RISK
FACTORS
Risks
Relating to Our Corporate Structure
Our
corporate structure, in particular, the Variable Interest Entities (or “VIEs”), and their Agreements (or VIE Agreements),
are subject to significant risks, as set forth in the following risk factors.
Because
we conduct our agent business through VIEs, if we fail to comply with applicable law, we could be subject to severe penalties and our
business could be materially and adversely affected.
We
uses our subsidiaries’ and the VIEs vertically and horizontally integrated production, distribution, and sales channels to provide
health and well-being focused plant-based products, pursuant to a series of contractual arrangements between Shineco and VIEs, as a result
of which, under United States generally accepted accounting principles, the assets and liabilities of the VIEs are treated as our assets
and liabilities and the results of operations of VIEs are treated in all aspects 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 Shineco and the VIEs.
If
Shineco and the VIEs or their ownership structure or the contractual arrangements are determined to be in violation of any existing or
future PRC laws, rules or regulations, or Shineco fails to obtain or maintain any of the required governmental permits or approvals,
the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:
|
● |
revoking
or suspending the business and operating licenses of Shineco; |
|
|
|
|
● |
discontinuing
or restricting the operations of Shineco; |
|
|
|
|
● |
imposing
conditions or requirements with which we may not be able to comply; |
|
|
|
|
● |
requiring
us to restructure the relevant ownership structure or operations which may significantly impair the rights of the holders of our
common stock; |
|
|
|
|
● |
restricting
or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; and |
|
|
|
|
● |
imposing
fines to the VIEs or Shineco. |
We
cannot assure you that the PRC courts or regulatory authorities may not determine that our corporate structure and contractual arrangements
violate PRC laws, rules or regulations. If the PRC courts or regulatory authorities determine that our contractual arrangements are in
violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable, and the VIEs
will losse their status as a VIE entity and we will not be entitled to treat the VIEs’ assets, liabilities and results of operations
as our assets, liabilities and results of operations, which could effectively eliminate the assets, liabilities, revenue and net income
of VIEs from Shineco’s balance sheet and statement of income. This would most likely require us to cease conducting our business
and would result in the delisting of our common stock from the stock market where the common stock will be traded and a significant impairment
in the market value of our common stock.
We
depend upon the VIE Agreements in conducting our business in the PRC, which may not be as effective as direct ownership.
We
rely on contractual arrangements with the consolidated VIEs and their shareholders, to operate our business. Our affiliations with the
VIEs are managed through the VIE Agreements, which agreements may not be as effective in providing us with control over the VIEs as direct
ownership. These contractual arrangements may not be as effective as direct ownership in providing us with control over the consolidated
VIEs. If the consolidated VIEs or their shareholders fail to perform their respective obligations under these contractual arrangements,
our recourse to the assets held by the consolidated VIEs is indirect and we may have to incur substantial costs and expend significant
resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly
in light of uncertainties in the PRC legal system. Furthermore, in connection with litigation, arbitration or other judicial or dispute
resolution proceedings, assets under the name of any of record holder of equity interest in the consolidated VIEs, including such equity
interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed pursuant to
the contractual arrangement or ownership by the record holder of the equity interest.
All
of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC.
Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC
legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the U.S. As a result, uncertainties
in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce
these contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual
arrangements, it would be very difficult to exert effective control over the consolidated VIEs, and our ability to conduct our business
and our financial condition and results of operations may be materially and adversely affected.
We
may not be able to consolidate the financial results of some of our affiliated companies or such consolidation could materially adversely
affect our operating results and financial condition.
All
of our business, other than that conducted through WFOE and Tenet Huatai, is conducted through the VIEs, which are considered VIEs for
accounting purposes, and we are considered the primary beneficiary, thus enabling us to consolidate our financial results in our consolidated
financial statements. In the event that in the future a company we hold as a VIE no longer meets the definition of a VIE under applicable
accounting rules, or we are deemed not to be the primary beneficiary, we would not be able to consolidate line by line that entity’s
financial results in our consolidated financial statements for reporting purposes. Also, if in the future an affiliate company becomes
a VIE and we become the primary beneficiary, we would be required to consolidate that entity’s financial results in our consolidated
financial statements for accounting purposes. If such entity’s financial results were negative, this would have a corresponding
negative impact on our operating results for reporting purposes.
Because
we rely on a series of agreement with the VIEs to form our control over the VIEs (the “VIE Agreements”), the termination
of these agreements would severely and detrimentally affect our continuing business viability under our current corporate structure.
We
are a holding company and a substantial majority of our business operations are conducted through the VIE Agreements. As a result, our
revenues mainly rely on dividend payments from the VIEs after it receives payments from the VIEs pursuant to the VIE Agreements. The
VIEs may terminate the VIE Agreements for any or no reason at all. Because neither we, nor our subsidiaries, own equity interests of
the VIEs, the termination of the VIE Agreements would sever our ability to continue receiving payments from the VIEs under our current
holding company structure. While we are currently not aware of any event or reason that may cause the VIE Agreements to terminate, we
cannot assure you that such an event or reason will not occur in the future. In the event that any or all of the VIE Agreements are terminated,
this would have a severe and detrimental effect on our continuing business viability under our current corporate structure, which, in
turn, may affect the value of your investment.
Contractual
arrangements entered into by our subsidiary and our PRC operating affiliate may be subject to scrutiny by the PRC tax authorities. Such
scrutiny may lead to additional tax liability and fines, which would hinder our ability to achieve or maintain profitability.
Under
PRC law, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. If any
of the transactions entered into by our subsidiary and our PRC operating affiliate are found not to have been conducted on an arm’s-length
basis or to result in an unreasonable reduction in tax under PRC law, the PRC tax authorities have the authority to disallow tax savings,
adjust the profits and losses of our respective PRC entities and assess late payment interest and penalties.
If
the PRC government deems that the VIE Agreements do not comply with PRC regulatory restrictions on foreign investment in the relevant
industries or other laws or regulations of the PRC, or if these regulations or the interpretation of existing regulations change in the
future, Shineco’s shares may decline in value or become worthless provided that Shineco is unable to assert its contractual control
rights over the assets of its PRC subsidiaries that conduct all or substantially all of the operations.
Shineco
is a holding company incorporated in Delaware. As a holding company with no material operations of our own, we conduct a substantial
majority of our operations through our operating entities established in the People’s Republic of China, or the PRC, primarily
the variable interest entities (the “VIEs”). Due to PRC legal restrictions on foreign ownership in any internet-related businesses
we may explore and operate, we do not have any equity ownership of the VIEs, instead we control and receive the economic benefits of
the VIEs’ business operations through certain contractual arrangements. Our common stock that currently listed on the Nasdaq Capital
Markets are shares of our Delaware holding company that maintains service agreements with the associated operating companies. The Chinese
regulatory authorities could disallow our structure, which could result in a material change in our operations and the value of our securities
could decline or become worthless. For a description of our corporate structure and contractual arrangements, see “Corporate Structure”
on page 10 above and our Annual Report on Form 10-K for the year ended June 30, 2021, which is incorporated by reference herein.
We
believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. We also
believe that each of the contracts among our wholly-owned PRC subsidiary, the consolidated VIEs and its shareholders is valid, binding
and enforceable in accordance with its terms. However, there are substantial uncertainties regarding the interpretation and application
of current and future PRC laws and regulations. Thus, the PRC governmental authorities may take a view contrary to the opinion of our
PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structure will be adopted
or if adopted, what they would provide. PRC laws and regulations governing the validity of these contractual arrangements are uncertain
and the relevant government authorities have broad discretion in interpreting these laws and regulations.
If
these regulations change or are interpreted differently in the future and our corporate structure and contractual arrangements are deemed
by the relevant regulators that have competent authority, to be illegal, either in whole or in part, we may lose control of the consolidated
VIEs, which conducts our manufacturing operations, holds significant assets and accounts for significant revenue, and have to modify
such structure to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material disruption
to our business. Further, if our corporate structure and contractual arrangements are found to be in violation of any existing or future
PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:
|
● |
revoking
our business and operating licenses; |
|
● |
confiscating
any of our income that they deem to be obtained through illegal operations; |
|
● |
shutting
down our services; |
|
● |
discontinuing
or restricting our operations in China; |
|
● |
imposing
conditions or requirements with which we may not be able to comply; |
|
● |
requiring
us and the PRC entities to restructure the relevant ownership structure and contractual arrangements; and |
|
● |
restricting
or prohibiting our use of proceeds from overseas offerings to finance the consolidated VIEs’ business and operations; and |
|
|
|
|
● |
taking
other regulatory or enforcement actions that could be harmful to our business. |
Furthermore,
new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure
and contractual arrangements. Occurrence of any of these events could materially and adversely affect our business, financial condition
and results of operations and the market price of our common stock. In addition, if the imposition of any of these penalties or requirement
to restructure our corporate structure causes us to lose the rights to direct the activities of the consolidated VIE or our right to
receive their economic benefits, we would no longer be able to consolidate the financial results of such VIE in our consolidated financial
statements, which may cause the value of our common stock to decline significantly or even become worthless.
If
any of the VIE becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy assets held by
such entity, which could materially and adversely affect our business, financial condition and results of operations.
We
currently conduct our operations in China through contractual arrangements with the VIEs. As part of these arrangements, substantially
all of our assets that are important to the operation of our business are held by the VIEs. If any of these entities goes bankrupt and
all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our
business activities, which could materially and adversely affect our business, financial condition and results of operations. If any
of the VIEs undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors may claim
rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely
affect our business, our ability to generate revenue and the market price of our common stock.
Risks
Associated With Doing Business in China
Changes
in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the
profitability of our business.
The
PRC’s economy is in a transition from a planned economy to a market-oriented economy subject to five-year and annual plans adopted
by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic
conditions within the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under
this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and
business development in the PRC will follow market forces. While we believe that this trend will continue, there can be no assurance
that this will be the case. A change in policies by the PRC government could adversely affect our interests by, among other factors:
changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources
of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform
policies for more than two decades, there is no assurance that the government will continue to pursue such policies or that such policies
may not be significantly altered, especially in the event of a change in leadership, social or political disruption, confiscatory taxation,
restrictions on currency conversion, imports or sources of supplies, or ability to continue as a for-profit enterprise, expropriation
or nationalization of private enterprises, changes in the allocation of resources or other circumstances affecting the PRC’s political,
economic and social environment.
Substantial
uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations
could have a significant impact upon the business that we may be able to conduct in the PRC and accordingly on the results of our operations
and financial condition.
Our
business operations conducted through the VIEs may be adversely affected by the current and future political environment in the PRC.
The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our
ability to operate in China may be adversely affected by changes in Chinese laws and regulations. Under the current government leadership,
the government of the PRC has been pursuing reform policies which have adversely affected China-based operating companies whose securities
are listed in the United States, with significant policies changes being made from time to time without notice. There are substantial
uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual arrangements with borrowers in the event of the imposition
of statutory liens, death, bankruptcy or criminal proceedings. Only after 1979 did the Chinese government begin to promulgate a comprehensive
system of laws that regulate economic affairs in general, deal with economic matters such as foreign investment, corporate organization
and governance, commerce, taxation and trade, as well as encourage foreign investment in China. Although the influence of the law has
been increasing, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently
cover all aspects of economic activities in China. Also, because these laws and regulations are relatively new, and because of the limited
volume of published cases and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve
significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
In addition, there have been constant changes and amendments of laws and regulations over the past 30 years in order to keep up with
the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws and regulations
and decide contractual disputes and issues, their inexperience in adjudicating new business and new polices or regulations in certain
less developed areas causes uncertainty and may affect our business. Consequently, we cannot predict the future direction of Chinese
legislative activities with respect to either businesses with foreign investment or the effectiveness on enforcement of laws and regulations
in China. The uncertainties, including new laws and regulations and changes of existing laws, as well as judicial interpretation by inexperienced
officials in the agencies and courts in certain areas, may cause possible problems to foreign investors. Although the PRC government
has been pursuing economic reform policies for more than two decades, the PRC government continues to exercise significant control over
economic growth in the PRC through the allocation of resources, controlling payments of foreign currency, setting monetary policy and
imposing policies that impact particular industries in different ways. We cannot assure you that the PRC government will continue to
pursue policies favoring a market oriented economy or that existing policies will not be significantly altered, especially in the event
of a change in leadership, social or political disruption, or other circumstances affecting political, economic and social life in the
PRC. Any adverse changes in Chinese laws and regulations and the Chinese government’s significant oversight and discretion over
the conduct of our business could significantly limit or completely hinder our ability to offer or continue to offer securities to investors
and cause the value of our securities to significantly decline or be worthless.
Adverse
regulatory developments in China may subject us to additional regulatory review, and additional disclosure requirements and regulatory
scrutiny to be adopted by the SEC in response to risks related to recent regulatory developments in China may impose additional compliance
requirements for companies like us with significant China-based operations, all of which could increase our compliance costs, subject
us to additional disclosure requirements.
The
recent regulatory developments in China, in particular with respect to restrictions on China-based companies raising capital offshore,
may lead to additional regulatory review in China over our financing and capital raising activities in the United States. In addition,
we may be subject to industry-wide regulations that may be adopted by the relevant PRC authorities, which may have the effect of limiting
our service offerings, restricting the scope of our operations in China, or causing the suspension or termination of our business operations
in China entirely, all of which will materially and adversely affect our business, financial condition and results of operations. We
may have to adjust, modify, or completely change our business operations in response to adverse regulatory changes or policy developments,
and we cannot assure you that any remedial action adopted by us can be completed in a timely, cost-efficient, or liability-free manner
or at all.
On
July 30, 2021, in response to the recent regulatory developments in China and actions adopted by the PRC government, the Chairman of
the SEC issued a statement asking the SEC staff to seek additional disclosures from offshore issuers associated with China-based operating
companies before their registration statements will be declared effective. On August 1, 2021, the China Securities Regulatory Commission
stated in a statement that it had taken note of the new disclosure requirements announced by the SEC regarding the listings of Chinese
companies and the recent regulatory development in China, and that both countries should strengthen communications on regulating China-related
issuers. We cannot guarantee that we will not be subject to tightened regulatory review and we could be exposed to government interference
in China.
A
slowdown or other adverse developments in the PRC economy may harm our customers and the demand for our services and our products.
All
of our operations are conducted in the PRC. Although the PRC economy has grown significantly in recent years, there is no assurance that
this growth will continue. A slowdown in overall economic growth, an economic downturn, a recession or other adverse economic developments
in the PRC could significantly reduce the demand for our products and services.
If
relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease.
At
various times during recent years, the United States and China have had significant disagreements over political and economic issues.
Controversies may arise in the future between these two countries that may affect our economic outlook both in the United States and
in China. Any political or trade controversies between the United States and China, whether or not directly related to our business,
could reduce the price of our common stock.
Future
inflation in China may inhibit the profitability of our business in China.
In
recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead
to growth in the money supply and rising inflation. If prices for our services and products rise at a rate that is insufficient to compensate
for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to the adoption by Chinese
government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and
contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take
other action, which could inhibit economic activity in China, and thereby harm the market for our services and products.
The
fluctuation of the Renminbi may have a material adverse effect on your investment.
The
change in value of the Renminbi against the U.S. dollar and other currencies is affected by, various factors, such as changes in China’s
political and economic conditions and China’s foreign exchange controls. On July 21, 2005, the PRC government changed its decade-old
policy of pegging the value of the Renminbi to the U.S. dollar. Under such policy, the Renminbi was permitted to fluctuate within a narrow
and managed band against a basket of certain foreign currencies. Later on, the People’s Bank of China has decided to further implement
the reform of the RMB exchange regime and to enhance the flexibility of RMB exchange rates. Such changes in policy have resulted in a
significant appreciation of the Renminbi against the U.S. dollar since 2005. There remains significant international pressure on the
PRC government to adopt a more flexible currency policy, which could result in a further and more significant adjustment of the Renminbi
against the U.S. dollar. Any significant appreciation or revaluation of the Renminbi may have a material adverse effect on the value
of, and any dividends payable on, shares of our common stock in foreign currency terms. More specifically, if we decide to convert our
Renminbi into U.S. dollars, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount
available to us. To the extent that we need to convert U.S. dollars we receive from our 2018 offering into Renminbi for our operations,
appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion.
In addition, appreciation or depreciation in the exchange rate of the Renminbi to the U.S. dollar could materially and adversely affect
the price of shares of our common stock in U.S. dollars without giving effect to any underlying change in our business or results of
operations.
Restrictions
on currency exchange may limit our ability to receive and use our revenue effectively.
Substantially
all of our revenue is denominated in Renminbi. As a result, restrictions on currency exchange may limit our ability to use revenue generated
in Renminbi to fund any business activities we may have outside China in the future or to make dividend payments to our stockholders
in U.S. dollars. Under current PRC laws and regulations, Renminbi is freely convertible for current account items, such as trade and
service-related foreign exchange transactions and dividend distributions. However, Renminbi is not freely convertible for direct investment
or loans or investments in securities outside China, unless such use is approved by SAFE. For example, foreign exchange transactions
under our subsidiary’s capital account, including principal payments in respect of foreign currency-denominated obligations, remain
subject to significant foreign exchange controls and the approval requirement of SAFE. The statutory limit for the total amount of foreign
debts of a foreign-invested company is the difference between the amount of total investment as approved by MOFCOM or its local counterpart
and the amount of registered capital of such foreign-invested company. These limitations could affect our ability to convert Renminbi
into foreign currency for capital expenditures.
Our
subsidiaries and affiliated entities in China are subject to restrictions on making dividends and other payments to us.
We
are a holding company and rely principally on dividends paid by our subsidiary in China for our cash needs, including paying dividends
and other cash distributions to our stockholders to the extent we choose to do so, servicing any debt we may incur and paying our operating
expenses. Our wholly-owned subsidiaries, such as Tenet Jove’s and Tenet Huatai’s income in turn depends on the fees paid
by the VIEs in China under the VIE Agreements. Current PRC regulations permit our subsidiary in China to pay dividends to us only out
of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Under the applicable
requirements of PRC law, Our wholly-owned subsidiaries in China may only distribute dividends after it has made allowances to fund certain
statutory reserves. These reserves are not distributable as cash dividends. In addition, if our subsidiaries or our affiliated entities
in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends
or make other payments to us. Any such restrictions may materially affect such entities’ ability to make dividends or make payments,
in service fees or otherwise, to us, which may materially and adversely affect our business, financial condition and results of operations.
The
newly enacted “Holding Foreign Companies Accountable Act” and proposed “Accelerating Holding Foreign Companies Accountable
Act” both call for additional and more stringent criteria to be applied to restrictive market companies upon assessing the qualification
of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to
our offering and if our auditors fail to permit the PCAOB to inspect the auditing firm, our common stock may be subject to delisting.
On
April 21, 2020, the SEC and the PCAOB released a joint statement highlighting the risks associated with investing in companies based
in or having substantial operations in certain “restrictive markets,” including China. The joint statement emphasized the
risks associated with lack of access from the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in the
markets where the PCAOB has limited access to the local auditing firms and their work.
On
December 18, 2020, the “Holding Foreign Companies Accountable Act” was signed by President Donald Trump and became law. This
legislation requires certain issuers to establish that they are not owned or controlled by a foreign government. Specifically, an issuer
must make this certification if the PCAOB is unable to audit specified reports because the issuer has retained a foreign public accounting
firm that is not subject to inspection by the PCAOB. Furthermore, if the PCAOB is unable to inspect the issuer’s public accounting
firm for three consecutive years, the issuer’s securities are banned from trading on a national stock exchange.
On
September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which became law in December 2020. In June 2021, the Senate
passed the AHFCAA, which, if signed into law, would reduce the time period for the delisting of foreign companies under the HFCAA to
two consecutive years, instead of three years.
The
limited PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors in China.
As a result, investors may be deprived of the benefits of such PCAOB inspections and supervision. The inability of the PCAOB to conduct
inspections of auditors in China makes it more difficult to evaluate the effectiveness of these public accounting firms’ audit
procedures or quality control procedures, which could cause existing investors and potential investors in our Ordinary Shares to lose
confidence in our audit procedures and audited financial statements.
Our
current auditor, Assensture PAC, is an independent registered public accounting firm with the PCAOB and is subject to laws in the U.S.
pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our auditor
is subject to inspection by the PCAOB on a regular basis. However, the above recent developments may have added uncertainties to our
offerings, to which Nasdaq may apply additional and more stringent criteria with respect to our auditor’s audit and quality control
procedures, adequacy of personnel and training, sufficiency of resources, geographic reach, and experience as related to their audits.
The
PRC’s legal and judicial system may not adequately protect our business and operations and the rights of foreign investors.
The
legal and judicial systems in the PRC are still rudimentary, and enforcement of existing laws is uncertain. As a result, it may be impossible
to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of
another jurisdiction. The PRC’s legal system is based on the civil law regime, that is, it is based on written statutes. A decision
by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation
of Chinese laws may be varied to reflect domestic political changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign
investors. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting
the PRC’s political, economic or social life, will not affect the PRC government’s ability to continue to support and pursue
these reforms. Such a shift could have a material adverse effect on our business and prospects.
Because
our principal assets are located outside of the United States and most of our directors and officers reside outside the United States,
it may be difficult for you to enforce your rights based on U.S. federal securities laws against us and our officers and directors in
the U.S. or to enforce a U.S. court judgment against us or them in the PRC.
Most
of our directors and officers reside outside the United States. In addition, our operating subsidiaries are located in the PRC and substantially
all of their assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce
their legal rights against us based on the civil liability provisions of the U.S. federal securities laws against us in the courts of
either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, it may be difficult to enforce such judgments in
PRC courts.
Certain
PRC regulations, including the M&A Rules and national security regulations, may require a complicated review and approval process
which could make it more difficult for us to pursue growth through acquisitions in China.
The
M&A Rules established additional procedures and requirements that could make merger and acquisition activities in China by foreign
investors more time-consuming and complex. For example, the MOFCOM must be notified in the event a foreign investor takes control of
a PRC domestic enterprise. In addition, certain acquisitions of domestic companies by offshore companies that are related to or affiliated
with the same entities or individuals of the domestic companies, are subject to approval by the MOFCOM. In addition, the Implementing
Rules Concerning Security Review on Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by the MOFCOM in August
2011, require that mergers and acquisitions by foreign investors in “any industry with national security concerns” be subject
to national security review by the MOFCOM. In addition, any activities attempting to circumvent such review process, including structuring
the transaction through a proxy or contractual control arrangement, are strictly prohibited. There is significant uncertainty regarding
the interpretation and implementation of these regulations relating to merger and acquisition activities in China. In addition, complying
with these requirements could be time-consuming, and the required notification, review or approval process may materially delay or affect
our ability to complete merger and acquisition transactions in China. As a result, our ability to seek growth through acquisitions may
be materially and adversely affected. In addition, if the MOFCOM determines that we should have obtained its approval for our entry into
contractual arrangements with our affiliated entities, we may be required to file for remedial approvals. There is no assurance that
we would be able to obtain such approval from the MOFCOM. We may also be subject to administrative fines or penalties by the MOFCOM that
may require us to limit our business operations in the PRC, delay or restrict the conversion and remittance of our funds in foreign currencies
into the PRC or take other actions that could have material and adverse effect on our business, financial condition and results of operations.
PRC
regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or
additional capital contributions to our PRC subsidiary and affiliated entities, which could harm our liquidity and our ability to fund
and expand our business.
As
an offshore holding company of our PRC subsidiary, we may (i) make loans to our PRC subsidiary and affiliated entities, (ii) make additional
capital contributions to our PRC subsidiary, (iii) establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries,
and (iv) acquire offshore entities with business operations in China in an offshore transaction. However, most of these uses are subject
to PRC regulations and approvals. For example:
|
● |
loans
by us to our wholly-owned subsidiary in China, which is a foreign-invested enterprise, cannot exceed statutory limits and must be
registered with the State Administration of Foreign Exchange of the PRC (or SAFE) or its local counterparts; |
|
● |
loans
by us to our affiliated entities, which are domestic PRC entities, over a certain threshold must be approved by the relevant government
authorities and must also be registered with SAFE or its local counterparts; and |
|
● |
capital
contributions to our wholly-owned subsidiary must file a record with the MOFCOM or its local counterparts and shall also be limited
to the difference between the registered capital and the total investment amount. |
We
cannot assure you that we will be able to obtain these government registrations or filings on a timely basis, or at all. If we fail to
finish such registrations or filings, our ability to capitalize our PRC subsidiary’s operations may be adversely affected, which
could adversely affect our liquidity and our ability to fund and expand our business.
On
March 30, 2015, the State Administration of Foreign Exchange (SAFE) promulgated a notice relating to the administration of foreign-invested
company of its capital contribution in foreign currency into Renminbi (Hui Fa [2015]19) (or Circular 19). Although Circular 19 has fastened
the administration relating to the settlement of exchange of foreign-investment, allows the foreign-invested company to settle the exchange
on a voluntary basis, it still requires that the bank review the authenticity and compliance of a foreign-invested company’s settlement
of exchange in previous time, and the settled in Renminbi converted from foreign currencies shall deposit on the foreign exchange settlement
account, and shall not be used for several purposes as listed in the “negative list”. As a result, the notice may limit our
ability to transfer funds to our operations in China through our PRC subsidiary, which may affect our ability to expand our business.
Meanwhile, the foreign exchange policy is unpredictable in China, it shall be various with the nationwide economic pattern, the strict
foreign exchange policy may have an adverse impact in our capital cash and may limit our business expansion.
Governmental
control of the convertibility of Renminbi and restrictions on the transfer of cash into and out of China may constrain our liquidity
and adversely affect our ability to use cash in our operation.
The
PRC government also imposes controls on the convertibility of the Renminbi into foreign currencies. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from SAFE, by complying with certain procedural requirements.
Approvals from appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out
of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may, at its discretion,
impose any restriction on access of foreign currencies for current account transactions.
As
an offshore holding company of our PRC subsidiary, the majority of our income is received in Renminbi. If the PRC government imposes
restrictions on access of foreign currencies for current account transactions, we may not be able to pay dividends in foreign currencies
to our stockholders.
A
failure by the beneficial owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations could restrict
our ability to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability under PRC
law.
SAFE
has promulgated regulations, including the Notice on Relevant Issues Relating to Domestic Residents’ Investment and Financing and
Round-Trip Investment through Special Purpose Vehicles (or SAFE Circular No. 37), effective on July 4, 2014, and its appendices, that
require PRC residents, including PRC institutions and individuals, to register with local branches of SAFE in connection with their direct
establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’
legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular No. 37
as a “special purpose vehicle.” SAFE Circular No. 37 further requires amendment to the registration in the event of any significant
changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer
or exchange, merger, division or other material event. In the event that a PRC stockholder holding interests in a special purpose vehicle
fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit
distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose
vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Further, failure to comply with the
various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.
These
regulations apply to our direct and indirect stockholders who are PRC residents and may apply to any offshore acquisitions or share transfers
that we make in the future if our shares are issued to PRC residents. However, in practice, different local SAFE branches may have different
views and procedures on the application and implementation of SAFE regulations, and since SAFE Circular No. 37 was relatively new, there
remains uncertainty with respect to its implementation. As of the date of this reoffer prospectus, all PRC residents known to us that
currently hold direct or indirect interests in our company have completed the necessary registrations with SAFE as required by SAFE Circular
37. However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our
company, nor can we compel our beneficial owners to comply with the requirements of SAFE Circular 37. However, we cannot assure you that
these individuals or any other direct or indirect stockholders or beneficial owners of our company who are PRC residents will be able
to successfully complete the registration or update the registration of their direct and indirect equity interest as required in the
future. If they fail to make or update the registration, our stockholders could be subject to fines and legal penalties, and SAFE could
restrict our cross-border investment activities and our foreign exchange activities, including restricting our PRC subsidiary’s
ability to distribute dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from paying dividends.
As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.
Increases
in labor costs in the PRC may adversely affect our business and our profitability.
The
economy of China has been experiencing significant growth, leading to inflation and increased labor costs. China’s overall economy
and the average wage in the PRC are expected to continue to grow. Future increases in China’s inflation and material increases
in the cost of labor may materially and adversely affect our profitability and results of operations.
Compliance
with China’s new Data Security Law, Measures on Cybersecurity Review (revised draft for public consultation), Personal Information
Protection Law (second draft for consultation), regulations and guidelines relating to the multi-level protection scheme and any other
future laws and regulations may entail significant expenses and could materially affect our business.
China
has implemented or will implement rules and is considering a number of additional proposals relating to data protection. China’s
new Data Security Law promulgated by the Standing Committee of the National People’s Congress of China in June 2021, or the Data
Security Law, will take effect in September 2021. The Data Security Law provides that the data processing activities must be conducted
based on “data classification and hierarchical protection system” for the purpose of data protection and prohibits entities
in China from transferring data stored in China to foreign law enforcement agencies or judicial authorities without prior approval by
the Chinese government. As the Data Security Law has not yet come into effect, we may need to make adjustments to our data processing
practices to comply with this law.
Additionally,
China’s Cyber Security Law, requires companies to take certain organizational, technical and administrative measures and other
necessary measures to ensure the security of their networks and data stored on their networks. Specifically, the Cyber Security Law provides
that China adopt a multi-level protection scheme (MLPS), under which network operators are required to perform obligations of security
protection to ensure that the network is free from interference, disruption or unauthorized access, and prevent network data from being
disclosed, stolen or tampered. Under the MLPS, entities operating information systems must have a thorough assessment of the risks and
the conditions of their information and network systems to determine the level to which the entity’s information and network systems
belong-from the lowest Level 1 to the highest Level 5 pursuant to the Measures for the Graded Protection and the Guidelines for Grading
of Classified Protection of Cyber Security. The grading result will determine the set of security protection obligations that entities
must comply with. Entities classified as Level 2 or above should report the grade to the relevant government authority for examination
and approval.
Recently,
the Cyberspace Administration of China has taken action against several Chinese internet companies in connection with their initial public
offerings on U.S. securities exchanges, for alleged national security risks and improper collection and use of the personal information
of Chinese data subjects. According to the official announcement, the action was initiated based on the National Security Law, the Cyber
Security Law and the Measures on Cybersecurity Review, which are aimed at “preventing national data security risks, maintaining
national security and safeguarding public interests.” On July 10, 2021, the Cyberspace Administration of China published a revised
draft of the Measures on Cybersecurity Review, expanding the cybersecurity review to data processing operators in possession of personal
information of over 1 million users if the operators intend to list their securities in a foreign country.
It
is unclear at the present time how widespread the cybersecurity review requirement and the enforcement action will be and what effect
they will have on the life sciences sector generally and the Company in particular. China’s regulators may impose penalties for
non-compliance ranging from fines or suspension of operations, and this could lead to us delisting from the U.S. stock market.
Also,
on August 20, 2021, the National People’s Congress passed the Personal Information Protection Law, which will be implemented on
November 1, 2021. The law creates a comprehensive set of data privacy and protection requirements that apply to the processing of personal
information and expands data protection compliance obligations to cover the processing of personal information of persons by organizations
and individuals in China, and the processing of personal information of persons in China outside of China if such processing is for purposes
of providing products and services to, or analyzing and evaluating the behavior of, persons in China. The law also proposes that critical
information infrastructure operators and personal information processing entities who process personal information meeting a volume threshold
to-be-set by Chinese cyberspace regulators are also required to store in China personal information generated or collected in China,
and to pass a security assessment administered by Chinese cyberspace regulators for any export of such personal information. Lastly,
the draft contains proposals for significant fines for serious violations of up to RMB 50 million or 5% of annual revenues from the prior
year.
Interpretation,
application and enforcement of these laws, rules and regulations evolve from time to time and their scope may continually change, through
new legislation, amendments to existing legislation and changes in enforcement. Compliance with the Cyber Security Law and the Data Security
Law could significantly increase the cost to us of providing our service offerings, require significant changes to our operations or
even prevent us from providing certain service offerings in jurisdictions in which we currently operate or in which we may operate in
the future. Despite our efforts to comply with applicable laws, regulations and other obligations relating to privacy, data protection
and information security, it is possible that our practices, offerings or platform could fail to meet all of the requirements imposed
on us by the Cyber Security Law, the Data Security Law and/or related implementing regulations. Any failure on our part to comply with
such law or regulations or any other obligations relating to privacy, data protection or information security, or any compromise of security
that results in unauthorized access, use or release of personally identifiable information or other data, or the perception or allegation
that any of the foregoing types of failure or compromise has occurred, could damage our reputation, discourage new and existing counterparties
from contracting with us or result in investigations, fines, suspension or other penalties by Chinese government authorities and private
claims or litigation, any of which could materially adversely affect our business, financial condition and results of operations. Even
if our practices are not subject to legal challenge, the perception of privacy concerns, whether or not valid, may harm our reputation
and brand and adversely affect our business, financial condition and results of operations. Moreover, the legal uncertainty created by
the Data Security Law and the recent Chinese government actions could materially adversely affect our ability, on favorable terms, to
raise capital, including engaging in follow-on offerings of our securities in the U.S. market or the Stock Exchange of Hong Kong.
Our
current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.
On
March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which became effective on January 1, 2020.
The Foreign Investment Law does not explicitly classify whether variable interest entities that are controlled through contractual arrangements
would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has
a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China
through other means as provided by laws, administrative regulations or the State Council. Therefore, it still leaves space for interpretation,
future laws, administrative regulations or provisions of the State Council to include contractual arrangements as a form of foreign investment.
Therefore, there can be no assurance that our control over the VIE through contractual arrangements will not be deemed as a foreign investment
under the Foreign Investment Law in the future.
The
Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate
in industries specified as either “restricted” or “prohibited” from foreign investment on a “negative list”.
The Special Administrative Measures for Access to Foreign Investment (Negative List) (2020 Edition) (Order No. 32 of the National Development
and Reform Commission and the Ministry of Commerce), came into effect on July 23, 2020, further shortened the “negative list”
compared to the 2019 edition, increasing foreign investment openness to the services, manufacturing and agriculture industries.
The
Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries
will require market entry clearance and other approvals from relevant PRC government authorities. If our control over VIEs through contractual
arrangements is deemed as foreign investment in the future, and any business of Shineco is “restricted” or “prohibited”
from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign
Investment Law, the contractual arrangements may be deemed invalid and illegal, and we may be required to unwind such contractual arrangements
and restructure our business operations, any of which may have material adverse effects on our business operations.
Furthermore,
if future laws, administrative regulations or provisions mandate further actions to be taken by companies with existing VIE contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure
to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely
affect our current corporate structure and business operations.
The
Chinese government exerts substantial influence over the manner in which we must conduct our business activities. If the Chinese government
intervenes or influences our operations in the future, it could result in a material change in our operations and/or the value of your
common stock.
The
Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through
regulations and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those
relating to taxation, insurance commissions, property and other matters. The central or local governments of these jurisdictions may
impose new and restrictive regulations or interpretations of existing regulations that would require additional expenditures and efforts
on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including
any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant effect on economic conditions in China, and result in
a material change in our operations and/or the value of our common stock.
For
example, the Chinese cybersecurity regulator announced on July 2, 2021, that it had begun an investigation of Didi Global Inc. (NYSE:
DIDI) and two days later ordered that Didi Global Inc.’s application be removed from all the smartphone application stores in China.
Given
the example of Didi Global Inc. and recent statements of by the Chinese government indicating an intent to exert more oversight and control
overseas offerings and foreign investments in China-based companies, such regulatory actions could significantly limit or completely
hinder our ability to offer or continue to offer securities to investors and cause the value and trading prices of our common stock to
significantly decline or become worthless.
We
have been closely monitoring regulatory developments in China regarding any necessary approvals from the CSRC, CAC or other PRC governmental
authorities required for overseas listings. If (i) we, our subsidiaries or the VIEs inadvertently conclude that any of such permission
was not required or (ii) it is determined in the future that the approval of the CSRC, CAC or any other regulatory authority is required
for maintaining listing of our securities on Nasdaq, we will actively seek such permissions or approvals but may face sanctions by the
CSRC, CAC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit
our ability to pay dividends outside of China, limit our operations in China, delay or restrict the repatriation of the proceeds from
offerings into China or take other actions that could have a material adverse effect on our business, financial condition, results of
operations and prospects, as well as the trading price of our securities. The CSRC, CAC or other PRC regulatory agencies also may take
actions requiring us, or making it advisable for us, to halt offerings before settlement and delivery of our securities. Any uncertainties
and/or negative publicity regarding such an approval requirement could have a material adverse effect on the trading price of our securities.
In the event that we failed to obtain such required approvals or permissions, it would be likely that our securities would be delisted
from Nasdaq or any other foreign exchange our securities are listed then.
Although
we are currently not required to obtain any permission from any PRC government to continue listing our common stock on Nasdaq, it will
remain uncertain when and whether we will be required to obtain any permission from the PRC government to continue listing our shares
of common stock on Nasdaq, and even when we obtain such permission in accordance with the new rules and regulations, it will be unclear
whether such permission will be rescinded or revoked at some point in time.
In
light of recent events indicating greater oversight by the CAC over data security, we may be subject to a variety of PRC laws and other
obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have a
material adverse effect on our business, our listing on Nasdaq, financial condition, and results of operations .
The
regulatory requirements with respect to cybersecurity and data privacy are constantly evolving and can be subject to varying interpretations,
and significant changes, resulting in uncertainties about the scope of our responsibilities in that regard. Failure to comply with the
cybersecurity and data privacy requirements in a timely manner, or at all, may subject us to government enforcement actions and investigations,
fines, penalties, suspension or disruption of our operations, among other things. The Cybersecurity Law, which was adopted by the National
People’s Congress on November 7, 2016 and came into force on June 1, 2017, and the Cybersecurity Review Measures, or the “Review
Measures,” which were promulgated on April 13, 2020, provide that personal information and important data collected and generated
by a critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical
information infrastructure operator purchases internet products and services that affect or may affect national security, it should be
subject to cybersecurity review by the CAC. In addition, a cybersecurity review is required where critical information infrastructure
operators, or the “CIIOs,” purchase network-related products and services, which products and services affect or may affect
national security. Due to the lack of further interpretations, the exact scope of what constitute a “CIIO” remains unclear.
Further, the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws.
On
June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law, which took effect on
September 1, 2021. The Data Security Law requires that data shall not be collected by theft or other illegal means, and also provides
for a data classification and hierarchical protection system. The data classification and hierarchical protection system puts data into
different groups according to its importance in economic and social development, and the damages it may cause to national security, public
interests, or the legitimate rights and interests of individuals and organizations in case the data is falsified, damaged, disclosed,
illegally obtained or illegally used. In addition, the Office of the Central Cyberspace Affairs Commission and the Office of Cybersecurity
Review under the CAC, published the Measures of Cybersecurity Review (Revised Draft for Comments) on July 10, 2021, which provides that,
aside from CIIOs, data processing operators engaging in data processing activities that affect or may affect national security, must
be subject to the cybersecurity review by the Cybersecurity Review Office. On December 28, 2021, a total of thirteen governmental departments
of the PRC, including the PRC State Internet Information Office, issued the Measures of Cybersecurity Review, which became effective
on February 15, 2022. According to the Measures of Cybersecurity Review, a cybersecurity review is conducted by the CAC, to assess potential
national security risks that may be brought about by any procurement, data processing, or overseas listing. The Measures of Cybersecurity
Review further, if effective, would require that critical information infrastructure operators and services and data processing operators
that possess personal data of at least one (1) million users must apply for a review by the Cybersecurity Review Office of PRC, if they
plan to conduct securities listings on foreign exchanges. In addition to the new Measures of Cybersecurity Review, it also remains uncertain
whether any future regulatory changes would impose additional restrictions on companies like us.
However,
it remains uncertain as to how the Measures of Cybersecurity Review will be interpreted or implemented and whether the PRC regulatory
agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Measures
of Cybersecurity Review. If any such new laws, regulations, rules, or implementation and interpretation come into effect, we expect to
take all reasonable measures and actions to comply therewith. However, we cannot assure you that PRC regulatory agencies, including the
CAC, would take the same view as we do, and we will not be subject to the cybersecurity review by the CAC or designated as a CIIO. We
may experience disruptions to our operations should we be required to have a cybersecurity review by the CAC. Any cybersecurity review
could also result in uncertainty to our continued Nasdaq listing, negative impacts on our share trading prices and diversion of our managerial
and financial resources.
Risks
Related To Our Business
Our
herb farming business is subject to the volatility of prices for raw TCM herbs.
We
currently planted gingko trees in our leased farm land. However, in the future, we may continue to cultivate and sell certain herbs in
bulk to third-party vendors, based on local market prices primarily determined by TCM manufacturers and trading companies. Such market
prices have increased significantly in recent years in response to changes in the supply of and demand for raw herbs, market uncertainty
and a variety of additional factors that are beyond our control, including inflation, changes in weather, disease outbreaks, domestic
government regulation, market speculation and overall economic conditions. There can be no assurance that market prices, which historically
have fluctuated widely, will continue to increase or remain stable, and any future declines in prices may negatively impact the viability
of our herb farming business.
Unforeseen
and severe weather can reduce cultivation activities and lead to a decrease in anticipated harvest.
Seasonal
climate change and weather variations such as levels of rainfall and temperature may, among other things, affect the quality, overall
supply and availability of raw herbs. Sustained adverse weather conditions in Xinjiang Province and Shandong Province in general where
our herbs are planted, such as rain, extreme cold or snow, could disrupt or curtail cultivation activities. This in turn could reduce
our anticipated harvest yields, delay the timing of our anticipated harvest and distribution, and negatively affect the quality of our
harvest. In addition, natural disasters such as fires, earthquakes, snowstorms, floods or droughts, or natural conditions such as crop
disease, pests or soil erosion, may also negatively impact our cultivation and harvest.
In
addition, the actual climatic conditions of the areas where we cultivate our plants may not conform to historical patterns and may be
affected by variations in weather patterns, including any potential impact of climate change. The effects of climate change may produce
more unpredictable weather events that may adversely affect our ability to cultivate and harvest successfully. The occurrence of any
of these may materially harm our herb farming business.
We
may not be able to secure financing needed for future operating needs on acceptable terms, or on any terms at all.
From
time to time, we may seek additional financing to provide the capital required to maintain or expand our production facilities, research
and development initiatives and equipment and/or working capital, as well as to repay outstanding loans if cash flow from operations
is insufficient to do so. We cannot predict with certainty the timing or amount of any such capital requirements. If such financing is
not available on satisfactory terms, we may be unable to expand our business or to develop new business at the rate desired, and our
operating results may suffer. If we are able to incur debt, we may be subject to certain restrictions imposed by the terms of the debt
and the repayment of such debt may limit our cash flow and our ability to grow. If we are unable to incur debt, we may be forced to issue
additional equity, which could have a dilutive effect on our current stockholders.
Expansion
of our business may put added pressure on our management and operational infrastructure impeding our ability to meet any increased demand
for our products and services and possibly hurting our operating results.
Our
business plan is to significantly grow our operations to meet anticipated growth in demand for our products and services. Our planned
growth includes the increase of our line of products and expansion of sales in our existing markets as well as new markets over the next
few years. Growth in our business may place a significant strain on our personnel, management, financial systems and other resources.
The evolution of our business also presents numerous risks and challenges, including:
|
● |
the
continued acceptance of our products and services by the pharmaceutical markets; |
|
|
|
|
● |
our
ability to successfully and rapidly expand sales to potential customers in response to potentially increasing demand; |
|
|
|
|
● |
the
costs associated with such growth, which are difficult to quantify, but could be significant; |
|
|
|
|
● |
rapid
technological change; and |
|
|
|
|
● |
the
highly competitive nature of the pharmaceutical industries. |
If
we are successful in obtaining rapid market growth of our products, we will be required to deliver large volumes of quality products
and services to customers on a timely basis at a reasonable cost to those customers. Meeting any such increased demands will require
us to expand our manufacturing facilities, to increase our ability to purchase raw materials, to increase the size of our work force,
to expand our quality control capabilities and to increase the scale upon which we provide our products and services. Such demands would
require more capital and working capital than we currently have available and we may be unable to meet the needs of our customers, which
could adversely affect our relationship with our customers and reduce our revenues.
There
can be no assurance that we can sustain or increase profitability.
There
can be no assurance that we can attain or increase profitability. Unanticipated problems, expenses, and delays are frequently encountered
in developing and marketing products. These include, but are not limited to, competition, the need to develop customers and market expertise,
market conditions, sales, marketing, increases in the cost of raw materials and governmental regulation. Our failure to meet any of these
conditions would have a materially adverse effect upon us and may force us to reduce or curtail our operations. We may not achieve our
business growth objectives and the failure to achieve such goals would have an adverse impact on our business and results of operations.
In addition, we expect to incur additional general and administrative expenses as a public company in the United States which could also
have a negative impact on our future profitability.
Our
growth strategy includes the pursuit of acquisitions and new product development which could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
Our
business strategy includes growth through strategic acquisitions of one or more complimentary businesses and the development of new products
and technologies. Growth through acquisitions and/or new product development will involve significant expenditures of capital and other
resources and involve significant risks. Developing new pharmaceutical products will result in research and development costs that may
achieve no tangible results and will adversely affect our future profitability. In addition, any acquisition or combination that we consummate
will likely involve, among other things, the payment of cash, the incurrence of contingent liabilities and the amortization of expenses
related to goodwill and other intangible assets, and transaction costs, which may adversely affect our business, financial condition,
results of operations and growth prospects. Our ability to integrate and organize any new businesses and/or products, whether internally
developed or obtained by acquisition or combination, will likely require significant expansion of our operations. There is no assurance
that we will have or be able to obtain the necessary resources to satisfactorily effect such expansion, and the failure to do so could
have a material adverse effect on our business, financial condition, results of operations and growth prospects. In addition, future
acquisitions or combinations by the company involve risks of, among other things, entering markets or segments in which we have no or
limited prior experience, the potential loss of key employees or difficulty, delay or failure in the integration of the operations of
any such new business with our current business and operating and financial difficulties of any new or newly combined operations, any
of which could have a materially adverse effect on our business, financial condition, results of operations and growth prospects. Moreover,
there can be no assurance that the anticipated benefits of any internally developed new business segment or business combination will
be realized.
The
failure to maintain our relationships with our existing customers or the failure to obtain new customers could negatively affect our
revenues and decrease our earnings or have an adverse impact on our business.
We
maintain purchase orders for the sales of our products to our customers. Although we have entered into agreements to supply our customers,
we cannot assure that such agreements will be renewed when the terms of such agreements expire or that our relationships with our customers
will be maintained on satisfactory terms or at all. The failure to maintain our relationships with our customers or the failure to obtain
new customers could negatively affect our revenues and decrease our earnings or have an adverse impact on our business.
We
rely on a limited number of suppliers and the loss of any of our suppliers, or delays or problems in the supply of materials used in
our products, could materially and adversely affect our business, financial condition, results of operations and growth prospects.
We
generally rely on a limited number of suppliers for most of the primary materials used in our products. Our suppliers may not be able
to supply the necessary materials without interruption and we may not have adequate remedies for such failure, which could result in
a shortage of our products. If one of our suppliers fails or refuses to supply us for any reason, it could take time and expense to obtain
a new supplier. In addition, our failure to maintain existing relationships with our suppliers or to establish new relationships in the
future could negatively affect our ability to obtain the materials used in our products in a timely manner. The search for new suppliers
could potentially delay the manufacture of our products, resulting in shortages in the marketplace and may cause us to incur additional
expense. Failure to comply with applicable legal requirements subjects our suppliers to possible legal or regulatory action, including
shutdown, which may adversely affect their ability to supply us with the materials we need for our products. Any delay in supplying,
or failure to supply, materials for our products by any of our suppliers could result in our inability to meet the commercial demand
for our products, and could adversely affect our business, financial condition, results of operations and growth prospects.
Our
existing indebtedness may adversely affect our ability to obtain additional funds and may increase our vulnerability to economic or business
downturns.
We
are subject to a number of risks associated with our indebtedness, including:
|
● |
we
must dedicate a portion of our cash flows from operations to pay debt service costs and, as a result, we have less funds available
for operations and other purposes; |
|
● |
it
may be more difficult and expensive to obtain additional funds through financings, if available at all; |
|
|
|
|
● |
we
are more vulnerable to economic downturns and fluctuations in interest rates, less able to withstand competitive pressures and less
flexible in reacting to changes in our industry and general economic conditions; and |
|
|
|
|
● |
if
we default under any of our existing credit facilities or if our creditors demand payment of a portion or all of our indebtedness,
we may not have sufficient funds to make such payments. |
Our
future success depends in part on our ability to make strategic acquisitions and investments. Our failure to consummate or handle the
risks associated with these acquisitions and investments could have a material adverse effect on our market penetration and revenues
growth.
As
part of our plan to expand our manufacturing capacity and product offerings, we intend to make strategic acquisitions in the highly-fragmented
traditional Chinese medicine sector. Strategic acquisitions could subject us to uncertainties and risks, including:
|
● |
high
acquisition and financing costs; |
|
|
|
|
● |
potential
ongoing financial obligations and unforeseen or hidden liabilities; |
|
|
|
|
● |
failure
to achieve the intended objectives, benefits or revenue-enhancing opportunities; |
|
|
|
|
● |
cost
of and difficulties in integrating acquired businesses and managing a larger business; and |
|
|
|
|
● |
diversion
of our resources and management attention. |
The
failure to increase our current manufacturing capacity could materially and adversely affect our business, financial condition, results
of operations and growth prospects.
We
currently manufacture our products at traditional manufacturing facilities to accommodate our production lines. Manufacturing products
in only one region in Shandong presents risks because a disaster, such as a fire or hurricane, may interrupt our manufacturing capability.
In such an event, we will have to resort to alternative sources of manufacturing that could increase our costs as well as result in significant
delays. Any increase in costs, slowdowns or shutdowns could have a material adverse effect on our business, financial condition, results
of operations and growth prospects.
Due
to the impact of COVID-19, our current utilization of the manufacturing facilities has not reached full capacity which may restrict our
ability to attract large customers who require certainty in the production process. We intend to expand our manufacturing operations
by adding production lines, but there is no assurance that we will have the financial resources required for this planned expansion or
that any such expansion will be successful or completed in a timely fashion or within budget. We may encounter difficulties and significant
unexpected costs and delays in scaling up our manufacturing operations. The failure to scale-up manufacturing operations in a timely
and cost-effective way may adversely affect our income. In the event the demand for our products rapidly increases or spikes in a certain
period, we may not have the manufacturing ability to fulfill demand, either in our own facilities or through agreements with third parties.
This lack of manufacturing capacity could have a material adverse effect on our business, financial condition, results of operations
and growth prospects.
The
loss of one or more members of our management team or other key employees could affect our ability to successfully grow our business.
Our
success and future growth depends to a significant degree on the skills and continued services of our management team and other key employees.
We do not currently have an employment agreement with any of our executive officers, nor do we currently maintain key person life insurance.
If one or more members of our management or other key employees were to resign or no longer be able to serve as our employees, it could
impair our revenue growth, business and future prospects. In addition, our ability to execute our business plan is dependent on our ability
to attract and retain additional highly skilled personnel.
If
we are unable to maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting
obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and
sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for
shares of our Common Stock.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal
control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer
and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles.
As
a public company, we have significant additional requirements for enhanced financial reporting and internal controls. We are required
to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of
2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting is a continuous
effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend
significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.
We
cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting.
We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will
maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to maintain
appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result
in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors
to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.
Risks
Relating to Investment in Our Common Stock
An
active and visible trading market for our common stock may not develop.
We
cannot predict whether an active market for our common stock will develop in the future. In the absence of an active trading market:
|
● |
Investors
may have difficulty buying and selling or obtaining market quotations; |
|
|
|
|
● |
Market
visibility for our common stock may be limited; and |
|
|
|
|
● |
A
lack of visibility for our common stock may have a depressive effect on the market price for our common stock. |
The
trading price of our common stock is subject to significant fluctuations in response to variations in quarterly operating results, changes
in analysts’ earnings estimates, announcements of innovations by us or our competitors, general conditions in the industry in which
we operate and other factors. These fluctuations, as well as general economic and market conditions, may have a material or adverse effect
on the market price of our common stock.
The
market price for our common stock may be volatile.
The
market price for our common stock may be volatile and subject to wide fluctuations due to factors such as:
|
● |
the
perception of U.S. investors and regulators of U.S. listed Chinese companies; |
|
|
|
|
● |
actual
or anticipated fluctuations in our quarterly operating results; |
|
|
|
|
● |
changes
in financial estimates by securities research analysts; |
|
|
|
|
● |
negative
publicity, studies or reports; |
|
|
|
|
● |
conditions
in Chinese and global cybersecurity product markets; |
|
|
|
|
● |
our
capability to match and compete with technology innovations in the industry; |
|
|
|
|
● |
changes
in the economic performance or market valuations of other companies in the same industry; |
|
|
|
|
● |
announcements
by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments; |
|
|
|
|
● |
addition
or departure of key personnel; |
|
|
|
|
● |
fluctuations
of exchange rates between RMB and the U.S. dollar; |
|
|
|
|
● |
natural
disasters, fires, explosions, acts of terrorism or war, or disease or other adverse health developments, including those related
to the COVID-19 pandemic; and |
|
|
|
|
● |
general
economic or political conditions in or impacting China. |
In
addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the
operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of
our common stock.
Our
common stock may in the future be considered a “penny stock,” and thereby be subject to additional sale and trading regulations
that may make it more difficult to sell.
Our
common stock may in the future be considered to be a “penny stock” if it does not qualify for one of the exemptions from
the definition of “penny stock” under Section 3a51-1 of the Exchange Act, as amended. Our common stock may be a “penny
stock” if it meets one or more of the following conditions: (i) the stock trades at a price less than $5.00 per share; (ii) it
is NOT traded on a “recognized” national exchange; (iii) it is not quoted on the NASDAQ Capital Market, or even if so, has
a price less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets
less than $5 million. The principal result or effect of being designated a “penny stock” is that securities broker-dealers
participating in sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15-2 through
15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential
investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document
at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires
broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock
to that investor. This procedure requires the broker-dealer to: (i) obtain from the investor information concerning his or her financial
situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in
penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable
of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor,
confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance
with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
We
are not likely to pay cash dividends in the foreseeable future.
We
currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not expect
to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate. Should we determine to pay
dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from the VIEs. The VIEs may,
from time to time, be subject to restrictions on its ability to make distributions to us, including restrictions on the conversion of
RMB into U.S. dollars or other hard currency and other regulatory restrictions.