc. (“Goodwill”) on May 4,
2020.
On July 17, 2019, the Company received
FINRA approval to effect a 10-for-1 stock dividend to holders of its common stock as of June 1, 2019, the record date for the dividend.
As a result, common stock figures, share capital, additional paid in capital, and earnings per share information have been retroactively
adjusted to reflect the stock dividend.
On May 8, 2020, Sumnet (Canada) Inc. (“Sumnet
(Canada)”) was incorporated in Canada. Sumnet (Canada) issued all its ordinary shares to the Company on May 8, 2020 so that
Sumnet (Canada) became the wholly owned subsidiary of Company. On July 29, 2020, Smith Barney Enterprises Limited (“Smith
Barney”) was incorporated in the British Virgin Islands. Smith Barney issued all its ordinary shares to the Company on July
29, 2020 so that Smith Barney became the wholly owned subsidiary of Company. On August 28, 2020, Green Energy (HK) Limited (“Green
Energy”) was incorporated in Hong Kong. Green Energy issued all its ordinary shares to Smith Barney on August 28, 2020 so
that Green Energy became the wholly owned subsidiary of Smith Barney. On September 27, 2020, Beijing Asian League Wins Technology
Co., Ltd. (“Beijing ALW”) was incorporated in People’s Republic of China. Green Energy subscribed all capital
stock of Beijing ALW on September 27, 2020 so that Beijing ALW became the wholly owned subsidiary of Green Energy.
On November 11, 2020, the Company entered
into a Mutual Rescission Agreement (the “Goodwill Rescission Agreement”) with Goodwill and Shuhua Liu, the shareholder
of Goodwill. Under the Goodwill Rescission Agreement, Shuhua Liu agreed to deliver to the Company 3,000,000 shares of its common
stock that were issued to Shuhua Liu under the MoralArrival Share Exchange Agreement, which the Company agreed to cancel upon such
delivery by Shuhua Liu. Under the terms of the Goodwill Rescission Agreement, the obligations of all parties to the MoralArrival
Share Exchange Agreement shall be terminated and the transactions contemplated thereby unwound and voided as if the MoralArrival
Share Exchange Agreement was never entered into and the transactions contemplated thereby never occurred.
From and after the Closing Date of the
Reverse Merger described in Item 2.01, above, the Company’s primary operations will now consist of the operations of Hengshui
Jingzhen.
Our Corporate Structure
The chart below presents our corporate
structure and contractual arrangements that we have in place for our VIE:
Business Overview
Hengshui Jingzhen is an integrated waste
services company serving customers in Hebei, China and the surrounding area since 2015. Hengshui Jingzhen provides services on
hazardous waste collection, transfer, disposal and recycling. Our Company aims at providing technology solutions for environmental
protection, especially on recycling and exploitation of industrial waste. We have advanced technology for efficiently disposing
and utilizing hazardous waste. We operate through three lines of business: waste incineration, waste disposal and waste utilization.
We plan to start marketing the environmental
technologies, equipment and products in 2021 across China, Japan, the Southeast Asia and the United States. The services and products
that we plan to market include hazardous waste disposal, pollution treatment equipment and industrial waste products. We plan to
market Hengshui Jingzhen by acquiring businesses in possession of the waste conversion technology, organizing conferences nationwide
with potential enterprise client in need of waste disposal services, and partnering with local environmental protection organizations
to expand our business’s outreach to hundreds of factories across China. However, our plan to operate in the waste industry
may be adversely impacted by the outbreak of coronavirus, which was first reported to have surfaced in Wuhan, China, in December
2019, and is now continuing to spread throughout other parts of the world. Although China has made great efforts to contain the
spread of the virus and had brought the outbreak under control, the economy, financial market and businesses in China have been
suffering from the pandemic.
Our Products and Services
Hengshui Jingzhen is an integrated waste
services company operating primarily in Hebei, China. With a team of experienced personnel and national-approved license, storage
and disposal facilities, we incinerated 49,500 tons of hazardous waste and disposed 9,600 tons of acidic and alkaline wastes in
the year of 2019. We have two warehouses with a storing capacity of 15,600 tons of solid waste and a daily processing capacity
of 165 tons. We provide waste management services to customers primarily across the
plastics and rubber, fine chemicals, steel manufacturing, healthcare and pharmaceutical, agriculture and petrochemical industries.
We are also equipped with advanced pollution prevention facilities. We have three major plants: incineration plant, acidic and
alkaline wastes disposal plant and hydrochloric acid waste comprehensive utilization plant. In the last two fiscal years, we generated
revenue mostly from three business lines: (1) Our waste incineration business line constituted approximately 91.19% and approximately
97.16% of our total revenue for the fiscal years ended September 30, 2020 and 2019, respectively; (2) Our waste disposal business
line constituted approximately 1.70% and approximately 0% of our total revenue for the fiscal years ended September 30, 2020 and
2019, respectively; (3) Our waste utilization business line constituted approximately 5.85% and approximately 1.97% of our total
revenue for the fiscal years ended September 30, 2020 and 2019, respectively.
Waste Incineration
Our waste incineration business line focuses
on using high temperature incineration treatment via a two-combustion room system, three-combustion room system and nine-stage
exhaust treatment system to complete flue gas cooling, denitration, desulfurization and deacidification, adsorption of dioxins
and dust removal. It utilizes an automatic, continuously monitoring online system. The system produces emissions lower than the
national emission control standard.
Waste Disposal
Our second business line focuses on the
disposal of acid and alkaline wastes. The acid and alkaline waste are initially treated by a neutralization method. They are then
treated again by an integrated sewage treatment system, achieving zero emissions and fully meeting the re-use standard.
Waste Utilization
Our third business line focuses on utilization
of hydrochloric acid waste. We innovatively transform the traditional economic model of “resources-products-hazardous waste”
into a closed-loop model of “resources-products-hazardous waste-renewable resources” to promote resource recycling.
We have a number of pending utility patents,
which are described in “Intellectual Property”.
Sales and Marketing
We market our services and products through three major methods:
Business Referral Networks
We engage in marketing our products and
services through our business referral networks such as the local industry conference, trade fairs, and other local events, especially
in Hebei province.
Our Sales and Marketing Team
As a growth business,
most of our sales and marketing staff participate in our marketing efforts. Our team promotes our services and
products directly at client’s plants and facilities.
Client Referrals
Our sales and marketing efforts also focus
on business development through client referrals.
Customers
Customers
Our customers are mainly located in provinces
of Hebei province. For the year ended September 30, 2020, the Company’s revenue from
one of its industrial customers accounted for 12.1% of its total revenue. During the year ended September 30, 2019, the Company’s
revenue from two of its industrial customers accounted for 12.4% and 11.5% of the Company’s total revenue, respectively.
Competition
We compete primarily with other two waste
services company in Hebei province and other waste services companies in the PRC. Within Hebei province, we have two competitors
who have larger disposal capacity in the waste industry. Nationally, we may face competition from dozens of competitors of varying
sizes and geographic reach, who operate their businesses similar to our waste services.
We
have distinguished ourselves from potential competitors due to a variety of factors. We strive to reduce our emissions to
keep more environmentally friendly and our new and enhanced technologies may increase our strength in the competition. Our
three-combustion room system can remove harmful particles from the incineration process. Our two spray towers can also reduce
the sulfur dioxide in the incineration process to enable us to meet our customers’ demands.
Competitive Advantages
Competitive Advantages of Our Technology
Our advanced technology helps us in serving
clients in a broad range of industries. We can provide waste management services of acids, caustics and heavy metals for fine chemicals
industry; we can process dust and spent pot liners for steel manufacturing industry; we can process medical waste for healthcare
and pharmaceutical industry and spent catalysts, refinery tank bottoms for petrochemical industries.
Competitive Advantage of Our Services
We
have broad service capabilities. And we have a diversified business model which makes us have the ability to support customer
needs in different industries. Our environmental services, including waste collection, recovery and arrangement for disposal
services and recycling have a good reputation in the Hebei area.
Competitive Advantage of Our Production Capacity
We have strong waste handling infrastructure. We currently operate
three processing plants, which are expected to process 49, 500 tons of waste per year.
Growth Strategy
We have begun to implement
the growth strategies described below and expect to continue to do so over the several years following the Reverse Merger.
Experienced Management
We have an experienced senior management
team. Our Chief Technology Officer, Kano Hiroshi, has 25 years of experience in the waste industry, including wastewater treatment
of large chemical plants, the pure water and wastewater treatment of semiconductor plants, the electrical design and automation
process design and program design of large-scale power plant flue gas desulfurization treatment projects.
Acquisition and Strategic Alliances
Our revenue model is based on acquisition
or strategic alliances with established operations in new markets and acquiring advanced technology. We hope to direct
acquisition efforts towards other Asian countries to develop advanced recycling technology and provide disposal services
and waste collection services.
Invest in Marketing
We will continue to invest in our sales
and marketing team to promote our services and products. We will invest resources toward our team to increase our sales.
Similarly, we will continue to evaluate opportunities to maximize the efficiency of our sales and marketing team.
Equipment
Our
property (as described in “Our Properties” below) and equipment consist of the workplace, plant buildings and
production equipment. Property and equipment are stated at cost less accumulated depreciation and impairment. Property and
equipment are depreciated at cost less impairment and residual value, if any, over the following estimated useful lives on a
straight-line basis:
Category
|
|
Estimated
useful life (years)
|
Workplace and plant buildings
|
|
20
|
Production equipment
|
|
3-10
|
Intellectual Property
We rely on our patents to protect our domestic
business interests and ensure our competitive position in our industry.
Patents
The patents we hold are as follows:
No.
|
|
Copyright Name
|
|
Start Date
|
|
Expiry Date
|
|
Owner
|
1
|
|
Jetting gun device for SNCR deNOx systems
|
|
December 22, 2020
|
|
May 9, 2030
|
|
Hengshui Jingzhen
|
Trademark
The trademark we hold are as follows.
No.
|
|
Trademark
|
|
Owner
|
1
|
|
|
|
Hengshui Jingzhen Environmental
|
Employees
Department
|
|
Number of
Employees
|
|
|
% of Total
|
|
Business Development Department
|
|
|
3
|
|
|
|
2.89
|
%
|
Human Resource and Administration Department
|
|
|
17
|
|
|
|
16.35
|
%
|
Financial Department
|
|
|
5
|
|
|
|
4.81
|
%
|
Sales Department
|
|
|
6
|
|
|
|
5.77
|
%
|
Production Department
|
|
|
3
|
|
|
|
2.89
|
%
|
Environmental Protection Department
|
|
|
4
|
|
|
|
3.85
|
%
|
Quality Management Department
|
|
|
5
|
|
|
|
4.81
|
%
|
Inspection and Detection Department
|
|
|
11
|
|
|
|
10.58
|
%
|
Waste Management Department
|
|
|
50
|
|
|
|
48.08
|
%
|
Total
|
|
|
104
|
|
|
|
100
|
%
|
As
of January 2021, we employ a total of 104 full-time employees, among which 3 work in the Business Development Department, 17
work in the Human Resource and Administration Department, 5 work in Financial Department, 6 work in Sales Department, 3 work
in Production Department, 4 work in Environmental Protection Department, 5 work in Qualify Management Department, 11 work in
Inspection and Detection Department and 50 work in the Waste Management Department.
Our employees are not represented by a
labor organization or covered by a collective bargaining agreement. We believe that we maintain a good working relationship with
our employees and we have not experienced any significant labor disputes. We are required under PRC law to make contributions to
employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum
amount specified by the local government from time to time. As required by regulations in China, we participate in various employee
social security plans organized by local governments. We pay social insurance for all the 104 full time employees, covering
housing funds and all five types of social insurance, including pension, medical insurance, work-related injury insurance, unemployment
insurance, and maternity insurance. All monthly payments were made on time.
Regulations
Waste Management service in China is subject
to a number of laws and regulations. This section summarizes material PRC regulations relevant to our business and operations in
China and the key provisions of such regulations.
Regulations Relating to Foreign Investment
Investment activities in the PRC by foreign
investors are mainly governed by the Guidance Catalog of Industries for Foreign Investment, or the Catalog, which was promulgated
and is amended from time to time jointly by the Ministry of Commerce and the National Development and Reform Commission on June 28,
2017 and entered into force on July 28, 2017. The Catalog divides industries into four categories in terms of foreign investment,
which are “encouraged,” “restricted,” and “prohibited,” and all industries that are not listed
under one of these categories are deemed to be “permitted.” In June 2018, the Ministry of Commerce and the National
Development and Reform Commission promulgated the Special Management Measures (2018 Version) for the Access of Foreign Investment,
or the 2018 Negative List, which became effective and replaced the restrictive category attached to the Catalog in July 2018. In
June 2019, the Ministry of Commerce and the National Development and Reform Commission promulgated National Development and Reform
Commission promulgated the Special Management Measures (2019 Version) for the Access of Foreign Investment, or the 2019 Negative
List, which became effective and replaced the 2018 Negative List in July 2019. In June 2019, the Ministry of Commerce and the National
Development and Reform Commission also promulgated the Catalogue of Industries for Encouraging Foreign Investment (2019 Version),
or the Encouraging Catalogue, which became effective and replaced the encouraged category attached to the Catalog in July 2019.
In June 2020, the Ministry of Commerce and the National Development and Reform Commission promulgated National Development and
Reform Commission promulgated the Special Management Measures (2020 Version) for the Access of Foreign Investment, or the 2020
Negative List, which became effective and replaced the 2019 Negative List in July 2020. Establishment of wholly foreign-owned enterprises
is generally allowed in industries that are not in the 2020 Negative List. Some industries in the 2020 Negative List are limited
to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such
joint ventures. In addition, foreign investment in projects under the 2020 Negative List is subject to government approvals. Foreign
investors are not allowed to invest in certain industries listed in the 2020 Negative List. Industries not listed in the Negative
List are generally open to foreign investment unless specifically restricted by other PRC regulations.
On March 15, 2019, the National People’s
Congress promulgated the Foreign Investment Law, which came into effect on January 1, 2020, and on December 26, 2019, the State
Council promulgated the Implementation Rules of Foreign Investment Law, which came into effect on January 1, 2020 and the existing
foreign investment laws in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law and the Wholly
Foreign-owned Enterprise Law, or Existing FIE Laws, together with their implementation rules and ancillary regulations were replaced.
According to the Foreign Investment Law and its implementation rules, foreign investment shall enjoy pre-entry national treatment,
except for those foreign invested entities that operate in industries deemed to be either “restricted” or “prohibited”
in the “negative list.” Foreign invested entities operating in foreign “restricted” or “prohibited”
industries will require entry clearance and other approvals. However, it is unclear whether the “negative list” will
differ from the Negative List. In addition, the Foreign Investment Law and its implementation rules does not comment on the concept
of “de facto control” or contractual arrangements with VIEs, however, it has a catch-all provision under definition
of “foreign investment” to include investments made by foreign investors in China through means stipulated by laws
or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws,
administrative regulations or provisions to provide for contractual arrangements as a form of foreign investment. See “Risk
Factors—Risks Relating to our Commercial Relationship with VIEs— Our contractual arrangement with VIEs may be affected
by the Foreign Investment Law.”
On December 30, 2019, the Ministry of Commerce
issued the Measures on Reporting of Foreign Investment Information, which became effective on January 1, 2020. Pursuant to these
measures, the establishment and change of foreign-invested enterprises are subject to reporting procedures, instead of prior approval
requirements, provided that such establishment or change does not involve special entry administration measures. If the establishment
or change of foreign-invested enterprise matters involve the special entry administration measures, the approval of the Ministry
of Commerce or its local counterparts is still required.
Regulations
Relating to Waste Management Service
Regulations
on Pollution Control
Our manufacturing
facilities are subject to various pollution control regulations with respect to noise, water and air pollution and the disposal
of waste and hazardous materials. We are also subject to periodic inspections by local environmental protection authorities.
The major environmental
regulations applicable to us include:
|
●
|
the Environmental Protection Law of the PRC;
|
|
●
|
the Law of the PRC on the Prevention and Control of Water Pollution;
|
|
●
|
the Law of the PRC on the Prevention and Control of Atmospheric Pollution;
|
|
●
|
the Law of the PRC on the Prevention and Control of Environmental Pollution of Solid Waste; and
|
|
●
|
the Law of the PRC on the Prevention and Control of Environmental Noise Pollution.
|
Due to the fact
that our main business involves processing of solid waste, we especially focus on the Law of the PRC on the Prevention and
Control of Solid Waste Pollution, which was enacted in 1995 and latest amended in 2020. Under this law, the PRC government
authority encourages and supports scientific research, technological development and the dissemination of advanced prevention and
control technologies and scientific knowledge in the prevention and control of environmental pollution of solid wastes. The
law provides that State gradually realizes zero import of solid wastes, which shall be organized and implemented by the competent
department of ecology and environment under the State Council together with the competent departments of commerce, development
and reform, and customs under the State Council.
In November 2020,
the Ministry of Ecological Environment, the Ministry of Commerce, the National Development and Reform Commission and the General
Administration of Customs jointly promulgated the Announcement on Issues Relating to the Comprehensive Ban on the Import of Solid
Wastes with effect from January 1, 2021. Pursuant to the announcement, it is forbidden to import solid wastes in any methods or
to dump, pile or disposal of solid wastes from abroad within the territory of China, the Ministry of Ecology and Environment will
no longer accept and approve any application for the import license for solid wastes.
Regulations
on Recycle of Renewable Resources
Administrative
Measures for the Recycle of Renewable Resources was enacted in 2007, and amended in 2019, which regulates the operation of the
renewable resource recycling industry. According to this administrative measure, renewable resources recycling operators
should apply for a business license from the local office of the state administration for market regulation and the record items
of renewable resources recycling operators are integrated into the business license; if the operator is recycling scrap metal,
regardless of whether it is recycles for production or non-production purposes, a renewable resources recycling operator is also
required to register with the local public security authority. Renewable resources recycling operators recycling scrap
metal must register any changes in their registration with the local public security authority within 15 days after such changes
take place.
Regulations
Relating to Environment Protection
Pursuant to the Environmental Protection
Law of the PRC promulgated by the National People’s Congress on December 26, 1989, amended on April 24, 2014
and effective on January 1, 2015, any entity which discharges or will discharge pollutants during the course of its operations
or other activities must implement effective environmental protection safeguards and procedures to control and properly treat waste
gas, waste water, waste residue, dust, malodorous gases, radioactive substances, noise vibrations, electromagnetic radiation and
other hazards produced during such activities. The preparation of relevant development and utilization plans and the construction
of the projects having impact on environment shall be subject to environmental impact assessment in accordance with the law. Furthermore,
the enterprises and business operators on which the management system for the pollutants discharge permit and registration is implemented
shall discharge pollutants according to their respective pollutants discharge permits or registrations and shall not discharge
pollutants without obtaining a pollutants discharge permit or registration.
Environmental protection authorities impose
various administrative penalties on persons or enterprises in violation of the Environmental Protection Law. Such penalties
include warnings, fines, orders to rectify within the prescribed period, orders to cease construction, orders to restrict or suspend
production, orders to make recovery, orders to disclose relevant information or make an announcement, imposition of administrative
action against relevant responsible persons, and orders to shut down enterprises. Any person or entity that pollutes the environment
resulting in damage could also be held liable under the Tort Law of the PRC. In addition, environmental organizations
may also bring lawsuits against any entity that discharges pollutants detrimental to the public welfare. In addition, on May 28,
2020, National People’s Congress promulgated the Civil Code of PRC, which will take effective on January 1, 2021, to
replace the PRC Inheritance Law, the PRC Adoption Law, the PRC Contract Law, the General Principles of the Civil
Law of the PRC, the PRC Marriage Law, the PRC Guarantee Law, the PRC Property Law and the PRC Tort
Liability Law. Seven parts are introduced in the Civil Code of the PRC, including General Part, Right in Rem, Contracts, Personality
Rights, Marriage and Family, Inheritance, Tort Liability.
Pursuant to the Environmental Protection
Law of the PRC, the Environmental Impact Assessment Law of the PRC, promulgated by the National People’s
Congress on October 28, 2002 and amended on July 2, 2016 and December 29, 2018 respectively, the Administrative Regulations on
the Environmental Protection of Construction Project promulgated by the State Council on November 29, 1998 and amended on July
16, 2017, and other applicable environmental laws and regulations, an enterprise with a project construction plan shall submit
an environmental impact assessment report, stating the environmental impacts the project is likely to have, to the administrative
authority of environmental protection for approval. Enterprises shall engage qualified institutions to issue the environmental
impact assessment reports.
According to the Law of the PRC on
the Prevention and Control of Water Pollution promulgated by the National People’s Congress on May 11, 1984 and last amended
on June 27, 2017, and effective on January 1, 2018, the Law of the PRC on the Prevention and Control of Atmospheric Pollution
promulgated by the National People’s Congress on September 5, 1987 and last amended on October 26, 2018, the Law of the PRC on
the Prevention and Control of Environmental Noise Pollution promulgated by the National People’s Congress on October 29,
1996 and amended on December 29, 2018, and the Law of the PRC on the Prevention and Control of Environmental Pollution
of Solid Waste, all the enterprises that may cause environmental pollution in the course of their business operation shall implement
preventive and curative environmental protection measures in their plants and establish a reliable environmental protection system.
Regulations on Work Safety
Under relevant construction safety laws
and regulations, including the Work Safety Law of the PRC which was promulgated by the National People’s Congress
on June 29, 2002, amended on August 27, 2009, August 31, 2014, and effective as of December 1, 2014, production
and operating business entities must establish objectives and measures for work safety and improve the working environment and
conditions for workers in a planned and systematic way. A work safety protection scheme must also be set up to implement the work
safety job responsibility system. In addition, production and operating business entities must arrange work safety training and
provide their employees with protective equipment that meets the national standards or industrial standards.
The Law of the PRC on the Prevention
and Control of Occupational Diseases, or the Occupational Diseases Prevention Law, promulgated by the National People’s Congress
on October 27, 2001, became effective on May 1, 2002, and latest amended on December 29, 2018 is applicable to activities for the
prevention and control of diseases contracted by the workers due to their exposure in the course of work to dust, radioactive substances
and other toxic and harmful substances. Pursuant to the Occupational Diseases Prevention Law, the employer shall strictly
abide by the national occupational health standards and implement the measures for occupational disease prevention and control
in accordance with laws and regulations. Violation of the Occupational Diseases Prevention Law may result in the imposition of
fines and penalties, the suspension of operation, an order to cease operation, and/or criminal liability in severe cases.
Regulations
Relating to Land Use Right and Construction
Pursuant to the PRC Land Administration
Law promulgated in June 1986 with the latest amendment in August 2019 (effective as of January 2020), the PRC Property
Law promulgated in March 2007 (effective as of October 2007) and the Part of Right in Rem of the Civil Code of the PRC, any entity
that needs land for construction must obtain land use right and must register with local counterparts of Ministry of Natural Resources.
Land use right is established at the time of registration.
According to the Measures for the
Planning Administration of Grant and Transfer of Right to Use Urban State-owned Land promulgated by the Ministry of Construction
in December 1992 with the latest amendment in 2011, and the PRC Law on Urban and Rural Planning promulgated by the National
People’s Congress in October 2007 and became effective in January 2008 with the latest amendment in April 2019, the Measures
for Administration of Granting Permission for Commencement of Construction Works promulgated by the Ministry of Housing and
Urban-Rural Development in June 2014 with the latest amendment in September 2018, and the Administrative Measures on the Filings
of Inspection Upon Completion of Construction of Buildings and Municipal Infrastructure promulgated by the Ministry
of Housing and Urban-Rural Development in October 2009, after obtaining land use right, the owner of land use right must obtain
construction land planning permit, construction works planning permit from the relevant municipal planning authority, and a construction
permit from relevant construction authority in order to commence construction. After a building is completed, an examination of
completion by the relevant governmental authorities and experts must be organized.
Regulations Relating to Intellectual
Property
Regulations on Trademarks
The Standing Committee of the National
People’s Congress and the State Council have promulgated comprehensive laws and regulations to protect trademarks. The Trademark
Law of the PRC (2019 revision) promulgated on August 23, 1982 and subsequently amended on February 22, 1993, October 27,
2001, August 30, 2013 and April 23, 2019, respectively. The last amendment was implemented on November 1, 2019. The Implementation
Regulation of the Trademark Law (2014 revision) issued by the State Council on August 3, 2002 and amended on April 29,
2014 are the main regulations protecting registered trademarks. The Trademark Office of National Intellectual Property Administration
administrates the registration of trademarks on a “first-to-file” basis, and grants a term of ten years to registered
trademarks. According to the Trademark Law and the implementing regulations, a trademark which has been approved and registered
by the trademark office is a registered trademark, including a trademark of goods, services, collective trademark and certification
trademark. The trademark registrant shall enjoy the exclusive right to use the trademark and shall be protected by law. The trademark
law also specifies the scope of registered trademarks, procedures for registration of trademarks and the rights and obligations
of trademark owners.
Regulations on Patents
Pursuant to the Patent Law of the PRC,
or the Patent Law, promulgated by the National People’s Congress on March 12, 1984, as amended on December 27, 2008, and
effective from October 1, 2009, which was latest amended on October 17, 2020 and to be effective from June 1, 2021 and the Implementation
Rules of the Patent Law of the PRC, promulgated by the State Council on June 15, 2001 and latest amended on January 9, 2010,
there are three types of patent in the PRC: invention patent, utility model patent and design patent. The protection period
is 20 years for invention patent, 10 years for utility model patent and 15 years for design patent, commencing from their respective
application dates. Any individual or entity that utilizes a patent or conducts any other activity in infringement of a patent without
prior authorization of the patentee shall pay compensation to the patentee and is subject to a fine imposed by relevant administrative
authorities and, if constituting a crime, shall be held criminally liable in accordance with the law. In the event that a patent
is owned by two or more co-owners without an agreement regarding the distribution of revenue generated from the exploitation of
any co-owner of the patent, such revenue shall be distributed among all the co-owners.
Existing patents can become narrowed, invalid
or unenforceable due to a variety of grounds, including lack of novelty, creativity, and deficiencies in patent application. In
China, a patent must have novelty, creativity and practical applicability. Under the Patent Law, novelty means that before a patent
application is filed, no identical invention or utility model has been publicly disclosed in any publication in China or overseas
or has been publicly used or made known to the public by any other means, whether in or outside of China, nor has any other person
filed with the patent authority an application that describes an identical invention or utility model and is recorded in patent
application documents or patent documents published after the filing date. Creativity means that, compared with existing technology,
an invention has prominent substantial features and represents notable progress, and a utility model has substantial features and
represents any progress. Practical applicability means an invention or utility model can be manufactured or used and may produce
positive results. Patents in China are filed with the National Intellectual Property Administration, or CNIPA. Normally, the CNIPA
publishes an application for an invention patent within 18 months after the filing date, which may be shortened at the request
of applicant. The applicant must apply to the CNIPA for a substantive examination within 3 years from the date of application.
Regulations on Copyright
The PRC Copyright Law, adopted in 1990
and revised in 2001, 2010, 2020 (to be effective from June 1, 2021) respectively, with its implementation rules adopted on August 2,
2002 and revised in 2011 and 2013, respectively, and the Regulations for the Protection of Computer Software as promulgated on
December 20, 2001 and amended in 2011 and 2013 provide protection for copyright of computer software in the PRC. Under these
rules and regulations, software owners, licensees and transferees may register their rights in software with the Copyright Protection
Center of China to obtain software copyright registration certificates.
The amended Copyright law covers
Internet activities, products disseminated over the Internet and software products, among the subjects entitled to copyright protection.
Registration of copyright is voluntary, and it is administrated by the Copyright Protection Center of China.
To further clarify some key Internet copyright issues, on December 17, 2012, the PRC Supreme People’s
Court promulgated the Regulation on Several Issues Concerning Applicable Laws on Trial of Civil Disputes over the Infringement
of Information Network Transmission Rights, or the 2013 Regulation. The 2013 Regulation took effect on January 1, 2013 and replaced
the Interpretations on Some Issues Concerning Applicable Laws for Trial of Disputes over Internet Copyright that
was initially adopted in 2000 and subsequently amended in 2004 and 2006. Under the 2013 Regulation, where an Internet information
service provider works in cooperation with others to jointly provide works, performances, audio and video products of which the
right holders have information network transmission right, such behavior will constitute joint infringement of third parties’
information network transmission right, and the PRC court shall order such Internet information service provider to assume
joint liability for such infringement.
Regulations on Domain Name
The Ministry of Industry and Information
Technology promulgated the Administrative Measures on Internet Domain Name on August 24, 2017 to protect domain names. According
to these measures, domain name applicants are required to duly register their domain names with domain name registration service
institutions. The applicants will become the holder of such domain names upon the completion of the registration procedure.
Regulations Relating to Employment
The PRC Labor Law and the Labor Contract
Law require that employers must execute written employment contracts with full-time employees. All employers must compensate their
employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract
Law may result in the imposition of fines and other administrative sanctions, and serious violations may constitute criminal offences.
On December 28, 2012, the PRC Labor
Contract Law was amended with effect on July 1, 2013 to impose more stringent requirements on labor dispatch. Under such law,
dispatched workers are entitled to pay equal to that of full-time employees for equal work, but the number of dispatched workers
that an employer hires may not exceed a certain percentage of its total number of employees as determined by the Ministry of Human
Resources and Social Security. Additionally, dispatched workers are only permitted to engage in temporary, auxiliary or substitute
work. According to the Interim Provisions on Labor Dispatch promulgated by the Ministry of Human Resources and Social Security
on January 24, 2014, which became effective on March 1, 2014, the number of dispatched workers hired by an employer shall
not exceed 10% of the total number of its employees (including both directly hired employees and dispatched workers). The Interim
Provisions on Labor Dispatch require employers not in compliance with the PRC Labor Contract Law in this regard to reduce the number
of its dispatched workers to below 10% of the total number of its employees prior to March 1, 2016.
Enterprises in China are required by PRC
laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan,
a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan,
and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including
bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate
their businesses or where they are located. The enterprise may be ordered to pay the full amount within a deadline if it fails
to make adequate contributions to various employee benefit plans and may be subject to fines and other administrative sanctions.
Regulations Relating to Foreign Exchange
Regulations on Foreign Currency Exchange
Under the PRC Foreign Currency Administration
Rules promulgated on January 29, 1996 and last amended on August 5, 2008 and various regulations issued by the State
Administration of Foreign Exchange and other relevant PRC government authorities, payment of current account items in foreign currencies,
such as trade and service payments, payment of interest and dividends can be made without prior approval from the State Administration
of Foreign Exchange by following the appropriate procedural requirements. By contrast, the conversion of RMB into foreign currencies
and remittance of the converted foreign currency outside the PRC for the purpose of capital account items, such as direct equity
investments, loans and repatriation of investment, requires prior approval from the State Administration of Foreign Exchange or
its local office.
On February 13, 2015, the State Administration
of Foreign Exchange promulgated the Circular on Simplifying and Improving the Foreign Currency Management Policy on Direct Investment,
effective from June 1, 2015, which cancels the requirement for obtaining approvals of foreign exchange registration of foreign
direct investment and overseas direct investment from the State Administration of Foreign Exchange. The application for the registration
of foreign exchange for the purpose of foreign direct investment and overseas direct investment may be filed with qualified banks,
which, under the supervision of the State Administration of Foreign Exchange, may review the application and process the registration.
The Circular of the State Administration
of Foreign Exchange on Reforming the Management Approach regarding the Settlement of Foreign Capital of Foreign-invested Enterprise
was promulgated on March 30, 2015 and became effective on June 1, 2015. According to this circular, a foreign-invested
enterprise may, according to its actual business needs, settle with a bank the portion of the foreign exchange capital in its capital
account for which the relevant foreign exchange bureau has confirmed monetary contribution rights and interests (or for which
the bank has registered the account-crediting of monetary contribution). For the time being, foreign-invested enterprises are allowed
to settle 100% of their foreign exchange capitals on a discretionary basis; a foreign-invested enterprise shall truthfully use
its capital for its own operational purposes within the scope of business; where an ordinary foreign-invested enterprise makes
domestic equity investment with the amount of foreign exchanges settled, the invested enterprise shall first go through domestic
re-investment registration and open a corresponding Account for Foreign Exchange Settlement Pending Payment with the foreign exchange
bureau (bank) at the place of registration. The Circular of the State Administration of Foreign Exchange on Reforming and Regulating
Policies on the Control over Foreign Exchange Settlement of Capital Accounts was promulgated and became effective on June 9,
2016. According to this Circular, enterprises registered in PRC may also convert their foreign debts from foreign currency into
Renminbi on self-discretionary basis. This Circular provides an integrated standard for conversion of foreign exchange under capital
account items (including but not limited to foreign currency capital and foreign debts) on self—discretionary basis, which
applies to all enterprises registered in the PRC. This Circular reiterates the principle that Renminbi converted from foreign currency-denominated
capital of a company may not be directly or indirectly used for purposes beyond its business scope and may not be used for investments
in securities or other investment with the exception of bank financial products that can guarantee the principal within the PRC
unless otherwise specifically provided. Besides, the converted Renminbi shall not be used to make loans for related enterprises
unless it is within the business scope or to build or to purchase any real estate that is not for the enterprise own use with the
exception for the real estate enterprise.
On January 26, 2017, the State Administration
of Foreign Exchange promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness
and Compliance Verification, which stipulates several capital control measures with respect to the outbound remittance of profits
from domestic entities to offshore entities, including (i) banks must check whether the transaction is genuine by reviewing
board resolutions regarding profit distribution, original copies of tax filing records and audited financial statements, and (ii) domestic
entities must retain income to account for previous years’ losses before remitting any profits. Moreover, pursuant to this
Circular, domestic entities must explain in detail the sources of capital and how the capital will be used, and provide board resolutions,
contracts and other proof as a part of the registration procedure for outbound investment.
In
addition, the Outbound Investment Sensitive Industry Catalogue (2018) lists certain sensitive industries that are subject to National
Development and Reform Commission pre-approval requirements prior to remitting investment
funds offshore, which subjects us to increased approval requirements and restrictions with respect to our overseas investment activity.
Since a significant amount of our PRC revenue is denominated in Renminbi,
any existing and future restrictions on currency exchange or outbound capital flows may limit our ability to utilize revenue generated
in Renminbi to fund our business activities outside of the PRC, make investments,
service any debt we may incur outside of China or pay dividends in foreign currencies to our shareholders, including holders of
our ordinary shares.
Regulations on Foreign Exchange Registration
of Overseas Investment by PRC Residents
The State Administration of Foreign Exchange
issued the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment
through Special Purpose Vehicles, or Circular 37, which became effective in July 2014, to replace the Circular of the
State Administration of Foreign Exchange on Issues Concerning the Regulation of Foreign Exchange in Equity Finance and Roundtrip
Investments by Domestic Residents through Offshore Special Purpose Vehicles, to regulate foreign exchange matters in relation
to the use of special purpose vehicles by PRC residents or entities to seek offshore investment and financing or conduct round
trip investment in China. Circular 37 defines a “special purpose vehicle” as an offshore entity established or
controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore
investment, using legitimate onshore or offshore assets or interests, while “round trip investment” is defined as direct
investment in China by PRC residents or entities through special purpose vehicles, namely, establishing foreign-invested enterprises
to obtain the ownership, control rights and management rights. Circular 37 stipulates that, prior to making contributions
into a special purpose vehicle, PRC residents or entities be required to complete foreign exchange registration with the State
Administration of Foreign Exchange or its local branch. In addition, the State Administration of Foreign Exchange promulgated the
Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015,
which amended Circular 37 and became effective on June 1, 2015, requiring PRC residents or entities to register
with qualified banks rather than the State Administration of Foreign Exchange in connection with their establishment or control
of an offshore entity established for the purpose of overseas investment or financing.
PRC residents or entities who had contributed
legitimate onshore or offshore interests or assets to special purpose vehicles but had not obtained registration as required before
the implementation of the Circular 37 must register their ownership interests or control in the special purpose vehicles with
qualified banks. An amendment to the registration is required if there is a material change with respect to the special purpose
vehicle registered, such as any change of basic information (including change of the PRC residents, name and operation term), increases
or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration
procedures set forth in Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose
controllers of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being
imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other
distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate,
and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC
foreign exchange administration regulations. See “Risk Factors—Risks Related to Doing Business in China—PRC regulations
relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiary
to liability or penalties, limit our ability to inject capital into our PRC subsidiary or limit our PRC subsidiary’s ability
to increase their registered capital or distribute profits.”
Regulations on Dividend Distribution
Distribution of dividends of foreign investment
enterprises are mainly governed by the PRC Company Law, as latest amended in 2018, which applies both PRC domestic companies and
foreign-invested companies, the Foreign Investment Law and its implementing rules. Under these regulations, foreign investment
enterprises in the PRC may distribute dividends only out of their accumulative profits, if any, determined in accordance with PRC
accounting standards and regulations. In addition, no less than 10% of the accumulated profits of the foreign investment enterprises
in the PRC are required to be allocated to fund certain reserve funds each year unless these reserves have reached 50% of the registered
capital of the enterprises. A PRC company is not permitted to distribute any profits until any losses from previous fiscal years
have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current
fiscal year.
Regulations Relating to Overseas
Listings
On August 8, 2006, six PRC regulatory
agencies, including the Ministry of Commerce, the State-Owned Assets Supervision and Administration Commission, the State Administration
of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and the State Administration
of Foreign Exchange, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which
became effective on September 8, 2006 and was amended on June 22, 2009. These regulations, among other things, require
that (i) PRC entities or individuals obtain approval from the Ministry of Commerce before they establish or control a special
purpose vehicle overseas, provided that they intend to use the special purpose vehicle to acquire their equity interests in a PRC
company at the consideration of newly issued share of the special purpose vehicle, or Share Swap, and list their equity interests
in the PRC company overseas by listing the special purpose vehicle in an overseas market; (ii) the special purpose vehicle
obtains approval from the Ministry of Commerce before it acquires the equity interests held by the PRC entities or PRC individual
in the PRC company by Share Swap; and (iii) the special purpose vehicle obtains China Securities Regulatory Commission approval
before it lists overseas. See “Risk Factors—Risks Related to Doing Business in China—The approval of the China
Securities Regulatory Commission may be required in connection with this offering under a PRC regulation. The regulation also establishes
more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through
acquisitions.”
Regulations Relating to Taxation
Dividend Withholding Tax
In March 2007, the National People’s
Congress enacted the Enterprise Income Tax Law which became effective on January 1, 2008, which was amended on February 24,
2017 and December 29, 2018. According to Enterprise Income Tax Law, dividends generated after January 1, 2008 and payable
by a foreign-invested enterprise in China to its foreign enterprise investors are subject to a 10% withholding tax, unless any
such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential withholding
arrangement. Pursuant to an Arrangement Between the Mainland of China and the Hong Kong for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Incomes (“Double Tax Avoidance Arrangement”),
with its fifth protocol coming into effect on December 6, 2019, and other applicable PRC laws, if a Hong Kong resident
enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under
such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident
enterprise receives from a PRC resident enterprise may be reduced to 5%. However, based on the Circular on
Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties (the “State Administration of
Taxation Circular 81”) issued on February 20, 2009 by State Administration of Taxation, if the relevant PRC tax
authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement
that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment.
Furthermore, pursuant to the Announcement
on Issues concerning “Beneficial Owners” in Tax Treaties issued on February 3, 2018 by the State Administration
of Taxation, when determining the status of “beneficial owners,” a comprehensive analysis may be conducted through
materials such as articles of association, financial statements, records of capital flows, minutes of board of directors, resolutions
of board of directors, allocation of manpower and material resources, the relevant expenses, functions and risk assumption, loan
contracts, royalty contracts or transfer contracts, patent registration certificates and copyright certificates, etc. However,
even if an applicant has the status as a “beneficiary owner,” if the competent tax authority finds necessity to apply
the principal purpose test clause in the tax treaties or the general anti-tax avoidance rules stipulated in domestic tax laws,
the general anti-tax avoidance provisions shall apply.
Enterprise Income Tax
In December 2007, the State Council
promulgated the Implementing Rules of the Enterprise Income Tax Law, which became effective on January 1, 2008 and amended
on April 23, 2019. The Enterprise Income Tax Law and its relevant implementing rules (i) impose a uniform 25% enterprise income
tax rate, which is applicable to both foreign-invested enterprises and domestic enterprises (ii) permits companies to continue
to enjoy their existing tax incentives, subject to certain transitional phase-out rules and (iii) introduces new tax incentives,
subject to various qualification criteria.
The Enterprise Income Tax Law also provides
that enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located
within China may be considered PRC resident enterprises and therefore be subject to PRC enterprise income tax at the rate of 25%
on their worldwide income. The implementing rules further define the term “de facto management body” as the management
body that exercises substantial and overall management and control over the production and operations, personnel, accounts and
properties of an enterprise. If an enterprise organized under the laws of jurisdiction outside China is considered a PRC resident
enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, it would be
subject to the PRC enterprise income tax at the rate of 25% on its worldwide income. Second, a 10% withholding tax would be imposed
on dividends it pays to its non-PRC enterprise shareholders and with respect to gains derived by its non-PRC enterprise shareholders
from transfer of its shares.
On October 17, 2017, the State Administration
of Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident Enterprise Income Tax at Source, or Bulletin 37,
as amended on June 15, 2018, which replaced the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers
by Non-PRC Resident Enterprises issued by the State Administration of Taxation on December 10, 2009, and partially replaced
and supplemented rules under the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident
Enterprises, or Bulletin 7, issued by the State Administration of Taxation on February 3, 2015. Under Bulletin 7,
an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises
may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable
commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived
from such indirect transfer may be subject to PRC enterprise income tax. In respect of an indirect offshore transfer of assets
of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment and therefore included
in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the
underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident enterprise, which
is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax at 10% would apply,
subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated
to make the transfer payments has the withholding obligation. Pursuant to Bulletin 37, the withholding party shall declare
and pay the withheld tax to the competent tax authority in the place where such withholding party is located within seven days
from the date of occurrence of the withholding obligation. Both Bulletin 37 and Bulletin 7 do not apply to transactions
of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public
stock exchange.
Value-Added Tax
In November 2011, the Ministry of
Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business
Tax. In March 2016, the Ministry of Finance and the State Administration of Taxation further promulgated the Notice on Fully
Promoting the Pilot Plan for Replacing Business Tax by Value-Added Tax. Pursuant to this Pilot Plan and the relevant notice, value
added tax at a rate of 6% is generally imposed, on a nationwide basis, on the revenue generated from the provision of service in
lieu of business tax in the modern service industries. Value added tax of a rate of 6% applies to revenue derived from the provision
of some modern services. Unlike business tax, a taxpayer is allowed to offset the qualified input value added tax paid on taxable
purchases against the output value added tax chargeable on the modern services provided.
Further, on March 20, 2019, the Ministry
of Finance, the State Administration of Taxation and the General Administration of Customs jointly issued the Announcement on Policies
for Deepening the VAT Reform, or Announcement 39, to further reduce value-added tax rates. According to the Announcement 39, (i)
for general VAT payers’ sales activities or imports that are subject to VAT at an existing applicable rate of 16% or 10%,
the applicable VAT rate is adjusted to 13% or 9% respectively; (ii) for the agricultural products purchased by taxpayers to which
an existing 10% deduction rate is applicable, the deduction rate is adjusted to 9%; (iii) for the agricultural products purchased
by taxpayers for production or commissioned processing, which are subject to VAT at 13%, the input VAT will be calculated at a
10% deduction rate; (iv) for the exportation of goods or labor services that are subject to VAT at 16%, with the applicable export
refund at the same rate, the export refund rate is adjusted to 13%; and (v) for the exportation of goods or cross-border taxable
activities that are subject to VAT at 10%, with the export refund at the same rate, the export refund rate is adjusted to 9%. The
Announcement 39 came into effect on April 1, 2019 and shall be prevail in case of any conflict with existing provisions.
RISK FACTORS
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks described below, together with all of the other information included
in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition
or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all
or part of your investment. You should read the section entitled “Special Notes Regarding Forward-Looking Statements”
above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements
in the context of this report.
Risks Relating
To Our Business
We may suffer
reduced profits or losses as a result of intense competition.
Our business is
highly competitive and requires substantial human and capital resources. Large international competitors and local niche companies
serve each of the markets in which we compete. Accordingly, we must make constant efforts to remain competitive and convince potential
clients of the quality and cost value of our service offerings. Competitors may also introduce new technology or services that
we would have to match in order to remain competitive, which could result in significant development costs.
Over the course
of performing certain contracts, we may also be requested by our public or private clients to modify the terms of these contracts,
whether called for under the contract or not. These modifications may alter the services provided under the contract, related investments
required or billing terms.
Finally, our contracts
may not be renewed at the end of their term, which in the case of important contracts may oblige us to undertake a costly reorganization
or restructuring of assets and operations covered by the contract when the contract does not provide for the transfer of the related
assets and employees to the succeeding operator and/or adequate indemnification to cover our costs of termination.
Our future
success depends on our ability to increase revenues from our waste management operations.
We believe that
our future success depends on our ability to significantly increase revenue from waste disposal. Our prospects must be considered
in light of the risks, expenses and difficulties frequently encountered by growing companies, including:
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Developing and enhancing processing methods;
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Entering new markets in a cost effective manner;
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Expanding on domestic marketing efforts to increase awareness of our services and capture market
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Responding to competitive pressures;
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Maintaining and developing relationships with customers and suppliers; and
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Attracting and retaining qualified management, consultants and employees.
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Changes
in Chinese environmental, safety and occupational health laws and regulations and enforcement policies could subject us to additional liability and adversely affect our
ability to continue certain operations.
Because Chinese
environmental regulations continue to develop and evolve rapidly, we cannot predict the extent to which our operations may be affected
by future enforcement policies as applied to existing laws, by changes to current environmental laws and regulations, or by the
enactment of new environmental laws and regulations. There are numerous Chinese provincial and local laws and regulations
relating to the protection of the environment and the ultimate impact of complying with such laws and regulations is not always
clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision.
Our business and operating results could be materially and adversely affected if we were required to increase expenditures to comply
with any new environmental regulations affecting our operations. We may, in the future, receive citations or notices from
governmental authorities that our operations are not in compliance with our permits or certain applicable regulations, including
various transportation, environmental or land use laws and regulations. Should we receive such citations or notices, we would
generally seek to work with the authorities to resolve the issues raised by such citations or notices. There can be no assurance,
however, that we will always be successful in this regard, and the failure to resolve a significant issue could result in adverse
consequences to us. As a result, we could incur material liabilities resulting from the costs of complying with environmental
laws, environmental permits or any claims concerning noncompliance, or liability from contamination.
We are also required to maintain safe production conditions
and to protect the occupational health of our employees. While we have conducted periodic inspections of our operating facilities
and carry out equipment maintenance on a regular basis to ensure that our operations are in compliance with applicable laws and
regulations, we may experience any material accidents or worker injuries in the course of our manufacturing process in the future.
In addition, our manufacturing process produces pollutants such as wastewater, noise, smoke and dust. The discharge of wastewater
and other pollutants from our manufacturing operations into the environment may give rise to liabilities that may require us to
incur costs to remedy such discharge. There might be situations that will give rise to material environmental liabilities.
We
cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions may be found to exist at our facilities or
at third-party sites for which we are liable. Enactment of stricter laws or regulations, stricter interpretations of
existing laws and regulations or the requirement to undertake the investigation or remediation of currently unknown
environmental contamination at our own or third-party sites may require us to make additional material expenditures, which
would materially increase our operating costs and other expenses and adversely affect our profitability.
If environmental
regulation enforcement is relaxed, the demand for our products may decrease.
The demand for
our products is substantially dependent upon the public’s concern with, and the continuation and proliferation of, the laws
and regulations governing the waste disposal industry. A decrease in the level of public concern, the repeal or modification
of these laws, or any signification relaxation of regulations relating to waste disposal and management would significantly reduce
the demand for our products and could have a material adverse effect on our operations and financial condition.
We do not
carry any business interruption or liability insurance. As a result, we may incur uninsured losses, increasing
the possibility that you would lose your entire investment in our company.
We could be exposed
to liabilities or other claims for which we would have no insurance protection. We do not currently maintain any business
interruption insurance or any other comprehensive insurance policy. As a result, we may incur uninsured liabilities and losses
as a result of the conduct of our business. Should uninsured losses occur, any purchasers of our common stock could lose
their entire investment.
Our business
is affected by competition and substantial technological change.
We currently face
competition from many other waste management companies that provide waste disposal services at prices that are substantially lower
than the prices we charge. Many of these companies have substantially greater financial and other resources than us and,
therefore, are able to spend more than us in areas such as technology development and marketing. Competitors may provide
services that render our services or proposed services uneconomical, which would have a material adverse effect on us.
Our business, results of operations
and financial condition may be adversely affected by public health epidemics, including the coronavirus or COVID-19.
Our business, results of operations and
financial condition may be adversely affected if a public health epidemic, including the coronavirus or COVID-19 interferes with
the ability of us, our employees, workers, contractors, suppliers, customers and other business partners to perform our and their
respective responsibilities and obligations relative to the conduct of our business. We maintain offices in Hengshui with employees
and workers upon whom we rely to, among other things, identify sources of supply in China, conduct factory inspections, place orders
for merchandise, and perform factory monitoring with respect to production, quality control and other requirements. A public health
epidemic, including the coronavirus, poses the risk that we or our employees, workers, contractors, suppliers, customers and other
business partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns
that may be requested or mandated by governmental authorities. We face similar risks if a public health epidemic, including the
coronavirus, affects other geographic areas where our employees, workers, contractors, suppliers, customers and other business
partners are located.
If we are not able to develop new
service offerings and protect intellectual property, or if a competitor develops or obtains exclusive rights to a breakthrough
technology, our financial results may suffer.
Our existing and proposed service offerings
to customers may require that we invest in, develop or license, and protect new technologies. Research and development of new technologies
and investment in emerging technologies often requires significant costs that may divert capital investment away from our traditional
business operations. We may experience difficulties or delays in the research, development, production and/or marketing of new
services or emerging technologies in which we have invested, which may negatively impact our operating results and
prevent us from recouping or realizing a return on the investments required to bring new services to market. Further,
protecting our intellectual property rights and combating unlicensed copying and use of intellectual property is difficult, and
any inability to obtain or protect new technologies could impact our services to customers and development of new revenue sources.
Our Company and others are increasingly focusing on new technologies that provide alternatives to traditional disposal. If a competitor develops or obtains exclusive rights to a “breakthrough technology” that
provides a revolutionary change in traditional waste management, or if we have inferior intellectual property to our competitors,
our financial results may suffer.
Our operations are subject to environmental,
health and safety laws and regulations, as well as contractual obligations that may result in significant liabilities.
There is risk of incurring significant
environmental liabilities in the use, treatment, storage, transfer and disposal of waste materials. We
have made and will continue to make significant capital and other expenditures to comply with our environmental, health and safety
obligations. We are continuously required to incur expenditures to ensure that the installations that we operate comply with applicable
legal, regulatory and administrative requirements, including general precautionary or preventative measures, or to advise our clients
so that they undertake the necessary actions for the compliance of their installations.
Each
of our operations, moreover, may become subject to stricter general or specific laws and regulations, and correspondingly greater
compliance expenditures, in the future. If we are unable to recover these expenditures through higher tariffs, this could adversely
affect our operations and profitability. Moreover, the scope of application of environmental, health, safety and other laws and
regulations is becoming increasingly broad. These laws and regulations govern, among other things, any discharge in a natural environment,
the collection, transport, treatment and disposal of all types of waste, and the rehabilitation of old sites at the end of operations,
as well as ongoing operations at new or old facilities.
In the ordinary course of our business,
we have in the past, we are currently, and we may in the future, become involved in legal and administrative proceedings relating
to land use and environmental laws and regulations. We generally seek to work with the authorities or other persons involved in
these proceedings to resolve any issues raised. If we are not successful, the adverse outcome of one or more of these proceedings
could result in, among other things, material increases in our costs or liabilities as well as material charges for asset impairments.
General economic conditions can directly
and adversely affect our revenues and our income from operations margins.
Our business is directly affected by changes
in national and general economic factors that are outside of our control, including consumer confidence, interest rates and access
to capital markets. A weak economy generally results in decreased consumer spending and decreases in volumes of waste generated,
which negatively impacts the ability to grow through new business or service upgrades, and may result in customer turnover and
reduction in customers’ waste service needs. Consumer uncertainty and the loss of consumer confidence may also reduce the
number and variety of services requested by customers. Additionally, a weak market for consumer goods can significantly decrease
demand by paper mills for recycled corrugated cardboard used in packaging; such decrease in demand can negatively impact commodity
prices and our operating income and cash flows.
Furthermore, concerns over inflation, energy costs, geopolitical
issues, the availability and cost of credit, unemployment, consumer confidence, asset values, capital market volatility and liquidity
issues may create difficult operating conditions in the future. In addition, the PRC Government has from time to time adjusted
our monetary, fiscal and other policies and measures to manage the rate of growth of the economy or control the overheating of
the general economy or certain industries or markets. As a result, the general economy in the PRC, the world or in any particular
industry in which we operate or which we serve may grow at a lower-than-expected rate or even experience a downturn. This in turn
could materially and adversely affect our businesses, financial condition and results of operations.
Risk Related to Our VIE Structure
We operate through Hengshui Jingzhen,
which is considered to be a VIE of our company. Any gains or losses of Hengshui Jingzhen directly impact our own financial condition.
We operate through Hengshui Jingzhen, which
is considered to be a VIE of our company, through a series of contractual agreements, as a result of which, under United States
generally accepted accounting principles, the assets and liabilities of Hengshui Jingzhen are treated as our assets and liabilities
and the results of operations of Hengshui Jingzhen are treated in all respects as if they were the results of our operations. There
are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to
the laws, rules and regulations governing the validity and enforcement of the contractual arrangements between Beijing ALW and
Hengshui Jingzhen.
We rely in great part on the success of
Hengshui Jingzhen. Our consolidated financial statements include the financial statements of our company, our subsidiaries and
our consolidated VIE for which we are the primary beneficiary. Any losses or detriments that affect Hengshui Jingzhen, also directly
affect our own financial condition.
Our
contractual arrangements may not be as effective in providing control over Hengshui Jingzhen as direct ownership.
We
rely on contractual arrangements with Hengshui Jingzhen to operate part of our businesses in China where foreign investment
in certain businesses is restricted or prohibited. For a description of these contractual arrangements, see Item 1.01 Entry
Into A Material Definitive Agreement. These contractual arrangements may not be as effective as direct ownership in providing
us with control over Hengshui Jingzhen.
If
we had direct ownership of Hengshui Jingzhen, we could exercise our rights as an equity holder directly to effect changes in
the boards of directors of those entities, which could effect changes at the management and operational level. Under our
contractual arrangements, we may not be able to directly change the members of the boards of directors of these entities and
would have to rely on Hengshui Jingzhen to perform its obligations to exercise our control over it. For example, Hengshui
Jingzhen and their respective equity holders could breach their contractual arrangements with
us by, among other things, failing to conduct their operations, including maintaining our websites and using our domain names
and trademarks which Hengshui Jingzhen has exclusive rights to use, in an acceptable manner or taking
other actions that are detrimental to our interests. However, if any equity holder is uncooperative and any dispute relating
to these contracts or the replacement of the equity holders remains unresolved, we will have to enforce our rights under the
contractual arrangements through the operations of PRC law and arbitral or judicial agencies, which may be costly and
time-consuming and will be subject to uncertainties in the PRC legal system. Consequently, the contractual arrangements may
not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership.
If the PRC government finds that
the contractual arrangements in relation to Hengshui Jingzhen do not comply with PRC governmental restrictions on
foreign investment, or if these regulations or the interpretation of existing regulations changes in the future, we could be subject
to penalties or be forced to relinquish our interests in those operations.
Foreign
ownership of certain types of businesses is subject to restrictions under applicable PRC laws, rules and regulations. The
contractual arrangements give us effective control over Hengshui Jingzhen and enable us to obtain substantially all the
economic benefits arising from Hengshui Jingzhen as well as consolidate the financial results of Hengshui Jingzhen in our
results of operations. Although the structure we have adopted is consistent with longstanding industry practice, and is
commonly adopted by comparable companies in China, the PRC government may not agree that these arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be
adopted in the future.
It is uncertain whether any new PRC laws,
rules or regulations relating to VIE structures will be adopted or if adopted, what they would provide. If
we or Hengshui Jingzhen are found to be in violation of any existing or future PRC laws, rules or regulations,
or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad
discretion to take action in dealing with such violations or failures, including revoking the business and operating licenses of Hengshui Jingzhen, requiring us to discontinue or restrict our operations, restricting our
right to collect revenue, blocking one or more of our websites, requiring us to restructure our operations or taking other regulatory
or enforcement actions against us. The imposition of any of these measures could result in a material adverse effect on our ability
to conduct all or any portion of our business operations. In addition, it is unclear what impact the PRC government actions would
have on us and on our ability to consolidate the financial results of Hengshui Jingzhen in our consolidated
financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in
violation of PRC laws, rules and regulations. If the imposition of any of these government actions causes us to lose our right
to direct the activities of Hengshui Jingzhen or otherwise separate from any of these entities and
if we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to
consolidate the financial results of Hengshui Jingzhen in our consolidated financial statements. Any of these events
would have a material adverse effect on our business, financial condition and results of operations.
Any
failure by Hengshui Jingzhen or its equity holders to perform its obligations under the contractual arrangements would have a
material adverse effect on our business, financial condition and results of operations.
If
Hengshui Jingzhen or their equity holders fail to perform their respective obligations under the contractual arrangements, we
may have to incur substantial costs and expend additional resources to enforce such arrangements. Although we have entered
into option agreements in relation to each variable interest entity, which provide that we may exercise an option to acquire,
or nominate a person to acquire, ownership of the equity in that entity or, in some cases, its assets, to the extent
permitted by applicable PRC laws, rules and regulations, the exercise of these options is subject to the review and approval
of the relevant PRC governmental authorities. We have also entered into equity pledge agreements with respect to each
variable interest entity to secure certain obligations of such variable interest entity or its equity holders to us under the
contractual arrangements. However, the enforcement of such agreements through arbitral or judicial agencies may be costly and
time-consuming and will be subject to uncertainties in the PRC legal system. Moreover, our remedies under the equity pledge
agreements are primarily intended to help us collect debts owed to us by Hengshui Jingzhen or its equity holders under the
contractual arrangements and may not help us in acquiring the assets or equity of Hengshui Jingzhen.
In addition, although the terms of the
contractual arrangements provide that they will be binding on the successors of Hengshui Jingzhen’s equity holders, as
those successors are not a party to the agreements, it is uncertain whether the successors in case of the death, bankruptcy or
divorce of an equity holder will be subject to or will be willing to honor the obligations of such variable
interest entity equity holder under the contractual arrangements. If Hengshui Jingzhen or its equity holder
(or its successor), as applicable, fails to transfer the shares of Hengshui Jingzhen according to the respective call
option agreement or equity pledge agreement, we would need to enforce our rights under the call option agreement or equity pledge
agreement, which may be costly and time-consuming and may not be successful.
The contractual arrangements are governed
by PRC law and provide for the resolution of disputes through arbitration or court proceedings in China. Accordingly, these contracts
would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The
legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. Moreover, there are very
few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should
be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel or court would
view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability to enforce the contractual
arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court judgments within a prescribed
time limit, the prevailing parties may only enforce the arbitration awards or court judgments in PRC courts, which would require
additional expense and delay. If we cannot enforce the contractual arrangements, we may not be able to exert effective control
over Hengshui Jingzhen, and our ability to conduct our business, as well as our financial condition and results of
operations, may be materially and adversely affected.
The
contractual arrangements with Hengshui Jingzhen may be subject to scrutiny by the PRC tax authorities. Any adjustment of
related party transaction pricing could lead to additional taxes, and therefore substantially reduce our consolidated net
income and the value of your investment.
The tax regime in China is rapidly evolving
and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted in significantly different ways.
The PRC tax authorities may assert that we or our subsidiaries or Hengshui Jingzhen or its equity holders owe and/or
are required to pay additional taxes on previous or future revenue or income. Under applicable PRC laws, rules and regulations,
arrangements and transactions among related parties, such as the contractual arrangements with Hengshui Jingzhen,
may be subject to audit or challenge by the PRC tax authorities. If the PRC tax authorities determine that any contractual arrangements
were not entered into on an arm’s length basis and therefore constitute a favorable transfer pricing, the PRC tax liabilities
of the relevant subsidiaries and/or Hengshui Jingzhen and/or its equity holders could be increased,
which could increase our overall tax liabilities. In addition, the PRC tax authorities may impose late payment interest. Our net
income may be materially reduced if our tax liabilities increase.
Risk Related to Doing Business in China
Changes in the economic and political
policies of the PRC government could have a material and adverse effect on our business and operations.
The economic, political and social conditions in the PRC, as
well as government policies, laws and regulations, could affect our business, financial condition and results of operations. A
majority of our business operations are in the PRC and especially our production operations. Accordingly, our results of operations
and prospects are, to a significant degree, subject to economic, political and legal developments in the PRC. The economy of the
PRC differs from the economies of developed countries in many aspects, including
the level of development, growth rate and degree of government control over foreign exchange and allocation of resources. While
China’s economy has experienced significant growth in the past 30 years, the growth has been uneven across different regions
and periods and among various economic sectors in China. We cannot assure you that China’s economy will continue to grow,
or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such slowdown will not have
a negative effect on its business and results of operations.
The Chinese Government continues to play a significant role
in regulating industrial development. It also exercises significant control over the PRC’s economic growth through the allocation
of resources, controlling payment of foreign currency-denominated obligations, setting monetary policies and providing preferential
treatments to particular industries or companies. All of these factors could affect the economic conditions in the PRC. Accordingly, our results of operations, financial condition and prospects are significantly dependent on economic
and political developments in China. Certain measures adopted by the PRC government may restrict loans to certain industries, such
as changes in the statutory deposit reserve ratio and lending guidelines for commercial banks by the People’s Bank of China.
These current and future government actions could materially affect our liquidity, access to capital, and ability to operate our
business.
The global financial markets experienced
significant disruptions in 2008 and the United States, Europe and other economies went into recession. The global economy may continue to deteriorate in the future
and continue to have an adverse impact on the PRC’s economy. Since 2012, growth of the
Chinese economy has slowed down. The PRC government has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures may benefit the overall PRC economy but may also have a negative effect on us.
Our financial condition and results of operation could be materially and adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. In addition, any stimulus measures designed to boost the Chinese
economy, may contribute to higher inflation, which could adversely affect our results of operations and financial condition.
Uncertainties with respect to the
PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our business
through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable
to foreign investments in China and, in particular, laws applicable to VIEs. The PRC legal system is based on written statutes,
and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws
and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However,
since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always
uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available
to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources
and management attention. In addition, most of our executive officers and directors are residents of China and not of the United
States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult
for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against
our Chinese operations and subsidiaries.
You may have difficulty enforcing
judgments against us.
Most of our assets are located outside
of the United States and most of our current operations are conducted in the PRC. In addition, all of our directors and officers
are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is
located outside the United States. As a result, it may not be possible to effect service of process within the
United States or elsewhere outside the PRC upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the
U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and
the substantial majority of whose assets are located outside of the United States. In addition, uncertainty exists as to whether the courts of the PRC would
recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability
provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in
the PRC against us or such persons predicated upon the securities laws of the United States or any state thereof. So, it
is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
The PRC government exerts substantial
influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues
to exercise substantial control over the waste management industry. Our ability to operate in China may be harmed by changes in
waste disposal-related laws and regulations and these laws and regulations are relatively new and evolving, and their interpretation
and enforcement involve significant uncertainties. While we believe that our operations in China are in material compliance with
all applicable legal and regulatory requirements, new laws and regulations may be promulgated that will regulate internet activities,
including online retail. If these new laws and regulations are promulgated, additional licenses may be required for our operations.
If our operations do not comply with these new regulations at the time they become effective, or if we fail to obtain any licenses
required under these new laws and regulations, we could be subject to penalties.
Future inflation in China may inhibit
our ability to conduct business in China.
According to the National Bureau of Statistics
of China, the annual average percent changes in the consumer price index in China for 2017, 2018 and 2019 were 1.6%, 2.1%, and
2.8%, respectively. Although we have not been materially affected by inflation in the past, we can provide no assurance that we
will not be affected in the future by higher rates of inflation in China. For example, certain operating costs and expenses, such
as employee compensation and office operating expenses may increase as a result of higher inflation. Additionally, because a substantial
portion of our assets consists of cash and cash equivalents, high inflation could significantly reduce the value and purchasing
power of these assets.
Restrictions on currency exchange
may limit our ability to receive and use our sales effectively.
We believe most of our revenues that we
generate in the future will be settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although
the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions,
significant restrictions still remain, including primarily the restriction that FIEs may only buy, sell or remit foreign currencies
after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition,
conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China,
and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain
that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
Fluctuations in exchange rates could
adversely affect our business and the value of our securities.
The value of our ordinary shares will be
indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies
in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect
our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of
operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged
into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer
been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to
prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against
the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on
fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While
we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified
by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Restrictions under PRC law on our
PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to
grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our
business.
Substantially all of our sales are earned
by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments
to their offshore parent companies. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their
accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Any limitations on the ability of our PRC subsidiaries to transfer funds
to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our
business, pay dividends and otherwise fund and conduct our business.
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. We may be required to make up the contributions for these plans as well as pay late fees and fines
if we fail to meet the requirements of the plans. If we are subject to late fees or fines in relation to the underpaid employee
benefits, our financial condition and results of operations may be adversely affected.
Under the Enterprise Income Tax Law,
we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC stockholders.
On March 16, 2007, the National People’s
Congress of China passed the EIT Law, and on November 28, 2007, the State Council of China passed its implementing rules, which
took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies”
within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese
enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial
and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration
of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated
Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application
of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an
enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties
mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial
assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half
of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an
enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends
to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated
by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises
are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
We may be deemed to be a resident enterprise
by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this
would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income
tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding
tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect
to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could
result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect
to gains derived by our non-PRC stockholders from transferring our shares.
If we were treated as a “resident
enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
We may be exposed to liabilities
under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could
have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments
to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the
purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China.
The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments
or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always
be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, we
can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible.
Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject
to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the
U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we
invest or that we acquire. 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.
Risks Related to the Market for our
Common Stock
Our common stock is quoted on the
OTC market, which may have an unfavorable impact on our stock price and liquidity.
Our
common stock is currently eligible to be quoted on the OTC market under the symbol “SNTW.” The OTC market is a
significantly more limited market than the New York Stock Exchange or NASDAQ. The quotation of our shares on the OTC market
may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock,
could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital
in the future. We plan to list our common stock as soon as practicable. However, we cannot assure you that we will be able to
meet the initial listing standards of any stock exchange, or that we will be able to maintain any such listing.
We are subject to penny stock regulations
and restrictions and you may have difficulty selling shares of our common stock.
The SEC has adopted regulations which generally
define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock” and is subject
to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers
that sell such securities to persons other than established customers and “accredited investors” (generally, individuals
with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions
covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s
written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities
and may affect the ability of purchasers to sell any of our securities in the secondary market, thus possibly making it more difficult
for us to raise additional capital.
For any transaction involving a penny stock,
unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC
relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer
and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that our common
stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock
Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person
from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
We do not intend to pay dividends
for the foreseeable future.
For the foreseeable future, we intend to
retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends
on our common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to
earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination
to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations,
financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.
Our largest stockholder holds a significant
percentage of our outstanding voting securities and may be able to control our management and affairs.
Hass Group, Inc., our largest stockholder,
is the beneficial owner of approximately 70% of our outstanding voting securities. As a result, it possesses significant influence,
and can elect a majority of our board of directors and authorize or prevent proposed significant corporate transactions. Its ownership
and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover,
or other business combination, or discourage a potential acquirer from making a tender offer.
Fulfilling our obligations incident
to being a public company, including with respect to the requirements of and related rules under the Sarbanes-Oxley Act of 2002,
is expensive and time-consuming, and any delays or difficulties in satisfying these obligations could have a material adverse effect
on our future results of operations and our stock price.
As a public company, the Sarbanes-Oxley
Act of 2002 and the related rules and regulations of the SEC require us to implement various corporate governance practices and
adhere to a variety of reporting requirements and complex accounting rules. Compliance with these public company obligations requires
us to devote significant time and resources and places significant additional demands on our finance and accounting staff and on
our financial accounting and information systems. We plan to hire additional accounting and financial staff with appropriate public
company reporting experience and technical accounting knowledge. Other expenses associated with being a public company include
increased auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director
and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses.
We are required under the Sarbanes-Oxley
Act of 2002 to document and test the effectiveness of our internal control over financial reporting. In addition, we are required
under the Exchange Act to maintain disclosure controls and procedures and internal control over financial reporting. Any failure
to maintain effective controls or implement required new or improved controls, or difficulties encountered in their implementation,
could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have
effective internal control over financial reporting, investors could lose confidence in the reliability of our financial statements.
This could result in a decrease in the value of our common stock. Failure to comply with the Sarbanes-Oxley Act of 2002 could potentially
subject us to sanctions or investigations by the SEC or other regulatory authorities.
Compliance with changing regulation
of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations and standards
relating to corporate governance and public disclosure, including SOX and related SEC regulations, have created uncertainty for
public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting.
Our management team will need to invest significant management time and financial resources to comply with both existing and evolving
standards for public companies, which will lead to increased general and administrative expenses and a diversion of management
time and attention from revenue generating activities to compliance activities.
Provisions in our charter documents
and under Nevada law could discourage a takeover that stockholders may consider favorable.
Provisions in our articles of incorporation
and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our board of directors
has the right to determine the authorized number of directors and to elect directors to fill a vacancy created by the expansion
of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to control
the size of or fill vacancies on our board of directors.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and
Analysis (“MD&A”) contains “forward-looking statements”, which represent our projections, estimates,
expectations or beliefs concerning, among other things, financial items that are related to management’s future plans or
objectives or to our future economic and financial performance. In some cases, you can identify these statements by terminologies
such as “may”, “should”, “plan”, “believe”, “will”, “anticipate”,
“estimate”, “expect” “project”, or “intend”, including their opposites or similar
phrases or expressions. You should be aware of that these statements are projections or estimates as to future events, and are
subject to a number of factors that may tend to influence the accuracy of the statements. These forward-looking statements should
not be regarded as a representation by the Company or any other persons that the events or plans of the Company will be achieved.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this MD&A. Except as may
be required under applicable securities laws, we undertake no obligation to publicly revise any forward-looking statement to reflect
circumstances or events after the date of this MD&A or to reflect the occurrence of unanticipated events. You should, however,
review the factors and risks we describe under “Risk Factors” in this report. Actual results may differ materially
from any forward looking statement.
Overview
Hengshui Jingzhen (the “Target Company”
or the “Target”) was formed under the laws of the People’s Republic of China (the “PRC”) on July
31, 2015. Hengshui Jingzhen is a provider of integrated services on hazardous waste collection, transfer, recycling and disposal,
operating primarily in Hebei Province and its surrounding area in China. The Target Company aims at providing technology solutions
for environmental protection, especially on recycling and exploitation of industrial wastes. Hengshui Jingzhen possesses advanced
technology on efficiently disposing and utilizing hazardous waste.
As a result of the consummation of the
Reverse Merger on January 20, 2021, the Target became an entity controlled by the Company through a series VIE agreements, and
the business of the Target became the business of the Company. We are now, through the Target, engaged in providing an integrated
service on hazardous waste management to our industrial, commercial, and municipal customers.
Results of Operations for the Year Ended September 30, 2020 as
compared to the Year Ended September 30, 2019:
The following table summarizes the Target Company’s results
of operations for the years ended September 30, 2020 and 2019:
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
$
|
|
|
%
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Change
|
|
Revenue
|
|
$
|
9,454,431
|
|
|
$
|
9,023,947
|
|
|
$
|
430,484
|
|
|
|
4.8
|
%
|
Cost of Revenue
|
|
|
4,214,046
|
|
|
|
4,564,959
|
|
|
|
(350,913
|
)
|
|
|
(7.7
|
)%
|
Gross Profit
|
|
|
5,240,385
|
|
|
|
4,458,988
|
|
|
|
781,397
|
|
|
|
17.5
|
%
|
Selling Expense
|
|
|
867,351
|
|
|
|
825,781
|
|
|
|
41,570
|
|
|
|
5.0
|
%
|
General and Administrative Expenses
|
|
|
1,405,610
|
|
|
|
1,201,718
|
|
|
|
203,892
|
|
|
|
17.0
|
%
|
Operating Income
|
|
|
2,967,424
|
|
|
|
2,431,489
|
|
|
|
535,935
|
|
|
|
22.0
|
%
|
Other Income
|
|
|
34,671
|
|
|
|
221,338
|
|
|
|
(186,667
|
)
|
|
|
(84.3
|
)%
|
Interest Income
|
|
|
5,494
|
|
|
|
5,457
|
|
|
|
37
|
|
|
|
0.7
|
%
|
Income Tax Provision (Benefit)
|
|
|
246,993
|
|
|
|
(95,813
|
)
|
|
|
342,806
|
|
|
|
(357.8
|
)%
|
Net Income
|
|
|
2,760,596
|
|
|
|
2,754,097
|
|
|
|
6,499
|
|
|
|
0.2
|
%
|
Comprehensive Income
|
|
$
|
3,416,718
|
|
|
$
|
2,281,448
|
|
|
$
|
1,135,270
|
|
|
|
49.8
|
%
|
Revenue
Hengshui
Jingzhen generated revenue primarily from its waste incineration, disposal, utilization, and transportation services.
The
following table reflects the Target’s revenue by service lines for the years ended September 30, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
|
|
Amount
|
|
|
% of
Revenues
|
|
|
Amount
|
|
|
% of
Revenues
|
|
Waste Incineration
|
|
$
|
8,621,764
|
|
|
|
91.2
|
%
|
|
$
|
8,767,725
|
|
|
|
97.2
|
%
|
Waste disposal
|
|
|
160,382
|
|
|
|
1.7
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Waste utilization
|
|
|
552,747
|
|
|
|
5.8
|
%
|
|
|
177,933
|
|
|
|
2.0
|
%
|
Transportation and other revenue
|
|
|
119,538
|
|
|
|
1.3
|
%
|
|
|
78,289
|
|
|
|
0.9
|
%
|
Total revenue
|
|
$
|
9,454,431
|
|
|
|
100
|
%
|
|
$
|
9,023,947
|
|
|
|
100
|
%
|
The total revenue
increased by $430,484, or 4.8%, from $9,023,947 for the year ended September 30, 2019 to $9,454,431 for the year ended September
30, 2020. The revenue in RMB, in fact, increased by 6.8%, however, 2.0% of the increase was offset by fewer USD converted
from RMB, due to RMB depreciation occurred in the year ended September 30, 2020, compared with the same period in 2019. The overall
increase in the total revenue, on a company-wide basis, was primarily attributed to $374,814 increase in revenue from waste utilization,
$160,382 increase in revenue from waste disposal, and $41,249 increase in revenue from transportation and other services. The Target
has developed new customers, started its waste disposal service line, and expanded its waste utilization service line during the
year ended September 30, 2020.
The revenues generated
from waste incineration service represented 91.2% and 97.2% of the total revenues for the years ended September 30, 2020 and 2019,
respectively. The revenue from the waste incineration service decreased by $145,961 in USD, or 1.7%, from $8,767,725 for the year
ended September 30, 2019 to $8,621,764 for the year ended September 30, 2020. The revenue in RMB for the year ended September 30,
2020 was, in fact, increased by 0.2% as compared to the year ended September 30, 2019, but the 0.2% of the increase was offset
by fewer USD converted from RMB, due to 1.9% of RMB depreciation occurred in the year ended September 30, 2020, compared with the
same period in 2019.
The revenues generated
from the waste disposal service represented 1.7% and Nil% of the total revenues for the years ended September 30, 2020 and 2019,
respectively. The revenue from waste disposal service increased by $160,382 for the year ended September 30, 2020 from Nil for
the year ended September 30, 2019. The Target has adopted an advanced technology in efficiently disposing hazardous waste and started
its waste disposal service during the year ended September 30, 2020.
The revenues generated
from the waste utilization service represented 5.8% and 2.0% of the total revenues for the years ended September 30, 2020 and 2019,
respectively. The revenue from the waste utilization service increased by $374,814, or 210.6%, from $177,933 for the year ended
September 30, 2019 to $552,747 for the year ended September 30, 2020. The revenue increase in the year ended September 30, 2020
was primarily attributable to expansion of its waste utilization service line.
The revenue generated from the transportation
and others represented 1.3% and 0.9% of the total revenues for the years ended September 30, 2020 and 2019, respectively. In April
2019, the Target acquired Hengshui Zhuoyuan Freight Co., Ltd. (“Hengshui Zhuoyuan”), a company providing waste transferring
service. Revenue from transportation was derived from the waste transferring services provided by Hengshui Zhuoyuan. The revenue
from Hengshui Zhuoyuan were $102,014 and $73,063 for the years ended September 30, 2020 and 2019, respectively. The revenue from
others were $17,524 and $5,226 for the years ended September 30, 2020 and 2019, respectively. The Target later decided to focus
on its core service lines and disposed Hengshui Zhuoyuan in July 2020.
Cost of Revenue
The
following table sets forth information regarding the Target Company’s cost of revenues by service lines for the years ended
September 30, 2020 and 2019:
|
|
Cost of Revenues
|
|
|
|
For the Years Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Amount
|
|
|
% of
Cost of
Revenue
|
|
|
Amount
|
|
|
% of
Cost of
Revenue
|
|
Waste Incineration
|
|
$
|
3,964,359
|
|
|
|
94.1
|
%
|
|
$
|
4,397,122
|
|
|
|
96.3
|
%
|
Waste disposal
|
|
|
15,650
|
|
|
|
0.4
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Waste utilization
|
|
|
137,616
|
|
|
|
3.3
|
%
|
|
|
52,413
|
|
|
|
1.1
|
%
|
Transportation and others
|
|
|
96,421
|
|
|
|
2.3
|
%
|
|
|
115,424
|
|
|
|
2.5
|
%
|
Total cost of revenue
|
|
|
4,214,046
|
|
|
|
100
|
%
|
|
|
4,564,959
|
|
|
|
100
|
%
|
The
cost of revenue decreased by $350,913, or 7.7%, from $4,564,959 for the year ended September 30, 2019 to $4,214,046 for the year
ended September 30, 2020. The cost of revenues, as a percentage of revenues, decreased to 44.6% for year ended September
30, 2020 from 50.6% for the year ended September 30, 2019. The decrease of the cost in the percentage of revenue was primarily
due to the lower raw material cost and adoption of more efficient processes.
Gross
Margin
The
following table sets forth information regarding the Target Company’s gross margin by service lines for the years ended September
30, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Waste Incineration
|
|
$
|
4,657,405
|
|
|
|
54.0
|
%
|
|
$
|
4,370,603
|
|
|
|
49.8
|
%
|
Waste disposal
|
|
|
144,732
|
|
|
|
90.2
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Waste utilization
|
|
|
415,131
|
|
|
|
75.1
|
%
|
|
|
125,520
|
|
|
|
70.5
|
%
|
Transportation and others
|
|
|
23,117
|
|
|
|
19.3
|
%
|
|
|
(37,135
|
)
|
|
|
(47.4
|
)%
|
Gross Margin
|
|
|
5,240,385
|
|
|
|
55.4
|
%
|
|
|
4,458,988
|
|
|
|
49.4
|
%
|
The
gross margin increased by 781,397, or 17.5%, from $4,458,988 for the year ended September 30, 2019 to $5,240,385 for the year ended
September 30, 2020. The higher gross margin was attributable to larger margin from the waste incineration, disposal and utilization
service lines, primarily the utilization and incineration, in the year ended September 30, 2020, compared to the year ended September
30, 2019. Ultimately, the margin increase was primarily due to higher revenue, lower raw material cost, and adoption of more
cost-efficient processes.
Operating Expenses
Hengshui
Jingzhen’s selling expenses consist primarily of sales commissions, freight charges and related compensation, advertising,
and promotion expenses. The selling expenses were $867,351 for the year ended September 30, 2020, representing 9.2% of the total
revenue for the year, no change from 9.2% for the prior year. The selling expenses for the year ended September 30, 2020 increased
by $41,570 or 5.0%, as compared to the prior year. The increase in selling expenses was primarily due to the increase in shipping
cost and sales commission, as a result of increased revenue.
General and administrative expenses primarily consist of salaries
and benefits, professional fees, depreciation and amortization expenses, office expenses, bad debt reserve, and other miscellaneous
expenses. General and administrative expenses for the year ended September 30, 2020 were $1,405,610, representing 14.9% of the
total revenue for the year, which increased from 13.3% of the total revenue for the year ended September 30, 2019. Compared to
the prior year, general and administrative expenses for the year ended September 30, 2020 increased by $203,892 or 17.0%. The increase
in general and administrative expenses was primarily attributed to $152,856 increase in bad debt reserve and $46,737.5 increase
in depreciation and amortization expenses for the year ended September 30, 2020.
Other Income
Other income was the net of non-operating incomes and expenses.
Other income for the years ended September 30, 2020 and 2019 were $34,671 and 221,338, respectively. Compared to the prior year,
the other income decreased by $186,667 or 84.3% in the year ended September 30, 2020. The larger amount of other income for the
prior year was primarily contributed to $291,146 partnership fee received from an environmental protection organization.
Interest Income (Expense)
Interest income earned on our short-term
deposits of excess operating cash, net of interest expense, were $5,494 and $5,457 for the years ended September 30, 2020 and 2019,
respectively.
Income Taxes
For the year ended
September 30, 2020 and 2019, the Target recorded income tax provision of $246,993 and income tax benefit of $95,813, respectively.
Under the current Chinese EIT Law, companies designated as Resources Comprehensive Utilization Enterprises are entitled to a three-year
EIT exemption beginning on the date when they first generated operation revenue, and the reduced national EIT rate of 12.5% for
the next three years following the expiration of the exemption. The Target has been certified as a Resources Comprehensive Utilization
Enterprise and has taken the income tax exemption since the calendar year of 2017. Prior to January 1, 2020, the Target was exempted
from EIT tax. Since January 1, 2020, the Target has been subjected to the 12.5% EIT tax rate and recorded $246,993 tax provision,
net of $333,813 current tax expense and $86,820 deferred tax benefit, for the fiscal year ended September 30, 2020.
Net Income
As a result of the above factors, the Target
had net income of $2,760,596 for the year ended September 30, 2020, as compared to net income of $2,754,097 for the comparable
period ended September 30, 2019, representing an increase of net income of approximately $6,499 or 0.2%.
Comprehensive Income
The Target had
$656,122 in foreign currency translation gain during the year ended September 30, 2020, as compared to $472,649 in foreign currency
translation loss during the year ended September 30, 2019, reflecting a change of $1,128,771. Such increase in foreign currency
translation gain was primarily caused by the currency exchange rate fluctuation.
Liquidity and Capital Resources
The following summarizes the key components
of the Target Company’s cash flows for the years ended September 30, 2020 and 2019:
|
|
For the Years Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
Change in
$
|
|
|
Change in
%
|
|
Net cash provided by operating activities
|
|
$
|
3,439,731
|
|
|
$
|
3,240,920
|
|
|
$
|
198,811
|
|
|
|
6.1
|
%
|
Net cash used in investing activities
|
|
$
|
(1,062,379
|
)
|
|
$
|
(1,290,332
|
)
|
|
$
|
227,953
|
|
|
|
(17.7
|
)%
|
Net cash used in financing activities
|
|
$
|
(549,866
|
)
|
|
$
|
(593,054
|
)
|
|
$
|
43,188
|
|
|
|
(7.3
|
)%
|
Effect of exchange rate change on cash and cash equivalents
|
|
$
|
(39,227
|
)
|
|
$
|
(22,787
|
)
|
|
$
|
(16,440
|
)
|
|
|
72.1
|
%
|
Net increase in cash and cash equivalents
|
|
$
|
1,788,259
|
|
|
$
|
1,334,747
|
|
|
$
|
453,512
|
|
|
|
34.0
|
%
|
Cash Flows Provided by Operating
Activities
Net cash provided by operating activities
was $3,439,731 for the fiscal year ended September 30, 2020, compared to that of $3,240,920 for the year ended September 30, 2019.
The increase of $198,811 or 6.1% of net cash provided by operating activities was primarily due to the increase in deferred revenue
and tax payable, and the decrease in prepaid VAT and advances to suppliers, partially offset by the increase in accounts receivable.
Cash Flows Used in Investing Activities
Net cash used in investing activities amounted
to $1,062,379 for the year ended September 30, 2020, compared to that of $1,290,332 for the year ended September 30, 2019, representing
a decrease of $227,953 or 17.7%. The decrease in net cash used in investing activities was mainly attributable to the proceeds
received from disposal of two subsidiaries and reduced investment in fixed assets, partially offset by the new acquisition of intangible
assets during the year ended September 30, 2020.
Cash Flows Used in Financing Activities
Net cash used in financing activities amounted
to $549,866 for the year ended September 30, 2020, compared to that of $593,054 for the year ended September 30, 2019, representing
a decrease of $ 43,188, or 7.3%. The decrease in net cash used in financing activities was mainly attributable to the decrease
in advances to related parties.
Net increase in cash and cash equivalents was $1,788,259 for
the year ended September 30, 2020, compared to net increase in cash and cash equivalents of $1,334,747 for the year ended September
30, 2019.
OUR PROPERTIES
Our principal executive
offices are located at Changning Road North, Economic and Technological Development Zone, Hengshui, Hebei, China 053000.
Our VIE, Hengshui Jingzhen’s
property consist of workplace and plant buildings. Hengshui Jingzhen’s operations are currently being conducted out of the
premises at North Side of Changning Road, Economic Development Zone, Hengshui City, Heibei, PRC. Hengshui Jingzhen consider its
current principal office space arrangement adequate and will reassess our needs based upon the future growth of the company. As
of December 31, 2020, our real property consisted of the following:
Ownership
|
|
Address
|
|
Space
(square
meters)
|
|
Start Date
|
|
End Date
|
|
* Purpose
|
Hengshui Jingzhen
|
|
North Side of Changning Road, Economic Development Zone, Hengshui City, Heibei, PRC
|
|
50898.42
|
|
June 22, 2018
|
|
November 2, 2054
|
|
Office, workplace, plants, warehouses, pumping station, etc.
|
Hengshui Jingzhen
|
|
South Side of Jiheng Road, East Side of Yingbin Roda, Hengshui City, Heibei, PRC
|
|
12675.49
|
|
June 18, 2020
|
|
June 17, 2070
|
|
Relocation and utilization of waste hydrochloric acid
|
Hengshui Jingzhen
|
|
South Side of Changning Road, Hengshui City, Heibei, PRC
|
|
22240.00
|
|
June 22, 2018
|
|
November 2, 2054
|
|
N/A
|
|
*
|
Purpose of the real property is listed as below:
|
6080 square-meter of the real property located
at North Side of Changning Road, Economic Development Zone, Hengshui City, Heibei, PRC is used for incineration plant.
4386 square-meter of the real property located
at North Side of Changning Road, Economic Development Zone, Hengshui City, Heibei, PRC is used for raw material warehouse #1; and
5805 square-meter of the same location is used as raw material warehouse #2.
597 square-meter of the real property located
at North Side of Changning Road, Economic Development Zone, Hengshui City, Heibei, PRC is used for pump and electricity room.
862.3 square-meter of the real property located
at North Side of Changning Road, Economic Development Zone, Hengshui City, Heibei, PRC is used for comprehensive office building.
793.32 cubic meter of the real property located
at North Side of Changning Road, Economic Development Zone, Hengshui City, Heibei, PRC is used for waste acid and alkali plant
and waste hydrochloric acid plant.
814.93 cubic meter of the real property located
at North Side of Changning Road, Economic Development Zone, Hengshui City, Heibei, PRC is used for affiliated building.
1900.5 square-meter of the real property
located at North Side of Changning Road, Economic Development Zone, Hengshui City, Heibei, PRC is used for old production plant.
6108 square-meter of the real property located
at North Side of Changning Road, Economic Development Zone, Hengshui City, Heibei, PRC is used for two steel-brick warehouses.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain
information, regarding the beneficial ownership of our common stock as of the date of this Current Report by (i) each stockholder
known by us to be the beneficial owner of more than 5% of our common stock, (ii) by each director and executive officer of our
company and (iii) by all executive officers and directors of our company as a group. Each of the persons named in the table has
sole voting and investment power with respect to common stock beneficially owned. The registered address of each person listed
below except Kano Hiroshi is S101-5289 Cambie Street, Vancouver,BC. V5Z 0J5 Canada.
|
|
Amount of
|
|
|
Percentage
|
|
|
|
Beneficially
|
|
|
of Shares
|
|
Name and Address
|
|
Ownership(1)
|
|
|
Owned(2)
|
|
Directors and Officers
|
|
|
|
|
|
|
Shuhua Liu
|
|
|
42,753,504
|
|
|
|
70.03
|
%
|
Chao Long Huang
|
|
|
2,681,397
|
(3)
|
|
|
4.39
|
%
|
Kano Hiroshi*
|
|
|
200,000
|
(4)
|
|
|
0.33
|
%
|
Jun Du*
|
|
|
0
|
|
|
|
0
|
%
|
All directors and executive officers as a group (four persons)
|
|
|
45,634,901
|
|
|
|
74.75
|
%
|
5% Stockholders
|
|
|
|
|
|
|
|
|
Hass Group, Inc.
|
|
|
42,753,504
|
(5)
|
|
|
70.03
|
%
|
Super Dragon Shipping & Trading Limited
|
|
|
4,328,496
|
(6)
|
|
|
7.09
|
%
|
|
*
|
The individual will serve as an officer on February 1,
2021.
|
|
(1)
|
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the common stocks. All shares represent only common stocks held by shareholders as no options are issued or outstanding.
|
|
(2)
|
Calculation based on 61,049,990 common stocks issued and outstanding as of the date of this Current Report.
|
|
(3)
|
Chao Long Huang, our chief financial officer and director, has voting and dispositive power of the 1,009,665 common stocks beneficially held by Zenox Enterprises Inc., a British Columbia company. The registered address of Zenox Enterprises Inc. is S101-5289 Cambie Street, Vancouver,BC. V5Z 0J5 Canada.
|
|
(4)
|
The registered address of Kano Hiroshi is Room 1906, 1-3-7, Katsushika-ku, Tokyo, JA 125-005.
|
|
(5)
|
Juli Enterprises Inc., a company organized under the laws of British Virgin Islands, owns 100% of the shares of the Hass Group, Inc. Shuhua Liu, a citizen of the PRC, servers as the sole director of Juli Enterprises Inc. As such, both Juli Enterprises Inc. and Shuhua Liu may be deemed to be the beneficial owners of all shares of common stock held by the Hass Group, Inc.
|
|
(6)
|
Super Dragon Shipping & Trading Limited is 100% beneficially owned by a citizen of the PRC, Chiu Kin Wong, who is the brother
of our chief financial officer and director, Chao Long Huang. Chiu Kin Wong and Chao Long Huang do not share the same household.
Chiu Kin Wong servers as the chief executive officer of Super Dragon Shipping & Trading Limited.
|
DIRECTORS AND EXECUTIVE OFFICERS
The following table
sets forth information regarding directors and officers:
Name
|
|
Age
|
|
Positions
|
|
Shuhua Liu
|
|
49
|
|
Chairwoman of the Board, Chief Executive Officer
|
|
Chao Long Huang
|
|
68
|
|
Chief Financial Officer and Director
|
|
Jun Du
|
|
42
|
|
Chief Operation Officer
|
|
Kano Hiroshi
|
|
61
|
|
Chief Technology Officer
|
|
Shuhua Liu,
age 49, has served as a Director of the Company since June 2019. She has also been serving as the President of Hebei Jingxin Group,
a construction company in China, since 2015. Prior to that, Ms. Liu served as the Executive Deputy General Manager of Hebei Jingxin
Group from 2010 to 2015. Ms. Liu received her Bachelor of Arts degree from National Open University in 2016, China and MBA degree
from Business School Netherlands of Tsinghua University of Beijing in 2017.
Chao Long (Charlene)
Huang, age 68, has served as Chief Financial Officer of the Company since May 2019. Ms. Huang has also been serving as
Chief Executive Officer of Zenox Enterprises Ltd., a trading company based in Canada, since 2005. From 1993 to 2016, Ms. Huang
served as Chief Executive Officer for various companies, including Shanghai Wellson Welding Materials Import & Export Co. Ltd.,
Shanghai Flying Dragon Mineral Products Co. Ltd. and Shanghai Starlink Forwarding Co. Ltd. Ms. Huang received an associate degree
from China Anhui Huangshan Forestry College in 1975 and a Bachelor of Arts degree from China Nanjing Teacher-training University
in 1991.
Jun Du,
age 42, will serve as our Chief Operation Officer starting from February 1, 2021. Mr. Du has served as a senior sales operation
manager at Nilfisk Cleaning Equipment (Shanghai) Co. since January 2020. Prior to such time, he served as a senior product &
marketing manager in APAC area for the same company from September 2015 to December 2019. He holds a Bachelor of Science degree
in Business Management from University of East Anglia in Norwich, England. He also holds a Master of Science degree in Information
Technology from the Lancaster Management School at Lancaster University. We believe Mr. Du’s extensive experience qualifies
him to serve as our Chief Operation Officer.
Kano Hiroshi, age 61, will
serve as our Chief Technology Officer starting from February 1, 2021. Mr. Hiroshi has been working in Fuji Electric Group for 25
years. He serves as the Chairman of the business planning department of the Industrial Electric Automation System Division at Fuji
Electric Group. During his time at Fuji Electric Group, he has been responsible for the wastewater treatment of large chemical
plants, the pure water and wastewater treatment of semiconductor plants, the electrical design and automation process design and
program design of large-scale power plant flue gas desulfurization treatment projects. Mr. Hiroshi is a member of the Japan Electrical
Instrument Association. He obtained his bachelor’s degree in Electrical Automation from Shanghai Jiaotong University. He
also holds a Master of electrical engineering degree from Keio University in 1995.
DIRECTOR AND EXECUTIVE COMPENSATION
Our employment agreements
with our directors and officers will be effective as of February 1, 2021. We have never paid any compensation to any of our executive
officers and directors. Our current officers have agreed to work with no remuneration until such time as we commence business operations
and receive sufficient revenues necessary to provide management salaries. During fiscal years 2019 and 2020, none of our officers
and directors received compensation in their capacity as officers and directors. There are no annuity, pension or retirement benefits
proposed to be paid to the officer or director or employees in the event of retirement at normal retirement date pursuant to any
presently existing plan provided or contributed to by our company.
Employment Agreements
Our employment agreements
with our officers generally provide for employment for a specific term and payments of annual salary. The agreements may be terminated
by either party as permitted by law. We have entered into employment agreements on January 20, 2021 with Shuhua Liu, our Chief
Executive Officer and Chairwoman of the Board; Chao Long Huang, our Chief Financial Officer, Director, Secretary, and Treasurer;
Jun Du, our Chief Operating Officer and Kano Hiroshi, our Chief Technology Officer.
Shuhua
Liu
We entered into an employment agreement
with our Chief Executive Officer and Chairwoman of the Board, Shuhua Liu, with a term between February 1, 2021 and February 1,
2023. Ms. Liu’s annual compensation is USD $50,000.
Chao
Long Huang
We entered into an employment agreement
with our Chief Financial Officer, Director, Secretary, and Treasurer, Chao Long Huang, with a term between February 1, 2021 and
February 1, 2023. Ms. Huang’s annual compensation is USD $50,000.
Jun
Du
We entered into an employment agreement
with our Chief Operating Officer, Jun Du, with a term between February 1, 2021 and February 1, 2024. Mr. Du’s annual compensation
is USD $50,000.
Kano
Hiroshi
We entered into an employment agreement
with our Chief Technology Officer, Kano Hiroshi, with a term between February 1, 2021 and February 1, 2023. Mr. Hiroshi’s
annual compensation is USD $50,000.
Executive Compensation — Fiscal Years 2019 and 2020
During fiscal
years 2019 and 2020, none of our officers received compensation in their capacity as officers.
Director Compensation — Fiscal Years 2019 and 2020
During fiscal years
2019 and 2020, no members of our Board of Directors received compensation in their capacity as directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
On April 9, 2019, the Company entered into
MoralArrival Share Exchange Agreement with MoralArrival, a British Virgin Islands company. The sole shareholder of MoralArrival
was Shuhua Liu. The acquisition of MoralArrival was with a related party, as Ms. Liu controls The Hass Group, Inc., the Company’s
largest stockholder and it was accounted for as acquisition of entity under common control. Under the terms of that MoralArival
Share Exchange Agreement, the Company agreed to exchange 3,000,000 shares of its common stock for all the outstanding shares of
common stock of MoralArrival. As a result of this transaction, MoralArrival has become a wholly-owned subsidiary of the Company.
The Company issued 3,000,000 shares of common stock to Ms. Liu in January 2020.
On June 15, 2020, the
Company entered into loan agreements with Shuhua Liu and Chiu Kin Wong for an aggregate of $400,000 with no interest. Shuhua Liu
agreed to lend $280,000 to the Company and Chiu Kin Wong agreed to lend $120,000, both for the Company’s working capital
in connection with going public, merger and acquisition. The Company agrees to repay the loan balance after its first financing
activity. Shuhua Liu is the Chief Executive Officer and Director of the Company. Chiu Kin Wong is a shareholder of the Company.
The largest amount of principal outstanding during the fiscal year ended July 31, 2020 is $400,000. The amount of principal outstanding
as of November 13, 2020 is $400,000. No principal or interest has been paid by the Company during the fiscal year ended July 31,
2020. During the year period ended July 31, 2020, the company has borrowed amount of $465,965 from its shareholders to pay certain
expenses.
On November 11, 2020,
the Company entered into a Mutual Rescission Agreement (the “Goodwill Rescission Agreement”) with Goodwill and Shuhua
Liu, the shareholder of Goodwill. Under the Goodwill Rescission Agreement, Shuhua Liu agreed to deliver to the Company 3,000,000
shares of its common stock that were issued to Liu under the MoralArrival Share Exchange Agreement, which the Company agreed to
cancel upon such delivery by Shuhua Liu. Under the terms of the Goodwill Rescission Agreement, the obligations of all parties to
the MoralArrival Share Exchange Agreement shall be terminated and the transactions contemplated thereby unwound and voided as if
the MoralArrival Share Exchange Agreement was never entered into and the transactions contemplated thereby never occurred.
Our Board of Directors
is responsible to approve all related party transactions. We have not adopted written policies and procedures specifically for
related person transactions.
LEGAL PROCEEDINGS
Hualuan Litigation
On August 12, 2020, the Company filed a
civil complaint asserting a breach of contract action against North China Pharmaceutical Group Hualuan Co., Ltd. with the Luancheng
District People’s Court in the city of Shijiazhuang, Hebei province. The Company sought a total amount of $48,314.51 (RMB
315,986.58) including payment of $33,727.41 (RMB 220,584) and interest of $14,587.26 (RMB 95,403.58) regarding a waste disposal
and industrial service contract signed on December 6, 2017. In the civil complaint, the Company is seeking recovery of monetary
damages, attorneys’ fees and costs. The case was officially accepted by the Court on August 24, 2020.
On September 29, 2020, a pretrial settlement
was conducted between the two parties by the Court. A settlement was reached, and the settlement agreement was field with the Court
on the same day. The Defendant agreed to pay the outstanding $33,727.41 (RMB 220,584) to the Company before October 9, 2020. The
Defendant agreed to use its assets as collateral to pay the settlement fee and to submit a list of assets no less than the total
settlement fee to the Court in two days. The litigation expense and property preservation fee were paid by the Defendant. As of
the date of this current report, no payment was made by North China Pharmaceutical Group.
Yuefeng Jiang Litigation
On June 19, 2019, Yuefeng
Jiang, as the shareholder who holds 25% shares of the Company filed a civil complaint asserting stock transfer dispute against
Jianwei Zhang, the other shareholder of the Company who holds 75% shares in Yixing People’s Court in Jiangsu. The plaintiff
also sued Baofa Zhang for joint and several liability.
On November 19, 2018,
the plaintiff signed a stock transfer agreement to transfer all his shares of the Company to Jianwei Zhang with three installments.
However, the Defendant only made the first installment and the other two installments which was more than 20% of the total contract
price were due. In the civil complaint, the plaintiff is seeking recovery of a total amount of $7.2 million (RMB 47,250,000) as
the unpaid contract price and penalty of 0.1% daily together with attorney’s fees and costs.
On July 25, 2019, a
settlement was reached between the plaintiff and the two Defendants. The Defendants agreed to pay the plaintiff a total settlement
amount of $7.2 million (RMB 47,250,000). Of the $7.2 million settlement amount, it is expected that $2.3 million (RMB 15,140,000)
will be paid by cash and the remaining $4.9 million (RMB 32,100,000) will be funded with the title transfer of a shop building
of Hengshui Jingxin Real Estate Development Company Limited located at Building 1 and 2, Longyuan Mingjun, No. 98 Fuyang 1st
Road, Taochegn District, Hengshui City, PRC. Within 90 days of the settlement agreement, the shop building shall be transferred
to the plaintiff. Within 30 days of the real property transfer, the plaintiff shall transfer his shares of the Company to Jianwei
Zhang. Baofa Zhang agreed to guarantee Jianwei Zhang’s payment to the plaintiff for a 2-year period. The plaintiff waived
all attorneys’ fees, litigation expense and monetary damages. The settlement agreement was field with the Court on the same
day. As of today, the Defendant has made all payments to the plaintiff and all dispute was settled thereof.
MARKET PRICE AND DIVIDENDS ON OUR COMMON
EQUITY
AND RELATED STOCKHOLDER MATTERS
Our common stock is currently eligible
to be quoted on the OTC market under the symbol “SNTW.” However, our common stock has not been traded on the OTC market
except on a limited and sporadic basis and there is no assurance that a regular public trading market will ever develop. OTC market
securities are not listed and traded on the floor of an organized national or regional stock exchange. Instead, OTC market securities
transactions are conducted through a telephone and computer network connecting dealers. OTC market issuers are traditionally smaller
companies that do not meet the financial and other listing requirements of a regional or national stock exchange.
Approximate Number of Holders of Our Common Stock
As of January 20, 2021, there were 61,049,990 shares of the
Company’s common stock, par value $0.001 per share, issued and outstanding and there were approximately 46 holders of record
of our common stock. This number excludes the shares of our common stock owned by stockholders holding stock under nominee security
position listings.
Dividend Policy
There are no restrictions in our articles
of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from
declaring dividends where, after giving effect to the distribution of the dividend:
|
1.
|
We would not be able to pay our debts as they become due in the usual course of business; or
|
|
|
|
|
2.
|
Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
|
We have not declared any dividends and
we do not plan to declare any dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation
Plans
We do not have in effect any compensation plans under which
our equity securities are authorized for issuance.
RECENT SALES OF UNREGISTERED SECURITIES
On July 23, 2014 the Company issued a total
of 4,000,000 shares of common stock to a director for cash in the amount of $0.001 per share for a total of $4,000.
On January 29, 2015 the Company issued
a total of 1,000,000 shares of common stock to 30 independent investors for cash in the amount of $0.04 per share for a total of
$40,000.
On November 28, 2017 the Company issued
250,000 shares of its common stock pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of
1933. The offering was not a public offering as defined in Section 4(2) due to the limited number of persons that received the
shares and the manner of the offering. In addition, the Purchaser represented that it had the necessary investment intent as required
by Section 4(2) and agreed to and received share certificates bearing a legend that stated that the securities were restricted
pursuant to Rule 144 of the Securities Act. The shares were issued in exchange for a payment of $7,500.00 in cash.
On March 15, 2018 the Company issued 399,000
shares of its common stock and warrants (the “Units”) pursuant to an exemption from registration provided by Section
4(2) of the Securities Act of 1933. The offering was not a public offering as defined in Section 4(2) due to the limited number
of persons that received the shares and the manner of the offering. In addition, the Purchasers represented that they had the necessary
investment intent as required by Section 4(2) and agreed to and received share certificates bearing a legend that stated that the
securities were restricted pursuant to Rule 144 of the Securities Act. These Units were issued to two shareholders for a total
consideration of $12,000.00. These Units were sold on a private placement basis and the Company paid no commission in connection
with such sales.
On April 11, 2019 the Company issued 3,000,000
shares of its common stock. The shares were issued pursuant to an exemption from registration provided Regulation S and by Section
4(2) of the Securities Act of 1933. The offering was not a public offering as defined in Section 4(2) due to the limited
number of persons that received the shares and the manner of the offering. In addition, the Purchaser represented that it
resided outside the United States and had the necessary investment intent as required by Regulation S and Section 4(2) and agree
to receive share certificates bearing a legend that stated that the securities were restricted pursuant to Rule 144 of the Securities
Act and Regulation S. All sales were made outside of the United States.
On November 11, 2020, the 3,000,000 shares
of common stock issued to Shuhua Liu were cancelled.
DESCRIPTION OF SECURITIES
We are authorized to issue two classes
of stock, common stock and preferred stock. The total number of shares of common stock that the Company shall have authority to
issue is Five Hundred Million (500,000,000), par value $0.001 per share. The total number of shares of Preferred Stock the Company
shall have authority to issue is Ten Million (10,000,000), par value $0.001 per share.
Each outstanding share of common stock
entitles the holder thereof to one vote per share on all matters. Our bylaws provide that elections for directors shall be by a
plurality of votes. Stockholders do not have preemptive rights to purchase shares in any future issuance of our common stock. Upon
our liquidation, dissolution or winding up, and after payment of creditors and preferred stockholders, if any, our assets will
be divided pro-rata on a share-for-share basis among the holders of the shares of common stock.
The holders of shares of our common stock
are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors
has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should we decide in the future
to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries, from
time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive
covenants in loan agreements, and other regulatory restrictions. See “Risks Related to Doing Business in China” ability
to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions
that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.”
Common Stock
The holders of our common stock are entitled
to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect
to the election of directors, with the result that the holders of more than 50% of the shares voting for the election of directors
can elect all of the directors then up for election. The holders of our common stock are entitled to receive dividends when, as
and if declared by the board of directors out of funds legally available therefor.
Holders of our common
stock will be entitled to dividends in such amounts and at such times as our Board of Directors in its discretion may declare out
of funds legally available for the payment of dividends. We currently intend to retain our entire available discretionary cash
flow to finance the growth, development and expansion of our business and do not anticipate paying any cash dividends on the common
stock in the foreseeable future. Any future dividends will be paid at the discretion of our Board of Directors after taking into
account various factors, including:
|
●
|
general business conditions;
|
|
●
|
our financial condition and performance;
|
|
●
|
our cash needs and capital investment plans;
|
|
●
|
our obligations to holders of any preferred stock we may issue;
|
|
●
|
income tax consequences; and
|
|
●
|
the restrictions Delaware and other applicable laws and our credit arrangements then impose.
|
If we liquidate or
dissolve our business, the holders of our common stock will share ratably in all our assets that are available for distribution
to our stockholders after our creditors are paid in full and the holders of all series of our outstanding preferred stock, if any,
receive their liquidation preferences in full.
In the event of liquidation,
dissolution or winding up of our company, the holders of common stock are entitled to share ratably in all assets remaining which
are available for distribution to them after payment of liabilities and after provision has been made for each class of stock,
if any, having preference over the common stock. Holders of shares of our common stock, as such, have no conversion, preemptive
or other subscription rights, and there are no redemption provisions applicable to the common stock.
Our common stock has
no preemptive rights and is not convertible or redeemable or entitled to the benefits of any sinking or repurchase fund.
Preferred Stock
The Company is authorized to issue Ten
Million (10,000,000) shares of preferred stock, par value $0.001 per share. Our Company, by resolution of its Board of Directors,
may divide and issue the Preferred Stock in series. Preferred Stock of each series when issued shall be designated to distinguish
them from the shares of all other series, including the preferences and relative and other rights, and the qualifications, limitations
or restrictions.
Except as may otherwise be required by
law, the shares of Preferred Stock shall not have any preferences or relative, participating, optional or special rights, other
than those specifically set forth in this resolution (as such resolution may be amended from time to time) and in the Corporation’s
Articles of Incorporation.
All of the issued and outstanding shares
of our common stock are duly authorized, validly issued, fully paid and non-assessable. To the extent that additional shares of
our common stock are issued, the relative interests of existing stockholders will be diluted.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation provide that
we will indemnify to the fullest extent permitted by law any person made or threatened to be made a party to any threatened, pending
or completed by action or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he or
she is or was our director or officer or a director or officer of another entity at our request against judgments, fines, penalties,
excise taxes, amounts paid in settlement and costs, charges and expenses (including attorney’s fees and disbursements) that
he or she incurs in connection with such action or proceeding.
Insofar as indemnification by us for liabilities
arising under the Exchange Act may be permitted to our directors, officers and controlling persons pursuant to provisions of the
articles of incorporation and bylaws, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is
against public policy and is, therefore, unenforceable. In the event that a claim for indemnification by such director, officer
or controlling person of us in the successful defense of any action, suit or proceeding is asserted by such director, officer or
controlling person in connection with the securities being offered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification
by us is against public policy as expressed in the Exchange Act and will be governed by the final adjudication of such issue.
At the present time, there is no pending
litigation or proceeding involving a director, officer, employee or other agent of ours in which indemnification would be required
or permitted. We are not aware of any threatened litigation or proceeding which may result in a claim for such indemnification.