20-F 1 f20f2021_nisuninter.htm ANNUAL REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2021

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report _________________

 

For the transition period from                          to                          

 

Commission file number 001-37829

 

NISUN INTERNATIONAL ENTERPRISE DEVELOPMENT GROUP CO., LTD

(Exact name of Registrant as specified in its charter)

 

British Virgin Islands

(Jurisdiction of incorporation or organization)

 

99 Danba Rd, Bldg C9

Putuo District, Shanghai

People’s Republic of China

(Address of principal executive offices)

 

Changjuan Liang, Chief Financial Officer

+86-577-8689-5678– telephone

liangchangjuan@cnisun.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class   Symbol   Name of each exchange on which registered
Class A common shares, par value $0.001 per share   NISN   Nasdaq Capital Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common shares as of the close of the period covered by the annual report: 32,752,629 Class A Common Shares and Nil Class B Common Shares.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes      No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes      No

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes      No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes      No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act:

 

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP   International Financial Reporting Standards as issued by
the International Accounting Standards Board
  Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17      Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

 

Yes      No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

Yes      No

 

 

 

 

 

 

Table of Contents

 

        Page 
PART I        
Item 1.   Identity of Directors, Senior Management and Advisers   1
Item 2.   Offer Statistics and Expected Timetable   1
Item 3.   Key Information   1
Item 4.   Information on the Company   44
Item 4A.   Unresolved Staff Comments   77
Item 5.   Operating and Financial Review and Prospects   78
Item 6.   Directors, Senior Management and Employees   88
Item 7.   Major Shareholders and Related Party Transactions   94
Item 8.   Financial Information   97
Item 9.   The Offer and Listing   98
Item 10.   Additional Information   98
Item 11.   Quantitative and Qualitative Disclosures About Market Risk   106
Item 12.   Description of Securities Other than Equity Securities   106
         
PART II        
Item 13.   Defaults, Dividend Arrearages and Delinquencies   107
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds   107
Item 15.   Controls and Procedures   107
Item 15T.   Controls and Procedures   108
Item 16.   [Reserved]   108
Item 16A.   Audit Committee Financial Expert   108
Item 16B.   Code of Ethics   108
Item 16C.   Principal Accountant Fees and Services   108
Item 16D.   Exemptions from the Listing Standards for Audit Committees   109
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers   109
Item 16F.   Change in Registrant’s Certifying Accountant   109
Item 16G.   Corporate Governance   109
Item 16H.   Mine Safety Disclosure   109
Item 16I.   Disclosure Regarding Foreign Jurisdictions that Prevent Inspections   109
         
PART III        
Item 17.   Financial Statements   110
Item 18.   Financial Statements   110
Item 19.   Exhibits   110

 

i

 

 

Conventions Used in this Annual Report

 

Except where the context otherwise requires and for purposes of this annual report on Form 20-F only, “we,” “us,” “our company,” “Company,” “our” and “Nisun” refer to NISUN INTERNATIONAL ENTERPRISE DEVELOPMENT GROUP CO., LTD, a British Virgin Islands company limited by shares (“Nisun International”), and its subsidiaries, including its offshore subsidiaries and PRC subsidiaries, and in the context of describing our operations and consolidated financial information, also include our consolidated affiliated entities in China.

 

References to “offshore subsidiaries” are to: 

 

  NiSun International Enterprise Management Group (British Virgin Islands) Co., Ltd. (“NiSun BVI”) (also referred to as 宁圣国际企业管理集团(维尔京群岛)有限公司), a limited company established under the laws of the British Virgin Islands and a wholly-owned subsidiary of Nisun International;

 

  NiSun International Enterprise Management Group (Hong Kong) Co., Limited (“NiSun HK”) (also referred to as 宁圣国际企业管理集团(香港)有限公司), a limited company established under the laws of Hong Kong and a wholly-owned subsidiary of NiSun BVI;
     
  Nami Holding (Cayman) Co., Ltd. (“Nami Cayman”), a Cayman Islands exempted company established under the laws of the Cayman Islands and a wholly-owned subsidiary of Nisun International; and
     
  Nami Holding (Hong Kong) Co., Limited (“Nami HK”), a Hong Kong company and a wholly-owned subsidiary of Nami Cayman.

 

References to “PRC subsidiaries” are to: 

 

  NiSun (Shandong) Industrial Development Co., Ltd. (“NiSun Shandong”) (also referred to as 宁圣(山东)产业发展有限公司), a wholly foreign owned enterprise (“WFOE”) and wholly-owned subsidiary of Nisun HK;
     
  NiSun Ocean (Qingdao) Supply Chain Investment Co., Ltd. (“NiSun Ocean”) (also referred to as 宁圣海洋 (青岛)供应链投资有限公司), a WFOE and wholly-owned subsidiary of NiSun HK;
     
  Zhumadian NiSun Supply Chain Management Co., Ltd (“ZMD NiSun”) (also referred to as 驻马店宁圣供应链管理有限公司), a WFOE and wholly-owned subsidiary of NiSun HK;

 

  NingChen (Shanghai) Enterprise Management Co., Ltd (“NingChen”) (also referred to as 宁臣(上海)企业管理有限公司), a wholly-owned subsidiary of NiSun Shandong;
     
 

Shanghai Naqing Enterprise Management Co., Ltd. (“Naqing”) (also referred to as 上海纳卿企业管理有限公司), a wholly-owned subsidiary of NiSun Shandong;

 

  Shandong Taiding International Investment Co., Ltd (“Taiding”) (also referred to as 山东泰鼎国际投资有限公司), a joint venture company established under the laws of PRC and 80% owned by NiSun BVI;

 

References to “consolidated affiliated entities” are to: variable interest entities (“VIEs”) and subsidiaries of VIEs.

 

References to VIEs are to: 

 

  Fintech (Shanghai) Digital Technology Co., Ltd (“Fintech”) (also referred to as 范太克(上海)数字科技有限公司), a PRC company and a consolidated affiliate controlled by Ningchen through a series of VIE agreements;
     
  Beijing Hengtai Puhui Information services Co., Ltd (“Hengpu”) (also referred to as 北京恒泰普惠信息服务有限公司), a PRC company and a consolidated affiliate controlled by Ningchen through VIE agreements;
     
  Shanghai Nami Financial Consulting Co., Ltd. (“Nami Shanghai”) (also referred to as 上海纳觅财务咨询有限公司), a PRC company and a consolidated affiliate controlled by Naqing through VIE agreements;
     

 

ii

 

 

References to VIE subsidiaries are to: 

 

  Khorgos Fintech Network Technology Co., Ltd (“Khorgos”) (also referred to as 霍尔果斯泛太克网络科技有限公司), a wholly-owned subsidiary of Fintech;

 

  FintechSupply Chain Management (Jiangsu) Co., Ltd. (“Fintech Jiangsu”) (also referred to as 范太克供应链管理(江苏)有限公司), a wholly-owned subsidiary of Fintech;

 

  Fintech Supply Chain Management (Shandong) Co. Ltd. (“Fintech Shandong”) (also referred to as 范太克供应链管理(山东)有限公司), a wholly-owned subsidiary of Fintech;

 

  Fanlunke Supply Chain Management (Shanghai) Co., Ltd. (“Fanlunke”) (also referred to as 范伦克供应链管理(上海)有限公司), a wholly-owned subsidiary of Fintech;

 

  Fintech Supply Chain Management (Ningbo) Co. Ltd. (“Fintech Ningbo”) (also referred to as 范太克供应链管理(宁波)有限公司), a wholly-owned subsidiary of Fintech;

 

  Fintech (Henan) Supply Chain Management Co. Ltd. (“Fintech Henan”) (also referred to as 范太克(河南)供应链管理有限公司), a wholly-owned subsidiary of Fintech;
     
  Fintech (Zibo) Supply Chain Management Co. Ltd. (“Fintech Zibo”) (also referred to as 范太克(淄博)供应链管理有限公司), a wholly-owned subsidiary of Fintech Henan;

 

  Shaanxi Fintech Supply Chain Management Co. Ltd. (“Fintech Shanxi”) (also referred to as 陕西范太克供应链管理有限公司), a wholly-owned subsidiary of Fintech;
     
  Fintech Supply Chain Management (Shanxi) Co. Ltd. (“Fintech SX”) (also referred to as 范太克供应链管理(山西)有限公司), a wholly owned subsidiary of Fintech;

 

  Inner Mongolia Fintech Supply Chain Management Co. Ltd. (“Fintech Inner Mongolia”) (also referred to as 内蒙古范太克供应链管理有限公司), a 70%-owned subsidiary of Fintech;
     
  Jiangxi Fintech Supply Chain Management Co. Ltd. (“Fintech Jiangxi”) (also referred to as 江西范太克供应链管理有限公司), a wholly owned subsidiary of Fintech;

 

  Jilin Province Lingang Supply Chain Management Co., Ltd. (“Jilin”) (also referred to as 吉林省临港供应链管理有限公司), a wholly-owned subsidiary of Fintech;

 

iii

 

 

  Jilin Province Lingang Hengda Supply Chain Management Co. Ltd. (“Hengda”) (also referred to as 吉林省临港恒达供应链管理有限公司), a wholly-owned subsidiary of Jilin;
     
  Liaogang NiSun (Yingkou) Supply Chain Management Co. Ltd. (“Liaogang”) (also referred to as 辽港宁圣(营口)供应链管理有限公司), a 51% owned subsidiary of Fintech;
     
  Liaogang NiSun (Shanghai) Supply Chain Management Co., Ltd. (“Liaogang SH”) (also referred to as 辽港宁圣(上海)供应链管理有限公司), a wholly-owned subsidiary of Liaogang;

 

  Nanjing NiSun Gold Co., Ltd. (“NiSun Nanjing”) (also referred to as 南京宁圣黄金有限公司), a wholly-owned subsidiary of Fintech;

 

  Hangzhou Fengtai Supply Chain Management Co., Ltd. (also referred to as 杭州丰钛供应链管理有限公司), a wholly-owned subsidiary of Hengpu; and

 

  Henan Youjiatian Agricultural Technology Co., Ltd. (“Youjiatian”) (also referred to as 河南由甲田农业科技有限公司), a 51% owned subsidiary of Fintech Henan.

 

References to “Xibolun subsidiaries” or “Hebron subsidiary” are to:

 

  Hong Kong Xibolun Technology Limited, a Hong Kong limited company (“Xibolun HK” or “Hebron HK,” and together with its subsidiaries referred to as “Xibolun Group”), which was wholly owned by Nisun International until its disposition on November 30, 2020;
     
  Zhejiang Xibolun Automation Project Technology Co., Ltd. (“Xibolun Automation”) (also referred to as 浙江希伯伦自控工程科技有限公司 or Zhejiang Xibolun Automatically Control System Engineering Technology Co., Ltd. in China), a PRC company and a wholly-owned subsidiary of Xibolun HK; and
     
  Wenzhou Xibolun Fluid Equipment Co., Limited (“Xibolun Equipment”) (also referred to as 温州希伯伦流体设备有限公司 or Wenzhou Xibolun Fluid Equipment Co., Ltd. in China), a PRC company and a wholly-owned subsidiary of Xibolun HK, which holds 30% of Xibolun Equipment directly and the remaining 70% through its direct subsidiary, Xibolun Automation.

 

Hebron is the English romanization of Xibolun in Chinese.

 

This annual report contains translations of certain RMB amounts into U.S. dollar amounts at a specified rate solely for the convenience of the reader. The exchange rates in effect as of December 31, 2021 and 2020 were US$1.00 for RMB 6.3726 and RMB 6.5250, respectively. The average exchange rates for the years ended December 31, 2021, 2020 and 2019 were US$1.00 for RMB 6.4508, RMB 6.9042, and RMB 6.9081, respectively.   We use period-end exchange rates for assets and liabilities and average exchange rates for revenue and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

For the sake of clarity, this annual report follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. For example, the name of the Chief Executive Officer will be presented as “Xiaoyun Huang,” even though, in Chinese, Mr. Huang’s name is presented as “Huang Xiaoyun.”

 

We obtained the industry and market data used in this annual report or any document incorporated by reference from industry publications, research, surveys and studies conducted by third parties and our own internal estimates based on our management’s knowledge and experience in the markets in which we operate. We did not, directly or indirectly, sponsor or participate in the publication of such materials, and these materials are not incorporated in this annual report other than to the extent specifically cited in this annual report. We have sought to provide current information in this annual report and believe that the statistics provided in this annual report remain up-to-date and reliable, and these materials are not incorporated in this annual report other than to the extent specifically cited in this annual report.

 

iv

 

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain matters discussed in this report may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under “Item 3—Key Information—Risk Factors,” “Item 4—Information on the Company,” “Item 5—Operating and Financial Review and Prospects,” and elsewhere in this report, as well as factors which may be identified from time to time in our other filings with the Securities and Exchange Commission (the “SEC”) or in the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements.

 

The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

 

v

 

 

PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

Not applicable for annual reports on Form 20-F.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable for annual reports on Form 20-F.

 

Item 3. Key Information

 

Our Corporate Structure and Contractual Arrangements with our Consolidated Affiliated Entities

 

Nisun International Enterprise Development Group Co., Ltd, or Nisun International, is not a PRC operating company but a British Virgin Islands (“BVI”) holding company with operations primarily conducted through (i) its PRC subsidiaries, and (ii) contractual arrangements with its consolidated affiliated entities based in China. PRC laws and regulations restrict and impose conditions on foreign investment in internet based, value-added telecommunication services, mobile application services and certain other businesses. Accordingly, we operate these businesses in China mainly through our consolidated affiliated entities and rely on contractual arrangements among our PRC subsidiaries, our consolidated affiliated entities and their nominee shareholders to control the business operations of our consolidated affiliated entities. Our consolidated affiliated entities are consolidated for accounting purposes, but are not entities in which our BVI holding company, or our investors, own equity. Such structure and the contractual arrangements are designed to enable Nisun International to have power to direct significant activities of our consolidated affiliated entities and to receive economic benefits from these entities where PRC law prohibits, restricts or imposes conditions on direct foreign investment in such entities. Investors in our common shares thus are not acquiring or owning equity interests in our consolidated affiliated entities but instead are acquiring interests in a BVI holding company. Investors may never directly hold equity interests in these consolidated affiliated entities.

 

Our consolidated affiliated entities have been treated as Variable Interest Entities under the Statement of Financial Accounting Standards Board Accounting Standards Codification 810 Consolidation and we are regarded as the primary beneficiary of our consolidated affiliated entities, or VIEs. Accordingly, we treat our VIEs as our consolidated entities under U.S. GAAP and we consolidate the financial results of our VIEs in our consolidated financial statements in accordance with U.S. GAAP.

 

Our subsidiaries, our VIEs and shareholders of VIEs have entered into a series of contractual agreements. These contractual arrangements enable us to:

 

receive the economic benefits that could potentially be significant to our consolidated affiliated entities in consideration for the services provided by our subsidiaries;

 

exercise effective control over our consolidated affiliated entities; and

 

hold an exclusive option to purchase all or part of the equity interests in our VIEs when and to the extent permitted by PRC law.

 

The contractual arrangements among our subsidiaries, our VIEs and their shareholders generally include equity interest holder voting rights proxy agreements, exclusive equity purchase option agreements, trademarks, technologies, management and consulting services agreements, and equity interest pledge agreements. Terms contained in each set of contractual arrangements with our VIEs and their respective shareholders are substantially similar. As a result of the contractual arrangements, we have effective control over and are considered the primary beneficiary of these affiliated companies, and we have consolidated the financial results of these companies in our consolidated financial statements. For more details of these contractual arrangements, see “Item 4. Information on the Company—B. Business Overview—Contractual Arrangements with Our Consolidated Affiliated Entities and the Nominee Shareholders;” and “Item 4. Information on the Company—C. Organizational Structure.”

 

1

 

 

The contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated affiliated entities and we may incur substantial costs to enforce the terms of the arrangements. Uncertainties in the PRC legal system may limit our ability, as a BVI holding company, to enforce these contractual arrangements. There are very few precedents upon which we can rely to determine whether such contractual arrangements would provide our subsidiaries with effective control over the relevant consolidated affiliated entities, or how such contractual arrangements in the context of a consolidated affiliated entity structure should be interpreted or enforced by the PRC courts. Should legal actions become necessary, we cannot guarantee that the court will rule in favor of the enforceability of the consolidated affiliated entity contractual arrangements. In the event we are unable to enforce these contractual arrangements, or if we experience significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated affiliated entities, and our ability to conduct our business may be materially adversely affected. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with our consolidated affiliated entities and their shareholders for our business operations, which may not be as effective as direct ownership in providing operational control” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—Shareholders of VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.”

 

Our corporate structure is subject to risks associated with our contractual arrangements with our VIEs. Investors may never directly hold equity interests in our VIEs. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, our VIEs, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with our VIEs and, consequently, significantly affect the financial performance of our VIEs and our company as a whole.

 

There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of the rights of our BVI holding company with respect to its contractual arrangements with our VIEs and their respective shareholders. It is uncertain whether any new PRC laws or regulations relating to VIE structures will be adopted or if adopted, what they would provide. If we or any of our VIEs is found to be in violation of any existing or future PRC laws 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. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Corporate Structure— Uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations,” and “—If the PRC government finds that the contractual arrangements that establish the structure for operating our business do not comply with PRC laws and regulations, we could be subject to severe consequences.”

 

We face various legal and operational risks and uncertainties associated with being based in or having our operations primarily in China and the complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offerings conducted overseas by and foreign investment in China-based issuers, the use of our VIEs, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy. These risks could result in a material adverse change in our operations and the value of our securities, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, or cause the value of such securities to significantly decline. For a detailed description of risks related to doing business in China, “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China.”

 

PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline or be of little or no value. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our listed securities.”

 

Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our common shares. For more details, see “Item 3. Key Information—D. Risk Factors— Risks Relating to Doing Business in China—Uncertainties in the PRC legal system and the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us and our investors, materially and adversely affect our financial condition and results of operations, and cause our shares to significantly decline in value or become worthless.”

 

2

 

 

Permissions Required from the PRC Authorities for the Operations and Securities Offerings of PRC Subsidiaries and Consolidated Affiliated Entities

 

We conduct our business primarily through our subsidiaries, our VIEs and their subsidiaries in China. Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, all of our PRC subsidiaries and consolidated affiliated entities have obtained the requisite licenses and permits from the PRC government authorities that are material for the business operations of our holding company, our subsidiaries, VIEs and VIE subsidiaries in China, including, Business Licenses, the Internet Content Provision (ICP) Licenses and Electronic Data Interchange (EDI) Licenses. All of our PRC subsidiaries, VIEs and VIE subsidiaries are required to obtain, and have obtained, their respective Business Licenses. Fintech, Hengpu and Nami are required to made, and have made a record filing with the competent telecommunications authority as a non-operational Internet Content (ICP) Provider and therefore have received the ICP Licenses. Hengpu is required to make, and has made, an Electronic Data Interchange (EDI) record filing with the competent telecommunications authority and therefore has received the EDI License. However, given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by government authorities, we cannot assure you that we have obtained all the permits or licenses required by the PRC government authorities for conducting our business in China. We may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the future. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet- related or finance-related businesses and companies, and any lack of requisite approvals, licenses, permits or filings applicable to our business may have a material adverse effect on our business and results of operations.”

 

Furthermore, we are subject to PRC rules and regulations relating to overseas listing and securities offering, and a substantial extension of the PRC government’s oversight over our business operations or overseas listings may hinder our ability to offer or continue to offer our securities. Under current PRC laws, regulations and regulatory rules, we, our PRC subsidiaries and our consolidated affiliated entities may be required to obtain permissions from the China Securities Regulatory Commission, or the CSRC, and may be required to go through cybersecurity review by the Cyberspace Administration of China, or the CAC, in connection with any future offering and listing on overseas capital markets.

 

On June 10, 2021, the Standing Committee of the National People’s Congress of China promulgated the Data Security Law which took effect on September 1, 2021. The Data Security Law provides for data security and privacy obligations of entities and individuals carrying out data activities, prohibits entities and individuals in China from providing any foreign judicial or law enforcement authority with any data stored in China without approval from the competent PRC authority, and sets forth the legal liabilities of entities and individuals found to be in violation of their data protection obligations, including rectification order, warning, fines of up to RMB10 million, suspension of relevant business, and revocation of business permits or licenses. The Data Security Law is relatively new, and therefore there are substantial uncertainties with respect to the interpretation and implementation of the law. We may need to adjust our operations to comply with data security requirements from time to time. If we were found to have violations, we may be ordered to rectify and terminate any actions that are deemed illegal by the government authorities and become subject to fines and other government sanctions, which may materially and adversely affect our business, financial condition, and results of operations.

 

On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severe and Lawful Crackdown on Illegal Securities Activities, which took effect on the same day. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies. These opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection. As of the date of this opinion, no official guidance and related implementation rules have been issued in relation to these recently issued opinions and the interpretation and implementation of these opinions remain unclear at this stage.

 

On July 10, 2021, the Cyberspace Administration of China issued the Measures for Cybersecurity Review which took effect on February 15, 2022. The Revised Cybersecurity Measures authorize the relevant government authorities to conduct cybersecurity review on a range of activities that affect or may affect national security, including listings in foreign countries by companies that possess personal data of more than one million users. The PRC National Security Law covers various types of national security, including technology security and information security. Given the nature of our business in China and the fact that we do not have personal information of more than one million users, we do not believe we are an “internet platform operator” that is required to file for a cybersecurity review pursuant to the Measures for Cybersecurity Review.

 

 

3

 

 

On August 20, 2021, the Standing Committee of the National People’s Congress adopted the Personal Information Security Law, which took effect on November 1, 2021. The Personal Information Protection Law includes the basic rules for personal information processing, the rules for cross-border provision of personal information, the rights of individuals in personal information processing activities, the obligations of personal information processors, and the legal responsibilities for illegal collection, processing, and use of personal information. We have access to confidential or personal information in certain of the businesses and have privacy policies and other documentation regarding the protection of personal information; however, we may not be successful in achieving compliance if any employees or contractors fail to comply with these policies and procedures.

 

On December 24, 2021, the CSRC issued Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (the “Administration Provisions”), and the Provisions of the State Council on the Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (the “Measures”). The Administration Provisions and Measures for overseas listings lay out specific requirements for filing documents and include unified regulation management, strengthening regulatory coordination, and cross-border regulatory cooperation. Domestic companies seeking to list abroad must carry out relevant security screening procedures if their businesses involve such supervision. Companies endangering national security are among those off-limits for overseas listings. According to Relevant Officials of the CSRC Answered Reporter Questions (“CSRC Answers”), after the Administration Provisions and Measures are implemented upon completion of public consultation and due legislative procedures, the CSRC will formulate and issue guidance for filing procedures to further specify the details of filing administration and ensure that market entities could refer to clear guidelines for filing, which means it will still take time to put the Administration Provisions and Measures into effect. As of the date of this report, the Administration Provisions and Measures have not yet come into effect. However, according to CSRC Answers, only new initial public offerings and refinancing by existent overseas listed Chinese companies will be required to go through the filing process; other existent overseas listed companies will be allowed sufficient transition period to complete their filing procedure. The Company may be required to obtain approval of and filling with the CSRC or other PRC government authorities for its future refinancing. However, it is uncertain when the Administration Provision and the Measures will take effect or if they will take effect as currently drafted. Currently, the period for public comment on these draft regulations has ended and their provisions and anticipated adoption or effective date are subject to changes and thus their interpretation and implementation remain substantially uncertain. It also remains unclear on whether a US-listed company, like Nisun International, is subject to the CSRC filing procedures, to maintain the listing of its securities in a foreign country. As of the date of this report, we cannot predict the impact of these regulations on maintaining the listing status of our common shares and/or other securities, or any of our future offerings of securities overseas in the overseas markets.

 

Based on PRC laws and regulations effective as of the date of this report and subject to different interpretations of these laws and regulations that may be adopted by PRC authorities, we believe that, as of the date of this report, we, our PRC subsidiaries and consolidated affiliated entities are not required to obtain any permission from the CSRC, the CAC, or any other PRC authority in connection with this offering. As a result, we have not submitted any application to the CSRC, the CAC or other PRC authorities for the approval of our securities offerings. As of the date of this report, we and our PRC subsidiaries have not received any inquiry, notice, warning or objection in relation to this offering or Nasdaq listing from the CSRC, the CAC or any other PRC authorities. If we fail to obtain the relevant approval or complete other review or filing procedures for any future offshore offering or listing, we may face sanctions by the CSRC or other PRC regulatory authorities, which may include fines and penalties on our operations in China, limitations on our operating privileges in China, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiaries, restrictions on or delays to our future financing transactions, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common shares. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Doing Business in China—The PRC government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or cause the value of our securities to significantly decline or be worthless,” and “Risk Factors—Risks Relating to Doing Business in China—Recent regulatory developments in China, including greater oversight and control by the CAC over privacy and data security, may subject us to additional regulatory review and any actions by the Chinese government to exert more oversight and control over foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.”

 

4

 

 

Holding Foreign Companies Accountable Act (HFCAA)

 

Our common shares may be prohibited from trading on a national exchange or “over-the-counter” markets under the HFCAA if the PCAOB determines it is unable to inspect or investigate completely our auditors for three consecutive years beginning in 2021. Further, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”) and on February 4, 2022, the U.S. House of Representatives passed the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength (COMPETES) Act of 2022, or the COMPETES Act. If either the AHFCAA or COMPETES Act is enacted into law, it would amend the HFCAA and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections or complete investigations for two consecutive years instead of three.

 

Pursuant to the HFCAA, the PCAOB issued a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China and (2) Hong Kong. In addition, the PCAOB’s report identified the specific registered public accounting firms which are subject to these determinations. Our auditor, Wei, Wei & Co., LLP, is headquartered in New York City, New York and has been inspected by the PCAOB on a regular basis. Wei, Wei & Co., LLP is a firm registered with the PCAOB and is required by the laws of the U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. Wei, Wei & Co., LLP has been subject to PCAOB inspections, and is not among the PCAOB-registered public accounting firms headquartered in the PRC or Hong Kong that are subject to PCAOB’s determination on December 16, 2021 of having been unable to inspect or investigate completely. Notwithstanding the foregoing, in the future, if it is later determined that the PCAOB is unable to inspect or investigate our auditor completely, or if there is any regulatory change or step taken by PRC regulators that does not permit Wei, Wei & Co., LLP to provide audit documentations to the PCAOB for inspection or investigation, or the PCAOB expands the scope of the Determination so that we are subject to the HFCAA, as the same may be amended, you may be deprived of the benefits of such inspection. Any audit reports not issued by auditors that are completely inspected or investigated by the PCAOB, or a lack of PCAOB inspections of audit work undertaken in China that prevents the PCAOB from regularly evaluating our auditors’ audits and their quality control procedures, could result in a lack of assurance that our financial statements and disclosures are adequate and accurate, which could result in limitation or restriction to our access to the U.S. capital markets and trading of our securities, including trading on the national exchange or “over-the-counter” markets, may be prohibited under the HFCAA. See “Risk Factors — Our shares may be delisted under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors for three consecutive years beginning in 2021, or for two consecutive years if the Accelerating Holding Foreign Companies Accountable Act becomes law; and the delisting of our shares, or the threat of their being delisted, may materially and adversely affect the value of your investment” and “Risk Factors — Newly enacted Holding Foreign Companies Accountable Act, recent regulatory actions taken by the SEC and the Public Company Accounting Oversight Board, and proposed rule changes submitted by Nasdaq calling for additional and more stringent criteria to be applied to China-based public companies could add uncertainties to our capital raising activities and compliance costs” for more information.

 

Cash and Other Assets Transfers within our Organization and Dividend Distribution

 

Cash may be transferred within our organization in the following manner: (i) we may transfer funds to our subsidiaries, including our PRC subsidiaries, by way of capital contributions or loans, through intermediate holding companies or otherwise; (ii) we and our subsidiaries may provide loans to our VIEs and vice versa; (iii) funds may be transferred between our VIEs and our subsidiaries, including our PRC subsidiaries, as service fees for services contemplated by the VIE agreements, as repayment of loan or pursuant to other commercial contracts; and (iv) our subsidiaries, including our PRC subsidiaries, may make dividends or other distributions to us through intermediate holding companies or otherwise.

 

Because we control our VIEs through contractual arrangements, neither us nor our subsidiaries are able to make direct capital contribution to our VIEs or their respective subsidiaries.

 

5

 

 

For the years ended December 31, 2019, 2020 and 2021, Nisun International, through its intermediate holding companies, provided capital contribution of nil, $0.7 million, and $15.1 million to its subsidiaries in China. For the years ended December 31, 2019, 2020 and 2021, our VIEs received debt financing of nil, $2.1 million and $4.4 million from our subsidiaries in China, respectively.

 

Our VIEs may transfer cash to the relevant WFOE by paying service fees according to the management and consulting service agreement. For the years ended December 31, 2019, 2020 and 2021, no service fee was paid to the relevant WFOEs under the management and consulting service agreement.

 

For the years ended December 31, 2019, 2020 and 2021, no dividends or distributions were made to Nisun International by our subsidiaries. Under PRC laws and regulations, our PRC subsidiaries and VIEs are subject to certain restrictions with respect to paying dividends or otherwise transferring any of their net assets to us. Remittance of dividends by a wholly foreign-owned enterprise out of China is also subject to examination by the banks designated by SAFE. The amounts restricted include the paid-up capital and the statutory reserve funds of our PRC subsidiaries and VIEs, totaling $12.6 million, $46.5 million and $64.6 million as of December 31, 2019, 2020 and 2021, respectively. Furthermore, cash transfers from our PRC subsidiaries to entities outside of China are subject to PRC government control of currency conversion. Shortages in the availability of foreign currency may temporarily delay the ability of our PRC subsidiaries and VIEs to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. For risks relating to the fund flows of our operations in China, see Item 3. Key InformationRisk FactorsRisks Relating to Doing Business in ChinaAny limitation on the ability of our PRC subsidiaries to make payments to us, or the tax implications of making payments to us, could have a material adverse effect on our ability to conduct our business or our financial condition.

 

In the years ended December 31, 2019, 2020 and 2021, no assets other than cash were transferred through our organization.

 

6

 

 

Nisun International has not declared or paid any cash dividends, nor does it have any present plan to pay any cash dividends on its common shares in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. See Item 8. Financial InformationA. Consolidated Statements and Other Financial InformationDividend Policy. For the BVI, PRC and U.S. federal income tax considerations applicable to an investment in our Class A common shares, see Item 10. Additional InformationE. Taxation.

 

For purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid within mainland China, assuming that: (i) our PRC subsidiaries have taxable earnings, and (ii) they determine to pay a dividend in the future: 

 

Taxation Scenario Statutory Tax and Standard Rates(1)
Hypothetical pre-tax earnings(2)   100%
Tax on earnings at statutory rate of 25%(3)   (25)%
Net earnings available for distribution   75%
Withholding tax at standard rate of 10%(4)   (7.5)%
Net distribution to Parent/Shareholders   67.5%

 

Notes:

 

(1)For purposes of this example, the tax calculation has been simplified. The hypothetical book pre-tax earnings amount, not considering timing differences, is assumed to equal taxable income in China. For income tax purposes, our PRC subsidiaries file income tax returns on a separate company basis.

 

(2)Under the terms of VIE agreements, our PRC subsidiaries may charge our VIEs for services provided to VIEs. These service fees shall be recognized as expenses of our VIEs, with a corresponding amount as service income by our PRC subsidiaries and eliminate in consolidation. For income tax purposes, our PRC subsidiaries and VIEs file income tax returns on a separate company basis. The service fees paid are recognized as a tax deduction by our VIEs and as income by our PRC subsidiaries and are tax neutral.

 

(3)Certain of our subsidiaries and VIEs qualifies for a 15% preferential income tax rate in China. However, such rate is subject to qualification, is temporary in nature, and may not be available in a future period when distributions are paid. For purposes of this hypothetical example, the table above reflects a maximum tax scenario under which the full statutory rate would be effective.

 

(4)The PRC Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise, or FIE, to its immediate holding company outside of China. A lower withholding income tax rate of 5% is applied if the FIEs immediate holding company is registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with China, subject to a qualification review at the time of the distribution. For purposes of this hypothetical example, the table above assumes a maximum tax scenario under which the full withholding tax would be applied.

 

The table above has been prepared under the assumption that all profits of our VIEs will be distributed as fees to our PRC subsidiaries under tax neutral contractual arrangements. If, in the future, the accumulated earnings of our VIEs exceed the service fees paid to our PRC subsidiaries (or if the current and contemplated fee structure between the intercompany entities is determined to be non-substantive and disallowed by Chinese tax authorities), our VIEs could make a non-deductible transfer to our PRC subsidiaries for the amounts of the stranded cash in our VIEs. This would result in such transfer being non-deductible expenses for our VIEs but still taxable income for the PRC subsidiaries. Such a transfer and the related tax burdens would reduce our after-tax income to approximately 50.6% of the pre-tax income. Our management believes that there is only a remote possibility that this scenario would happen.

 

A. Selected Consolidated Financial Data

 

We do not own the VIEs that we consolidate in our financial statements. We consolidate the results of the VIEs and their subsidiaries under U.S. GAAP through our contractual arrangements with the VIEs and their nominee shareholders. The following tables present the condensed consolidating schedules of financial information for Nisun International, its wholly owned subsidiaries that are the primary beneficiary of our VIEs, our other subsidiaries, our VIEs and VIEs’ subsidiaries as of the dates presented.

 

7

 

 

We completed the sale of our equity interest in Xibolun HK to Wise Metro Development Co., Ltd., an entity controlled by our former Chairman and CEO, Mr. Anyuan Sun (“Wise Metro”) on September 30, 2021, pursuant to a Call Option Agreement we entered on April 16, 2019 with Wise Metro. Under the agreement, Wise Metro was granted an option to purchase all of the equity of the Xibolun Group for a period beginning six months after the effective date of the Call Option Agreement and expiring two years and six months after the agreement effective date. On May 11, 2020, Wise Metro exercised the Call Option to acquire the Xibolun Group and on September 30, 2020, we completed the sale of Xibolun Group to Wise Metro. The transaction met the criteria for discontinued operations. Accordingly, the results of operations of Hebron Group and the gain of approximately $0.1 million, net of transaction and other costs, from its disposal are presented in separate line items as discontinued operations. Retrospective adjustments to the historical statements have been made in order to provide a consistent basis of comparison. The financial position and results of operations in relation to the discontinued operations were therefore not disaggregated considering they will not constitute any part of our consolidated financial statements after the completion of the disposition.

 

Selected Condensed Consolidated Statements of Operations Data

 

The following table presents our condensed consolidating schedule of financial position for our top-tier publicly-traded holding company, Nisun International, our wholly-owned subsidiaries that are the primary beneficiaries of the VIEs under U.S. GAAP (the “Primary Beneficiaries of VIEs”), our other subsidiaries that are not the Primary Beneficiaries of VIEs (the “Other Subsidiaries”), and VIEs and their subsidiaries that we consolidate as of the dates presented:

 

Selected Condensed Consolidated Balance Sheets Data

 

   As of December 31, 2021 
   Nisun
International
   Other
Subsidiaries
   Primary
Beneficiaries
of VIEs
   VIEs and
VIE
 subsidiaries
(PRC)
   Eliminations
adjustments
   Consolidated
Total
 
Cash  $68,296,949   $425,272   $6,056   $22,898,764   $-   $91,627,041 
Other current assets   -    241,390    2,963    135,926,634    -    136,170,987 
Intercompany receivables (1)   7,582,199    4,449,051    457,312    409,334    (12,897,896)   - 
Total current assets   75,879,148    5,115,713    466,331    159,234,732    (12,897,896)   227,798,028 
Investments in subsidiaries (2)   115,680,581    78,539,006    -    -    (194,219,587)   - 
Benefits through VIEs and VIE subsidiaries (2)   -    -    69,567,441    -    (69,567,441)   - 
Goodwill and intangible assets   -    19,846,662    8,482,427    -    -    28,329,089 
Other non-current assets   -    15,769,254    430,687    1,651,028    -    17,850,969 
Total non-current assets   115,680,581    114,154,922    78,480,555    1,651,028    (263,787,028)   46,180,058 
Total Assets   191,559,729    119,270,635    78,946,886    160,885,760    (276,684,924)   273,978,086 
Intercompany payables (1)   404,408    4,291    403,706    12,085,491    (12,897,896)   - 
Other liabilities and accrued liabilities   10,528,965    340,124    4,174    78,503,535    -    89,376,798 
Total Liabilities   10,933,373    344,415    407,880    90,589,026    (12,897,896)   89,376,798 
Total Shareholders’ Equity (2)   180,626,356    115,680,581    78,539,006    69,567,441    (263,787,028)   180,626,356 
Non-controlling interests   -    3,245,639    -    729,293    -    3,974,932 
Total Liabilities and Equity  $191,559,729   $119,270,635    78,946,886   $160,885,760   $(276,684,924)  $273,978,086 

 

8

 

 

   As of December 31, 2020 
   Nisun
International
   Other
Subsidiaries
   Primary
Beneficiaries
of VIEs
   VIEs and
VIE
subsidiaries
(PRC)
   Eliminations
adjustments
   Consolidated
Total
 
Cash  $2,426   $4,405   $1,316   $22,190,110   $-   $22,198,257 
Other current assets   -    281,905    -    22,968,532    -    23,250,437 
Due from legacy business   14,950,577    -    -    -    -    14,950,577 
Intercompany receivables (1)   509    2,267,082    -    -    (2,267,591)   - 
Total current assets   14,953,512    2,553,392    1,316    45,158,642    (2,267,591)   60,399,271 
Investments in subsidiaries (2)   80,260,786    58,080,737    -    -    (138,341,523)   - 
Benefits through VIEs and VIE’s subsidiaries (2)   -    -    35,406,748    -    (35,406,748)   - 
Goodwill and intangible assets   -    19,855,147    8,722,624    -    -    28,577,771 
Other non-current assets   -    -    17,055,071    2,064,716    -    19,119,787 
Total non-current assets   80,260,786    77,935,884    61,184,443    2,064,716    (173,748,271)   47,697,558 
Total Assets   95,214,298    80,489,276    61,185,759    47,223,358    (176,015,862)   108,096,829 
Intercompany payables (1)   -    173    336    2,267,082    (2,267,591)   - 
Other liabilities and accrued liabilities   18,371,779    228,317    -    9,559,335    -    28,159,431 
Total Liabilities   18,371,779    228,490    336    11,826,417    (2,267,591)   28,159,431 
Total Shareholders’ Equity (2)   76,842,519    80,260,786    58,080,737    35,406,748    (173,748,271)   76,842,519 
Non-controlling interests   -    -    3,104,686    (9,807)   -    3,094,879 
Total Liabilities and Equity  $95,214,298   $80,489,276    61,185,759   $47,223,358   $(176,015,862)  $108,096,829 

 

Selected Condensed Consolidated Statements of Operations Data

 

   For the Year Ended December 31, 2021 
   Nisun
International
   Other
Subsidiaries
   Primary
Beneficiaries
of VIEs
   VIEs and
VIE
subsidiaries
(PRC)
   Eliminations
adjustments
   Consolidated
Total
 
Third-party revenues  $-   $-   $-   $160,199,711   $-   $160,199,711 
Intra- group revenues (3)   -    -    -    -    -    - 
Total revenue   -   $-   $-   $160,199,711   $-   $160,199,711 
Total costs and expenses   (3,071,681)   (789,676)   (477,303)   (117,672,141)   -    (122,010,801)
Income from subsidiaries and VIEs (2)   33,452,042    33,268,971    33,627,137    -    (100,348,150)   - 
Income (loss) from non-operations   -    1,047,137    (228)   1,540,204    -    2,587,113 
Income before income tax expenses   30,380,361    33,526,432    33,149,606    44,067,774    (100,348,150)   40,776,023 
Less: income tax (benefit) expenses   -    (66,503)   (119,365)   10,455,369    -    10,269,501 
Net income   30,380,361    33,592,935    33,268,971    33,612,405    (100,348,150)   30,506,522 
Less: net income (loss) attributable to non-controlling interests   -    140,893    -    (14,732)   -    126,161 
Net income attributable to Nisun International’s shareholders   30,380,361    33,452,042    33,268,971    33,627,137    (100,348,150)   30,380,361 

 

   For the Year Ended December 31, 2020 
   Nisun
International
   Other
Subsidiaries
   Primary
Beneficiaries
of VIEs
   VIEs and
VIE
subsidiaries
(PRC)
   Eliminations
adjustments
   Consolidated
Total
 
Third-party revenues  $-   $-   $-   $42,190,191   $-   $42,190,191 
Intra- group revenues (3)   -    -    -    -    -    - 
Total revenue   -    -    -    42,190,191   $-    42,190,191 
Total costs and expenses   (1,098,668)   (431,464)   (414,241)   (30,217,599)   -    (32,161,972)
(Loss) income from subsidiaries and VIEs (2)   (11,993,122)   11,232,662    11,583,787    -    (10,823,327)   - 
Income (loss) from non-operations   -    105,063    980    723,408    -    829,451 
(Loss) income before income tax expenses   (13,091,790)   10,906,261    11,170,526    12,696,000    (10,823,327)   10,857,670 
Less: income tax (benefit) expenses   -    (109,013)   (62,136)   1,112,213    -    941,064 
Net income from continuing operations   (13,091,790)   11,015,274    11,232,662    11,583,787    (10,823,327)   9,916,606 
(Loss) income from discontinued operations   -    (22,971,016)   -    -    -    (22,971,016)
Net (loss) income   (13,091,790)   (11,955,742)   11,232,662    11,583,787    (10,823,327)   (13,054,410)
Less: net income attributable to non-controlling interests   -    37,380    -    -    -    37,380 
Net (loss) income attributable to Nisun International’s shareholders   (13,091,790)   (11,993,122)   11,232,662    11,583,787    (10,823,327)   (13,091,790)

9

 

 

   For the Year Ended December 31, 2019 
   Nisun
International
   Other
Subsidiaries
  

Primary
Beneficiaries
of VIEs

   VIEs and
VIE
subsidiaries
(PRC)
  

Eliminations
adjustments

   Consolidated
Total
 
Third-party revenues  $-   $-   $-   $2,525,524   $-   $2,525,524 
Intra- group revenues (3)   -    -    -    -    -    - 
Total revenue   -    -    -    2,525,524    -    2,525,524 
Total costs and expenses   (424,492)   (244)   -    (926,223)   -    (1,350,959)
Income from subsidiaries and VIEs (2)   3,164,471    1,600,661    1,600,661    -    (6,365,793)   - 
Income from non-operations   11    -    -    1,360    -    1,371 
Income before income tax expenses   2,739,990    1,600,417    1,600,661    1,600,661    (6,365,793)   1,175,936 
Less: income tax (benefit) expenses   -    (55,731)   -    -    -    (55,731)
Net income from continuing operations   2,739,990    1,656,148    1,600,661    1,600,661    (6,365,793)   1,231,667 
Income from discontinued operations   -    1,508,323    -    -    -    1,508,323 
Net income   2,739,990    3,164,471    1,600,661    1,600,661    (6,365,793)   2,739,990 
Less: net income attributable to non-controlling interests   -    -    -    -    -    - 
Net income attributable to Nisun International’s shareholders   2,739,990    3,164,471    1,600,661    1,600,661    (6,365,793)   2,739,990 

 

Notes:

 

(1)It represents the elimination of intercompany balances among Nisun International, the Primary Beneficiaries of VIEs, and VIEs and their subsidiaries that we consolidate.

 

(2)It represents the elimination of investments among Nisun International, the Primary Beneficiaries of VIEs, the Other Subsidiaries, and VIEs and their subsidiaries that we consolidate.

 

(3)It represents the elimination of the intercompany service charge at the consolidation level.

 

For the years ended December 31, 2021, 2020 and 2019, the Primary Beneficiaries of VIEs did not charge any service fee from the VIEs. Apart from what have been disclosed above, there was no intra-group revenues during the years ended December 31, 2021, 2020 and 2019, respectively.

 

B. Capitalization and Indebtedness

 

Not applicable for annual reports on Form 20-F.

 

C. Reasons for the Offer and Use of Proceeds

 

Not applicable for annual reports on Form 20-F.

 

D. Risk Factors

 

10

 

 

Summary Of Risk Factors

 

Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows, and prospects. These risks are discussed more fully below and include, but are not limited to, risks related to:

 

Risks Relating to Our Business and Industry

 

  We have a limited operating history in the rapidly evolving supply chain and financial services industries, and any unforeseeable changes and uncertainties could adversely affect our operating results and future prospects.

 

  If we are unable to innovate or respond effectively to the ever-changing financial technologies and industry practice, our business and results of operations would be materially adversely affected.

 

  We rely on our cooperation with our customers and industry partners, and if our technology solutions or services cannot meet the needs or expectations of customers and partners for any reason, we could lose our established market share.

 

  We are subject to evolving regulatory requirements, and if we fail to adapt to regulatory changes, our business and prospects may be materially and adversely affected.

 

  Failure to manage growth will cause disruption to our operations and impair our ability to generate revenue.

 

  We have modified our business models and had substantial strategic changes to our business operations, and may be subject to additional risks and uncertainties as a result.

 

  We cannot assure you that our growth strategies will be successful.

 

  Cyber-attacks or any failure to adequately maintain data security and prevent unauthorized access to confidential information could materially adversely affect our reputation, financial condition and operating results.

 

Risks Relating to Doing Business in China

 

  Adverse changes in political climate and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China and materially and adversely affect our competitive position.
     
  Uncertainties in the PRC legal system and the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us and our investors, materially and adversely affect our financial condition and results of operations, and cause our shares to significantly decline in value or become worthless.
     
  We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet- related or finance-related businesses and companies, and any lack of requisite approvals, licenses, permits or filings applicable to our business may have a material adverse effect on our business and results of operations.
     
  The PRC government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or cause the value of our securities to significantly decline or be worthless.
     
  Recent regulatory developments in China, including greater oversight and control by the CAC over privacy and data security, may subject us to additional regulatory review and any actions by the Chinese government to exert more oversight and control over foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
     
  PRC regulations establish complex procedures for some acquisitions conducted by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
     
  Trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or investigate completed our auditors for three consecutive years beginning in 2021, or for two consecutive years if the Accelerating Holding Foreign Companies Accountable Act or the America COMPETES Act becomes law.

 

11

 

 

  Newly enacted Holding Foreign Companies Accountable Act, recent regulatory actions taken by the SEC and the Public Company Accounting Oversight Board, and proposed rule changes by Nasdaq calling for additional and more stringent criteria to be applied to China-based public companies could add uncertainties to our capital raising activities and compliance costs.
     
  We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us and any tax we are required to pay could have a material and adverse effect on our ability to conduct our business.
     
  PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
     
  There are uncertainties under the PRC laws relating to the procedures for U.S. regulators to investigate and collect evidence from companies located in the PRC.
     
  Chinese economic growth slowdown may have a negative effect on our business.
     
  You may have difficulty enforcing judgments against us.
     
  Failure to comply with laws and regulations applicable to our business in China could subject us to fines and penalties and could also cause us to lose customers or otherwise harm our business.
     
  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.
     
  PRC regulation of loans and direct investment by offshore holding companies in PRC entities may delay or prevent us from using the proceeds of our securities offerings to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
     
  Failure to comply with the Individual Foreign Exchange Rules relating to the overseas direct investment or the engagement in the issuance or trading of securities overseas by our PRC resident stockholders may subject such stockholders to fines or other liabilities.
     
  We may be exposed to liabilities under the Foreign Corrupt Practices Act, and any determination that we violated the foreign corrupt practices act could have a material adverse effect on our business.
     
  Governmental control of currency conversion may affect the value of your investment.
     
  Payment of dividends is subject to restrictions under Nevada and the PRC laws.  

 

  Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China and materially and adversely affect our competitive position

 

  Chinese economic growth slowdown may have a negative effect on our business.

 

  We may be classified as a “Resident Enterprise” of China, which would result in unfavorable tax consequences.

 

  Uncertainties with respect to the PRC legal system could adversely affect us.

 

  Shareholders may experience difficulties in effecting service of legal process, enforcing foreign judgments, including those obtained in the U.S., or bringing actions in China against us or our management based on foreign laws.

 

12

 

 

Risks Relating to Our Corporate Structure

 

  Uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure and business operations.
     
  If the PRC government finds that the contractual arrangements that establish the structure for operating our business do not comply with PRC laws and regulations, we could be subject to severe consequences.

 

  We rely on our contractual arrangements with our consolidated affiliates and their shareholders for business operations, which may not be as effective as direct ownership in providing operational control.

 

  Shareholders of VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

  Our VIE agreements may be subject to scrutiny by the PRC tax authorities which may determine that we or our consolidated affiliates owe additional taxes.

 

Risks Related to Ownership of Our Common Shares

  

  British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.

 

  The laws of the British Virgin Islands provide little protection for minority shareholders, and minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.

 

  The market price of our Class A common shares may be volatile or may decline regardless of our operating performance, and shareholders may not be able to resell their shares.

 

  We do not intend to pay dividends for the foreseeable future.

 

Risks Related to Our Business and Industry

 

We have a limited operating history in the rapidly evolving supply chain and financial services industries, and any unforeseeable changes and uncertainties could adversely affect our operating results and growth prospects.

 

Financial technologies have brought dynamic and rapidly changes to the financial services and supply chain industries in China. The regulatory framework for those industries is also evolving and may remain uncertain for the foreseeable future. We provide technology-driven customized financing solutions to small- and mid-sized enterprises (SMEs) (hereinafter referred to as “SME financing solutions”) and direct banking solutions to small- and mid-sized commercial banks (referred to as “direct banking solutions” or “other financing solutions”) in China. We commenced our financial service operations in 2019 after we acquired NiSun BVI and its subsidiaries and contractually controlled affiliates, Fintech (Shanghai) Digital Technology Co., Ltd. (“Fintech”) and Beijing Hengtai Puhui Information Services Co., Ltd (“Hengpu”). We expanded our financial service operations following the acquisition of Nami Holding (Cayman) Co., Ltd.

 

In January 2020, we commenced our supply chain solutions service operations. Supply chain industry is at a relatively early stage of its development in China, and there are few established players with well-recognized business models that we can follow or build upon. In addition, we face uncertainties related to increased competition and a changing regulatory environment in China’s supply chain finance industry. As the financial services market dynamics, regulatory environment and our business continue to evolve, we may need to introduce new services from time to time or modify the existing business models. Any significant change to our existing business models may not achieve expected results and may have a material impact on our financial condition and results of operations. It is therefore difficult to effectively assess the future prospects of our operations. Investors should consider our business and prospects based on such uncertainties that we encounter or may encounter in this fast-growing industry, including, but not limited to:

 

  our ability to adapt to the changing macroeconomic environment in China and around the world, which may be influenced by a number of factors, such as geopolitical factors, global financial market volatility and pandemics such as COVID-19;

 

13

 

 

  our ability to compete successfully with our industry peers, some of whom may have more resources in the business than we do;

 

  our response to changes in the regulatory environment;

 

  our solutions to meet the changing needs of our customers and partners, including those resulting from changes in the regulatory environment in which they operate;

 

  our ability to maintain and strengthen our relationships with key stakeholders in the supply chain finance industry, including, but not limited to, core enterprises and their suppliers, as well as financial institutions;

 

  our strategy to reach more core enterprises and financial institutions and increase the volume of transactions that process commodity flows through our technology solutions;

 

  our innovations and diversification of our solution products;

 

  improvement of our operational efficiency;

 

  measures to safeguard the security of our IT systems and confidentiality of the data we obtain and use through our solutions and systems;

 

  ability to attract, retain, and motivate talented employees;

 

  solutions to potential litigation such as regulatory, intellectual property infringement, data privacy, or other claims; and

 

  other potential risks and uncertainties inherently associated with our industry and our operations;

 

If we are unable to effectively address those identified and unknown risks and uncertainties, or fail to adapt to changes in the financial services industry, our business, financial condition and operating results could be materially adversely affected.

 

If we are unable to innovate or respond effectively to ever-changing financial technologies and industry practice, our business and results of operations would be materially adversely affected.

 

The supply chain and SME financing markets in which we compete are subject to rapid and significant changes. Operating in the financial service industry requires cutting-edge technology to digitize supply chain finance processes and optimize payment cycles. We offer a wide range of solutions built upon our cutting-edge technologies such as AI, blockchain, big data, and cloud technology to digitize and optimize payment cycles throughout the supply chain procurement process. Innovation is key to improving our finance solution products and developing new technologies to meet ever-changing customer needs. If we fail to innovate or invest in technology innovation, our competitive position could be compromised, which in turn could have a material and adverse impact on our business, financial condition, operating results and prospects.

 

Our success will depend in part on our ability to adapt and respond to the technology changes in a timely and effective manner. It requires us to continue to invest significant resources to enhance our technology infrastructure and research and development efforts. Changes and developments in the supply chain finance industry may also require us to reevaluate our existing business models or financial solutions from time to time and make significant adjustments to our long-term strategy and business plans. We cannot assure you that we will succeed in implementing those initiatives. If we are unable to respond to technological developments or industry practices in a cost-effective manner, our business, financial position, and operating performance may be materially adversely affected.

 

14

 

 

We rely on our cooperation with our customers and industry partners, and if our technology solutions or services cannot meet the needs or expectations of customers and partners for any reason, we could lose our established market share.

 

Our relationships with our customers and partners are critical to our success. We generate revenue primarily by providing financial services and technology solutions to our customers and partners for service fees. In our supply chain solutions business, much of our business depends on our relationships with core enterprises and financial institutions and their willingness to continue to work with us. Almost all of our customers apply a complex and rigorously screened bidding process in selecting their fintech solutions partners to address some of their most challenging yet frequently encountered problems. We have been successful in building trusted relationships with those core enterprises and financial institutions and believe we will continue to deliver satisfactory fintech solutions to those businesses. However our service agreements are usually non-exclusive in nature, and they may choose to use their in-house research and development capabilities or choose our competitors to develop their supply chain fintech platforms and solutions. We cannot guarantee our customers and industry partners will renew contracts with us on a long term basis or at all, nor can we be certain that the customer will not engage other third-party technology solution providers for their technical solution needs.

 

Our ability to maintain and expand our customer base and build long-term relationships with our partners also depends on a number of other factors, such as:

 

  our technologies and solutions to keep up with rapid technological change and the ability to compete in the market;

 

  our adaptation to meet changing customer needs and expectations;

 

  satisfaction level of our customers and partners with the performance, customization and effectiveness of our solutions and customer service;

 

  our ability to accurately predict market trends and deliver attractive products and services at a prices sensitive to market demands;

 

  the success and development of our customers and partners; and

 

  overall economy conditions, market and regulatory developments.

 

Our business, financial condition, operating results and prospects may be materially adversely affected if our technology solutions or services cannot meet the needs or expectations of customers and partners, or our customers and partners opt for their in-house team or our competitors to provide them technology solutions.

 

We are subject to evolving regulatory requirements, and if we fail to adapt to regulatory changes, our business and prospects may be materially and adversely affected.

 

Many aspects of our business, including the provision of internet information, consulting services to customers and banks, online publication services relating to financial product information, and financing solutions services, among others, are subject to supervision and regulation by various governmental authorities in China. In addition, as we continue to expand the solutions on our platform, we may be subject to new and more complex regulatory requirements. We are also required to comply with applicable laws and regulations in relevant jurisdictions to protect the privacy and security of our customers’ information. Legal and regulatory restrictions may delay, or possibly prevent, some of our solutions or services from being offered, which may have a material adverse effect on our business, financial condition and results of operations. Violation of laws and regulations may also result in severe penalties, confiscation of illegal income, revocation of licenses and, under certain circumstances, criminal prosecution.

 

The PRC regulatory framework governing financial services and related technology services is evolving. New laws or regulations may be promulgated, which could impose new requirements or prohibitions that render our operations or our technologies non-compliant. In addition, due to uncertainties and complexities of the regulatory environment, we cannot assure you that regulators will interpret laws and regulations the same way we do, or that we will always be in full compliance with applicable laws and regulations. To remedy any violations, we may be required to modify our business models, solutions and technologies in ways that render our solutions less appealing. We may also become subject to fines or other penalties, or, if we determine that the requirements to operate in compliance are overly burdensome, we may elect to terminate potentially non-compliant operations. If those situations were to happen, our business, financial condition and results of operations may be materially and adversely affected.

 

15

 

 

Failure to manage our growth could cause disruption to our operations, impair our ability to generate revenue and strain our operational and other resources.

 

Since 2019, our business has experienced significant growths through acquisitions and service solution diversification. Our growth strategy includes increasing market penetration of our existing products and services, enhancing our financial technologies, developing new products, and increasing the number of industries and customers we serve. Pursuing these strategies has resulted in, and will continue to result in substantial demands on our capital and operating resources. In particular, the management of our growth will require, among other things:

 

  successful integration of our existing operations and acquired businesses;

 

  continued technology innovations and R&D capability enhancement;

 

  stringent cost controls and adequate replenishable liquidity;

 

  strengthening of financial and risk controls;

 

  increased marketing, sales and support activities; and

 

  retaining, training and hiring qualified employees and professionals.

 

If we are not able to manage our growth successfully, our business, financial condition and operating results would be materially and adversely affected.

 

We have modified our business models and had substantial strategic operational adjustments to our business as a result of changes in the regulatory mandates as well as our corporate reorganizations, and we may be subject to risks, uncertainties or potential liabilities associated with our legacy business, products or services.

 

Given the complexities, uncertainties and changes in the laws, rules, regulations, policies and administrative measures governing our industries and business operations, we have modified our business models and practices in response to changes in regulatory requirements and our strategies. In addition, among historical financial service products some of our affiliated entities offered, they had ceased to facilitate certain financial intermediary services before being acquired by our Company as a result of the legal and policy changes in the PRC financial industry. In addition, in the normal course of business, legacy Xibolun Group that has been divested by us in 2020 may still be subject to challenges from PRC taxing authorities regarding the amounts of taxes due. Although Xibolun Group management believed it had paid all accrued taxes owed, PRC taxing authorities may take the position that Xibolun Group owed more taxes than it had paid and could hold us liable for any overdue taxes that may be levied despite that Xibolun Group is no longer a part of our consolidated group.

 

We are not aware any PRC authorities have imposed such liability or administrative penalties on us as of the date of this prospectus. Nevertheless, we cannot assure you that we will not be subject to liabilities or regulatory penalties in connection with the historical products or services our affiliates previously offered. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of any violation of those policies and rules until notified by the relevant agencies, and we cannot assure you that our affiliates or disposed operations would not cause us to be subject to liabilities or administrative penalties even though the relevant products or operations had not been or no longer are associated with our Company. Any of such occurrence may materially and adversely affect our client relationship, reputation and business operations.

 

We cannot assure you that our growth strategies will be successful or that we will not incur loss in the future.

 

We implement diversified and complimentary business strategies in pursuing our growth. However, many obstacles to our growth exist, including, but not limited to, increased competition from similar businesses, our ability to improve our products and product mix to realize the benefits of our solution services, unexpected costs and costs associated with marketing efforts. We cannot assure you that we will be able to successfully overcome such obstacles, increase market share or succeed in achieving our goals. Our inability to implement this internal growth strategy successfully may have a negative impact on our growth, future financial condition, results of operations or cash flows.

 

16

 

 

In addition, we have incurred losses in the past. We cannot assure you that we will be able to generate profits in the future. We may experience losses due to our continued investments in technology, talent, content, brand recognition, customer base expansion and other initiatives. Our profitability also depends on our ability to manage our costs and expenses. We intend to manage and control our costs and expenses as a proportion of our total revenues, but there can be no assurance that we will achieve this goal. Our ability to achieve and sustain profitability is affected by various other factors, some of which are beyond our control, such as changes in macroeconomic and regulatory environment or competitive dynamics in the industry. Accordingly, shareholders should not rely on our financial results of any prior period as an indication of our future performance.

 

From time to time we may evaluate and pursue strategic investments or acquisitions, which could require significant management attention, disrupt our existing operations and adversely affect our financial results.

 

We may evaluate and consider strategic investments, combinations, acquisitions or alliances to expand our operations and further increase the value of our services to our customers. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction or may be unable to obtain the benefits of such transaction.

 

Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:

 

  difficulties in integrating the operations, personnel, systems, data, technologies, rights, platforms, products and services of the acquired business;

 

  inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;

 

  difficulties in retaining, training, motivating and integrating key personnel;

 

  diversion of management’s time and resources from our daily operations;

 

  difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;

 

  difficulties in retaining relationships with customers, employees and suppliers of the acquired business;

 

  risks of entering markets in which we have limited or no prior experience;

 

  assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;

 

  failure to successfully further develop the acquired technology;

 

  liability for activities of the acquired business before the acquisition, such as violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;

 

  potential disruptions to our ongoing businesses; and

 

  unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.

 

We have made certain investments and acquisitions during the past year, including, for example, working with local partners in Shandong to establish our Tai’an subsidiary as a key holding and operational platform and acquiring Nami Cayman and its subsidiaries and operating affiliates to support the growth of our SME financing solution services. However, our investments and acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will prove to be profitable or bring value to our shareholders.

 

17

 

 

COVID-19 pandemic had an adverse effect on some operations of our business and may have material impact on our future business operations.

 

The COVID-19 pandemic has negatively impacted the global economy, disrupted business operations of various industries, and created significant volatility and disruption of financial markets. In the Spring of 2020, our operations were temporarily affected by travel restrictions, office closings, home quarantine, delays in project implementation, on-site work and business development, among others. For fiscal year 2020, the COVID-19 pandemic did not have a material negative impact on the Company’s financial services business. However, the COVID-19 pandemic resulted in material adverse effects on the Company’s discontinued equipment and engineering business. Employees had very limited access to Xibolun Group’s manufacturing facilities, and as a result, the Company experienced difficulty in providing manufacturing and installation services. In addition, some of the Company’s customers and suppliers experienced financial distress, delayed or defaulted on their payments, reduced the scale of their business, and suffered disruptions in their business, which in turn had caused further adverse impact on the equipment and engineering business.

 

After Spring 2020, the COVID outbreak in China has gradually been controlled and we also returned to normal operations. However, in March 2022, due to the spread of new variants and subvariants of COVID-19 in Shanghai and several other cities in China, local governments of the impacted cities have imposed strict movement restrictions. In mid-March 2022, Shanghai authorities issued strict lockdown and shutdown orders in response to the pandemic and as a result, employees of our PRC operating entities located in Shanghai having been working from home. As our Shanghai employees were prepared for remote working in advance, our Shanghai entities have been able to continue to provide services to our customers remotely with minimum interruptions. Our management does not believe the lockdown restrictions in Shanghai will have a material adverse impact on the Company’s overall business, operating results and financial condition. However, the pandemic could adversely affect our business and financial results in 2022 if any virus resurges cause significant disruptions to our operations or the business of our supply chain customers, logistics and service providers, and negative impact to the pricing of our products. We cannot predict the severity and duration of the impact from such resurgence. If any new outbreak of COVID-19 is not effectively and timely controlled, or if government responses to outbreaks or potential outbreaks are severe or long-lasting, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers or other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the economic growth in the regions where we conduct business, and could materially and adversely impact our business, financial condition and results of operations.

 

If we cannot compete effectively, our results of operations could suffer.

 

Competition in the SME financing industry has been intense, and increasingly more participants have also entered into the supply chain solutions market. Our competitors operate with different business models, have different cost structures or participate selectively in different markets. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their financial service platforms and customers. Our competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and brand loyalty and broader partner relationships than us. Additionally, a current or potential competitor may acquire one or more of its existing competitors or form a strategic alliance with one or more of its competitors. Our competitors may be better at developing new products or services, responding faster to new technologies, or undertaking more extensive and effective marketing campaigns. If we are unable to compete with such companies and meet the need for innovation in the financial services industry, the demand for our financial services could stagnate or substantially decline, our financial services business could experience reduced revenues or fail to achieve or maintain more widespread market acceptance, any of which could harm our business and results of operations.

 

If SME financial products traded on provincial or regional financial assets exchanges become restricted or prohibited, or if such financial assets exchanges are prohibited from listing exchange administered products, our results of operations and financial condition would be materially and adversely affected.

 

We provide small-and mid-size enterprises with financing solution services in connection with the listing of their securities on the provincial or regional financial assets exchanges in the PRC. The PRC government has not adopted a regulatory framework governing such local exchanges or the listing, trading and distribution of exchange administered products. The local financial assets exchanges are established upon approval of the local governments, and the exchange administered products listed and traded on these exchanges are filed with and approved by local financial asset exchanges under the supervision of the offices of finance at the municipal and provincial levels. As a result, the major product types selected for distribution on such exchanges are dependent upon the local regulatory environment and policies. If any significant product types are discouraged by the local government authorities, our product portfolio, distribution services and related revenues may be negatively impacted.

 

18

 

 

In addition, although the local financial exchanges are regulated by the local government subject to the two prohibitive provisions issued by the State Council, we cannot guarantee that they would not be covered by the tightened national financial supervision system. If they are subject to approval or guidance of any national regulatory bodies, such as the People’s Bank of China, China Banking and Insurance Regulatory and Administration Committee, or the CSRC, these financial exchanges may be prohibited from listing certain or all of the products currently traded on such exchanges, or be prohibited from engaging in such listing and trading services. Under that circumstance, we may have to change our business model and as a result, our operating results from SME financing solution services would be materially and adversely affected.

 

We depend on our industry partners to derive a substantial portion of our revenues.

 

We derive a substantial portion of our revenues from our cooperation with industry partners, including state-owned enterprises in our supply chain finance operations, financial institutions underwriting our customers’ securities on the financial asset exchanges and commercial banks distributing various financial products. If we lose any of the product providers, sponsors or acquirers, or any of our partners significantly reduces its volume of business with us, our revenues and profitability would be substantially reduced if we are unable seek alternative partners on a timely basis, or at all. In addition, the product volume we source and distribute from specific product providers may vary from period to period, particularly because we are not the exclusive distributor for any particular product provider. Our dependence on our financial product providers, sponsors or acquirers may also adversely affect our ability to negotiate fee rates with our customers, which may in turn materially and adversely affect our results of operations.

 

While we are not aware of any data breach in the past, cyber-attacks, computer viruses or any future failure to adequately maintain security and prevent unauthorized access to electronic and other confidential information could result in a data breach which could materially adversely affect our reputation, financial condition and operating results.

 

The protection of our customers’, business partners’, our Company’s and employees’ data is critically important to us. Our customers, business partners, and employees expect we will adequately safeguard and protect their sensitive personal and business information. We have become increasingly dependent upon automated information technology processes. Improper activities by third parties, exploitation of encryption technology, data-hacking tools and discoveries and other events or developments may result in a future compromise or breach of our networks, payment terminals or other settlement systems. In particular, the techniques used by criminals to obtain unauthorized access to sensitive data change frequently and often are not recognized until launched against a target; accordingly, we may be unable to anticipate these techniques or implement adequate preventative measures. There can be no assurance that we will not suffer a criminal cyber-attack in the future, that unauthorized parties will not gain access to personal or business information or sensitive data, or that any such incident will be discovered in a timely manner.

 

We also face indirect technology, cybersecurity and operational risks relating to the third parties whom we work with to facilitate our business activities, including, among others, third-party online service providers who manage accounts for our customers and external cloud service provider. As a result of increasing consolidation and interdependence of technology systems, a technology failure, cyber-attack or other information or security breach that significantly compromises the systems of one entity could have a material impact on its counterparties. Any cyber-attack, computer viruses, physical or electronic break-ins or similar disruptions of such third-party service providers could adversely affect our operations and could result in misappropriation of funds of our customers.

 

Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with customers and cooperation partners could be severely damaged, we could incur significant liability and our business and operations could be adversely affected.

 

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Any negative publicity and allegations against us may adversely affect our brand and reputation, which may harm our ability to attract and retain customers and business partners and result in material adverse impact on our business, results of operations and prospects.

 

Negative publicity and allegations about us, our products and services or our financial results, including by short sellers or investment research firms, regardless of their veracity, may adversely damage our brand, public image and reputation, harm our ability to attract and retain customers and result in material adverse impact on our share price, business, results of operations and prospects. For example, on June 3, 2020, a short seller issued a report alleging that, among other things, the private placement we consummated in December 2019, Hengpu acquisition and Nami acquisition were undisclosed related party transactions which we failed to disclose. The trading price of our shares declined and a shareholder class action lawsuit was filed against us and some of our directors and senior executive officers with the United States District Court for the Southern District of New York. While the findings and conclusions of the independent investigation conducted by the special counsel have refuted the relevant allegations set out in the short report, and the class action lawsuit has been dismissed in its entirety, nevertheless our share price fluctuated after such negative publicity.

 

The loss of any of our key customers could reduce our revenues and our profitability.

 

For the year ended December 31, 2021, two customers accounted for 37% and 15% of the Company’s total revenue from the financial service business, respectively. Two customers accounted for 71% and 10% of the Company’s total revenue from supply chain trading business, respectively. For the year ended December 31, 2020, three customers accounting for 31%, 21% and 12% of the Company’s total revenue. For the year ended December 31, 2019, one customer accounted for approximately 100% of our total financial services revenue and accounts receivable from the financial services. As of December 31, 2021, two customers accounted for approximately 31% and 29% of the Company’s total accounts receivable balance. As of December 31, 2020, three customers accounted for approximately 45%, 20% and 17% of the Company’s total accounts receivable balance.   

 

We have not entered into long-term contracts with any of these major customers and instead rely on individual orders from such customers. Therefore, there can be no assurance that we will maintain or improve the relationships with these customers, or that we will be able to continue to serve these customers at current levels or at all. As the majority of our revenues are driven by individual orders for services, our major customers often change each period based on when a given order is placed. Although long-term contracts do not exist in our industry and our customers often make orders repeatedly, if we cannot develop and maintain long-term relationships with major customers or replace major customers from period to period with equivalent customers, the loss of such sales could have an adverse effect on our business, financial condition and results of operations.

 

Our supply chain solutions services are capital driven operations, and if we cannot maintain the level of capital and funding sources needed to support our solutions services to our customers, our business would be harmed.

 

For our supply chain solutions services, we participate as an intermediary and a trading partner in the procurement and distribution transactions, automate the transaction payments and streamline the supply chain finance process. Such supply chain transactions are common for the commodity-based industry such as the agriculture, infrastructure and energy markets. As such, our supply chain solutions services may be considered capital intensive operations in the merchandise flows from the upstream procurement to the downstream distribution. Further, to remain competitive and enhance customer experience and the quality of our services, we need to make continued investment to develop new solution products and expand into new industries. Such endeavors carry risks, such as cost overruns, delays in delivery or lack of acceptance from our clients or partners. There can be no assurance that we will have sufficient funds available to maintain the levels of funding or future investment required to support our products or innovations, and any delay in the delivery of new services or the failure to accurately predict and address market demand could render our services less desirable to our customers and cooperation partners. While we have made continued efforts to diversify revenue and funding sources, we cannot assure you that such efforts would be successful or could remain or become increasingly diversified in the future. If we become dependent on a small number of customers or funding sources, and any such entities decide not to collaborate with us, change the commercial terms to the extent unacceptable to us or limit the funding available on our platform, such constraints may materially limit our ability to serve our customers. As a result, our business, financial condition, results of operations and cash flow may be materially and adversely affected.

 

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Our PRC subsidiaries’ and consolidated affiliates’ books and records are prepared in accordance with China GAAP, not U.S. GAAP.

 

Substantially all of the business operations of the Company are located in Mainland China. Although Nisun International’s reports are prepared in accordance with U.S. GAAP, our PRC subsidiaries’ books and records are prepared in accordance with China GAAP. Despite our efforts to improve the Company’s controls and procedures, our accounting personnel do not have sufficient knowledge, experience and training in maintaining our books and records in accordance with U.S. GAAP standards. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm the value of our shares.

 

We are substantially dependent upon our senior management and key information technology and development personnel.

 

We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of new products and the enhancement of our existing products and technologies. In particular, we rely substantially on members of our senior management, including Chief Executive Officer, Xiaoyun Huang, Chief Financial Officer, Changjuan Liang, and senior executives of Fintech, Hengpu and Nami to manage our operations.

 

While we provide the legally required personal insurance for the benefit of our employees, we do not maintain key man life insurance on any of our senior management or key personnel. The loss of any one of them would have a material adverse effect on our business and operations. Competition for senior management and our other key personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key personnel that we lose. In addition, if any member of our senior management or key personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our Company. Although each of our senior management and key personnel has signed a confidentiality agreement in connection with their employment with us, we cannot assure you that we will be able to successfully enforce these provisions in the event of a dispute between us and any member of our senior management or key personnel.

 

We compete for qualified personnel with other technology companies and research institutions. Intense competition for these personnel could cause our compensation costs to increase, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.

 

We are heavily dependent upon the services of experienced personnel who possess skills that are valuable in our industry, and we may have to actively compete for their services.

 

We are heavily dependent upon our ability to attract, retain and motivate skilled personnel to serve our customers. Many of our personnel possess skills that would be valuable to all companies engaged in our industry. Consequently, we expect that we will have to actively compete for these employees. Some of our competitors may be able to pay our employees more than we are able to pay to retain them. Our ability to profitably operate is substantially dependent upon our ability to locate, hire, train and retain our personnel. There can be no assurance that we will be able to retain our current personnel, or that we will be able to attract and assimilate other personnel in the future. If we are unable to effectively obtain and maintain skilled personnel, the development and quality of our services could be materially impaired. See “Our Employees.”

 

If we fail to protect our intellectual property rights, it could harm our business and competitive position.

 

We rely on a combination of copyright, trademark and trade secret laws and non-disclosure agreements and other methods to protect our intellectual property rights. Our affiliated entities own a number of trademarks in China, all of which have been properly registered with regulatory agencies such as the State Intellectual Property Office and Trademark Office. This intellectual property has allowed our products to earn market share in the financial services and supply chain solutions industries.

 

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We also rely on trade secret rights to protect our business through non-disclosure agreements with certain employees. If any of our employees breach their non-disclosure obligations, we may not have adequate remedies in China, and our trade secrets may become known to our competitors. In accordance with Chinese intellectual property laws and regulations, we will have to renew our trademarks once the terms expire.

 

Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and enforcement difficulties. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend our intellectual property rights, or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

 

We may be exposed to intellectual property infringement and other claims by third parties which, if successful, could disrupt our business and have a material adverse effect on our financial condition and results of operations.

 

Our success depends, in large part, on our ability to use and develop our technology and know-how without infringing third party intellectual property rights. As litigation concerning intellectual property has become more common in China, we face a higher risk of being the subject of claims for intellectual property infringement, invalidity or indemnification relating to other parties’ proprietary rights. Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have or may obtain intellectual property rights that will prevent, limit or interfere with our ability to use or sell our products in either China or other countries, including the United States. In addition, the defense of intellectual property suits, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceedings to which we may become a party could cause us to:

 

  pay damage awards;

 

  seek licenses from third parties;

 

  pay ongoing royalties;

 

  redesign our products; or

 

  be restricted by injunctions,

 

each of which could effectively prevent us from pursuing some or all of our business and result in our customers or potential customers deferring or limiting their purchase or use of our branded products, which could have a material adverse effect on our financial condition and results of operations.

 

Our brands or reputation and the reputation of the financial service industry may materially and adversely be affected by factors outside of its control.

 

Enhancing the recognition and reputation of the brands of our financial services is critical to its business and competitiveness. Factors that are important to this objective include but are not limited to its ability to:

 

  maintain the quality and reliability of our technology platform;

 

  provide financial institutions, corporate and individual customers and industry partners with a superior client service experience;

 

  maintain accurate financial product matching and asset management tools and decision-making models;

 

  effectively manage and resolve any customer questions or concerns; and

 

  effectively protect personal information and privacy of customers and industry partners.

 

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Any negative publicity by the media or other parties about the foregoing or other aspects of our services, including but not limited to our management, business, compliance with laws, whether with merit or not, could severely hurt its reputation and harm its business and operating results.

 

Certain factors that may adversely affect our reputation are beyond our control. Negative publicity about our industry partners, service providers or other counterparties, such as negative publicity about their revenue generating practices and any failure by them to adequately protect the information of their investors, to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm the reputation of our financial services model working with those industry partners. Furthermore, any negative development in the financial services industry, such as bankruptcies or failures of other financial technology platforms, or negative perception of the industry as a whole, such as that arises from any failure of other financial advisory service providers or their technology platforms to detect or prevent money laundering or other illegal activities, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established and have a negative impact on our ability to attract new customers. Negative developments in the financial services industry, such as fraudulent behavior and/or the closure of other financial service platforms, may also lead to tightened regulatory scrutiny of the industry and limit the scope of permissible business activities that may be conducted by the industry participants. If any of the foregoing were to occur, our business and results of operations could be materially and adversely affected.

 

Our operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China.

 

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. We rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our digital technology systems and platform. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage.

 

In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pays for telecommunications and internet services rise significantly, our results of operations may be adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.

 

We face risks related to health pandemics or disease outbreaks.

 

In general, our business could be adversely affected by the effects of pandemic, including but not limited to, the COVID-19, avian influenza, severe acute respiratory syndrome (SARS), the influenza A virus, Ebola virus, or other outbreaks. In response to an pandemic, government and other organizations may adopt regulations and policies that could lead to severe disruptions to our daily operations, including temporary closure of our offices and other facilities. These severe conditions may cause us and/or our suppliers and customers to make internal adjustments, including but not limited to, temporarily closing down our business, limiting business hours, and setting restrictions on travel and/or visits with clients and suppliers for a prolonged period of time. Various impacts arising from a severe condition may cause business disruption, resulting in a material, adverse impact to our financial condition and results of operations.

 

Substantially all of our revenues and our workforce are concentrated in the PRC. Consequently, our results of operations will likely be adversely, and may be materially, affected, to the extent that the COVID-19 or any other pandemic harms the Chinese and global economy in general. Any potential impact to our results will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of the health pandemics and the actions taken by government authorities and other entities to contain the health pandemics or alleviate its impact, almost all of which are beyond our control. Potential impacts include, but are not limited to, the following:

 

  temporary closure of offices, travel restrictions or suspension of services of our customers and suppliers have negatively affected, and could continue to negatively affect, the demand for our services;

 

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  our customers that are negatively impacted by the outbreak of health pandemics, may reduce their budgets on equipment and engineering projects or delay the progress of the related projects or have less demands on our financial service which may materially adversely impact our revenue;

 

  our customers may require additional time to pay us or fail to pay us at all, which could significantly increase the amount of accounts receivable and require us to record additional allowances for doubtful accounts, which may in turn adversely affect our financial condition and operating results; and

 

  any disruption of our supply chains, logistics providers or customers could adversely impact our business and results of operations, including causing our subcontractors to temporarily cease operation for a period of time, which may also lead to delayed project progress and business harm to us;

 

Because of the possible future uncertainty surrounding the COVID-19, the financial impact related to the pandemic of and response cannot be reasonably estimated at this time. There is no guarantee that our total revenues will grow or remain at the similar level year-over-year in the future. We may have to record downward adjustments, if conditions have not been significantly improved and global stock markets have not recovered from recent declines.

 

Risks Related to Doing Business in China

 

Adverse changes in political climate and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China and materially and adversely affect our competitive position.

 

Substantially all of our business operations are conducted in China. Our business, results of operations, financial condition and prospects are subject to economic, political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. This government involvements has been instrumental in China’s significant growth in the past 30 years. In response to the global and Chinese economic downturns, the PRC government has adopted policy measures aimed at stimulating the economic growth in China. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits the growth of our industry or otherwise negatively affects our business, our growth rate or strategy and our results of operations could be adversely affected as a result.

 

Uncertainties in the PRC legal system and the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us and our investors, materially and adversely affect our financial condition and results of operations and cause our shares to significantly decline in value or become worthless.

 

We conduct all of our business through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China for the past decades. However, 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. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties.

 

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Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all. As a result, we may not be aware of our potential violation of these policies and rules. In addition, any administrative and court proceedings in China may be protracted and result in substantial costs and diversion of resources and management attention.

 

PRC government has significant oversight over the conduct of our business and it has recently indicated an intent to exert more oversight over offerings that are conducted overseas and/or foreign investment in China-based issuers. Any such action could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.

 

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet- related or finance-related businesses and companies, and any lack of requisite approvals, licenses, permits or filings applicable to our business may have a material adverse effect on our business and results of operations.

 

The PRC government extensively regulates the internet industry and finance-related industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry and finance-related industry. These internet-related or finance-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.

 

For example, PRC regulations impose sanctions for engaging in disseminating analysis, forecasting, advisory or other information related to securities and securities markets without having obtained the securities investment consultancy qualifications in China. We do not intend to engage in such business in China. However, our users could post articles or share contents that contain analysis, forecasting or advisory content related to securities on our platform. If any of the information or content displayed on our platform is deemed as analysis, forecasting, advisory or other information related to securities or securities markets, or any of our business in the PRC is deemed to be a service providing such information, we may be subject to regulatory measures including warnings, public condemnation, suspension of relevant business and other measures in accordance with applicable laws and regulations. Any such penalties may disrupt our business operations or materially and adversely affect our business, financial condition and results of operations.

 

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry and finance-related have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet and finance-related businesses in China, including our business. While we believe that we have obtained all the permits or licenses required to conduct our business operations in China, we cannot assure you that the relevant government authorities will determine we have obtained all required permits or licenses or completed all the record-filing procedures required for conducting our business, or that we will be able to maintain our existing licenses or obtain new permits if so required. If the PRC government considers that we were operating without the proper approvals, licenses, permits or filings or promulgates new laws and regulations that require additional approvals, licenses, permits or filings or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.

 

The PRC government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or cause the value of our securities to significantly decline or be worthless.

 

The Chinese government has significant oversight and discretion over the conduct of our business and may intervene or influence our operations as the government deems appropriate to further regulatory, political and societal goals. The Chinese government has recently published new policies that significantly affected certain industries such as the education and internet industries. Recent statements made by the Chinese government have indicated an intent to increase the government’s oversight and control over offerings of companies with significant operations in mainland China that are to be conducted in foreign markets, as well as foreign investment in China-based issuers like us. Any future action by the Chinese government expanding the categories of industries and companies whose foreign securities offerings are subject to government review could significantly limit or completely hinder our ability to offer or continue to offer securities to investors or could disallow our current operating structure, which would likely result in a material change in our operations and/or a material change in the value of our securities, including causing the value of such securities to significantly decline or become worthless.

 

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On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued a document to crack down on illegal activities in the securities market and promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. Since this document is still relatively new, uncertainties still exist in relation to how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our future business combination with a company with major operation in China.

 

Further, Chinese government continues to exert more oversight and control over Chinese technology firms. On July 2, 2021, Chinese cybersecurity regulator announced, that it had begun an investigation of Didi Global Inc. (NYSE: DIDI) and two days later ordered that the company’s application be removed from smartphone application stores. On July 5, 2021, the Chinese cybersecurity regulator launched the same investigation on two other Internet platforms, China’s Full Truck Alliance of Full Truck Alliance Co. Ltd. (NYSE: YMM) and Boss of KANZHUN LIMITED (Nasdaq: BZ).

 

On December 24, 2021, the CSRC issued the Administrative Provisions of the State Council Regarding the Overseas Issuance and Listing of Securities by Domestic Enterprises (the “Draft Administrative Provisions”) and the Measures for the Overseas Issuance of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”), collectively, the Draft Overseas Listing Rules, which are currently published for public comments only. According to the Draft Overseas Listing Rules, among other things, all China-based companies applying for overseas securities issuance, listing and post-listing capital operations shall be subject to statutory procedures, such as filing and information reporting requirement. After making initial applications with overseas stock markets for offerings or listings, all China-based companies shall file with the CSRC within three business days. In addition, overseas offerings and listings may be prohibited for such China-based companies when any of the following applies: (a) if the securities offerings and listings are prohibited by applicable PRC laws and rules; (b) if securities offerings and listings may constitute a threat to, or endanger national security as reviewed and determined by PRC authorities; (c) if there are material ownership disputes over applicants’ equity interests, major assets, core technologies or other items; (d) if a PRC company or its controlling shareholders or de facto controllers have committed certain crimes, under investigation for suspicion of major violations in the prior three years; (e) if any directors, supervisors, or senior executives of applicants have been subject to administrative punishments for severe violations, or are under investigations for crimes or major violations; or (f) other circumstances as provided. The Draft Administrative Provisions further provide that a fine between RMB 1 million and RMB 10 million may be imposed if a company fails to fulfill the filing requirements with the CSRC or conducts an overseas offering or listing in violation of the Draft Overseas Listing Rules. In the case of severe violations, an order to suspend relevant businesses or halt operations for rectification may be issued, and relevant business permits or operational license revoked. Overseas issuance and listings subject to the Draft Overseas Listing Rules include direct and indirect issuance and listings. Our future securities offerings if any could be deemed an indirect overseas issuance under the Draft Overseas Listing Rules and would be required to complete the filing procedures and submit the relevant information to CSRC after the Draft Overseas Listing Rules become effective. As of the date of this report, such rules have not become effective. In addition, after the rules take effect, we would only need to submit the filing materials and no CSRC approval would be required under the rules. However, in the event that a government approval is required, we cannot assure you that we will be able to receive clearance in a timely manner, or at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer our shares, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause our shares to significantly decline in value or become worthless.

 

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Recent regulatory developments in China, including greater oversight and control by the CAC over privacy and data security, may subject us to additional regulatory review and any actions by the Chinese government to exert more oversight and control over foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.

 

Recent statements by the Chinese government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China based issuers. The PRC government recently initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, among other things, including adopting new measures to extend the scope of cybersecurity reviews, cracking down on illegal activities in the securities market, and expanding the efforts in anti-monopoly enforcement. The PRC government is increasingly focused on data security, recently launching cybersecurity review against a number of mobile apps operated by several U.S.-listed Chinese companies and prohibiting these apps from registering new users during the review period. We are subject to various risks and costs related to the collection, use, sharing, retention, security, and transfer of confidential and private information, such as personal information and other data. Such covered data is wide ranging and relates to our investors, employees, suppliers, customers and other third parties. The relevant PRC laws apply not only to third-party transactions, but also to transfers of information between Nisun International, offshore subsidiaries, our PRC subsidiaries, and other parties with which we have commercial relations.

  

The PRC regulatory and enforcement regime with regard to privacy and data security is evolving. The PRC Cybersecurity Law, which was promulgated on November 7, 2016 and became effective on June 1, 2017, provides that personal information and important data collected and generated by operators of critical information infrastructure in the course of their operations in the PRC should be stored in the PRC, and the law imposes heightened regulation and additional security obligations on operators of critical information infrastructure. The interpretation and application of these cybersecurity laws, regulations and standards are still uncertain and evolving. We cannot assure you that relevant governmental authorities will not interpret or implement these and other laws or regulations in ways that may negatively affect us.

 

On November 14, 2021, the CAC published a discussion draft of the Administrative Measures for Internet Data Security, or the Draft Measures for Internet Data Security, which provides that data processors conducting the following activities shall apply for cybersecurity review: (i) merger, reorganization or division of Internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests affects or may affect national security; (ii) listing abroad of data processors processing over one million users’ personal information; (iii) listing in Hong Kong which affects or may affect national security; or (iv) other data processing activities that affect or may affect national security. There have been no clarifications from the authorities as of the date of this annual report as to the standards for determining such activities that “affects or may affect national security.” The CAC has solicited comments on this draft until December 13, 2021, but there is no timetable as to when it will be enacted. As such, substantial uncertainties exist with respect to the enactment timetable, final content, interpretation and implementation. The Draft Measures for Internet Data Security, if enacted as proposed, may materially impact our capital raising activities. Any failure to obtain such approval or clearance from the regulatory authorities could materially constrain our liquidity and have a material adverse impact on our business operations and financial results, especially if we need additional capital or financing.

 

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On December 28, 2021, the CAC, the NDRC, the MIIT, and several other administrations jointly published the Measures for Cybersecurity Review, effective on February 15, 2022, which provides that certain operators of critical information infrastructure purchasing network products and services or network platform operators carrying out data processing activities, which affect or may affect national security, must apply with the Cybersecurity Review Office for a cybersecurity review. However, the scope of operators of “critical information infrastructure” under the current regulatory regime remains unclear and is subject to the decisions of competent PRC regulatory authorities. Based on our understanding of the Measures as of the date hereof, the exact scope of operators of “critical information infrastructure” under the Measures and current PRC regulatory guidance remains unclear, and is subject to the decisions of the relevant PRC government authorities that have been delegated the authority to identify operators of “critical information infrastructure” in their respective jurisdictions (including regions and industries). PRC government authorities have wide discretion in the interpretation and enforcement of these laws, including the identification of operators of “critical information infrastructure” and the interpretation and enforcement of requirements potentially applicable to such operators of “critical information infrastructure.” As we operate an internet platform, we are at risk of being deemed to be an operator of “critical information infrastructure” or a network platform operator meeting the above criteria under PRC cybersecurity laws. If we are identified as an operator of “critical information infrastructure,” we would be required to fulfill various obligations as required under PRC cybersecurity laws and other applicable laws for such operators of “critical information infrastructure,” including, among others, setting up a special security management organization, organizing regular cybersecurity education and training, formulating emergency plans for cyber security incidents and conducting regular emergency drills, and we may need to follow cybersecurity review procedure and apply with Cybersecurity Review Office before making certain purchases of network products and services. During cybersecurity review, we may be required to suspend the provision of any existing or new services to our users, and we may experience other disruptions of our operations, which could cause us to lose users and customers therefore resulting in adverse impacts on our business. The cybersecurity review could also lead to negative publicity and a diversion of time and attention of our management and our other resources. It could be costly and time-consuming for us to prepare application materials and make the applications. Furthermore, there can be no assurance that we will obtain the clearance or approval for these applications from the Cybersecurity Review Office and the relevant regulatory authorities in a timely manner, or at all. If we are found to be in violation of cybersecurity requirements in China, the relevant governmental authorities may, at their discretion, conduct investigations, levy fines, request app stores to take down our apps and cease to provide viewing and downloading services related to our apps, prohibit the registration of new users on our platform, or require us to change our business practices in a manner materially adverse to our business. Any of these actions may disrupt our operations and adversely affect our business, results of operations and financial condition.

 

PRC regulations establish complex procedures for some acquisitions conducted by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, adopted by six PRC regulatory agencies in August 2006 and amended in June 2009, among other things, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. In addition, the Implementing Rules Concerning Security Review on the Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, or the Rules Concerning Security Review on M&A, issued by the Ministry of Commerce in August 2011, specify that mergers and acquisitions by foreign investors involved in “an industry related to national security” are subject to strict review by the Ministry of Commerce, and prohibit any activities attempting to bypass such security review, including by structuring the transaction through a proxy or contractual control arrangement. We believe that our business is not in an industry related to national security, but we cannot preclude the possibility that the competent PRC government authorities may publish explanations contrary to our understanding or broaden the scope of such security reviews in the future, in which case our future acquisitions and investment in the PRC, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Moreover, according to the Anti-Monopoly Law, the SMAR shall be notified in advance of any concentration of undertaking if certain filing thresholds are triggered. We may grow our business in part by directly acquiring complementary businesses in China. Complying with the requirements of the laws and regulations mentioned above and other PRC regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the SMAR, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. Our ability to expand our business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.

 

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In December 2020, the NDRC and the Ministry of Commerce promulgated the Measures for the Security Review of Foreign Investment, which came into effect on January 18, 2021. As these measures are recently promulgated, official guidance has not been issued by the relevant government authority. The interpretation of those measures remains unclear in many aspects such as what would constitute “important information technology and internet services and products” and whether these measures may apply to foreign investment that is implemented or completed before the enactment of these new measures. We cannot assure you that our current business operations will remain fully compliant, or we can adapt our business operations to new regulatory requirements on a timely basis, or at all.

 

Trading in our securities may be prohibited under the Holding Foreign Companies Accountable Act if the PCAOB determines that it cannot inspect or investigate completed our auditors for three consecutive years beginning in 2021, or for two consecutive years if the Accelerating Holding Foreign Companies Accountable Act or the America COMPETES Act becomes law.

 

In recent years, U.S. regulatory authorities have continued to express their concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. As part of a continued regulatory focus in the United States on access to audit and other information, the Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA includes requirements for the SEC to identify issuers whose audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely because of a restriction imposed by a non-U.S. authority in the auditor’s local jurisdiction. The HFCAA also requires that, to the extent that the PCAOB has been unable to inspect an issuer’s auditor for three consecutive years since 2021, the SEC shall prohibit its securities registered in the United States from being traded on any national securities exchange or over-the-counter markets in the United States.

 

On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA. The interim final rule applies to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction that the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. Consistent with the HFCAA, the interim final rule requires the submission of documentation to the SEC establishing that such a registrant is not owned or controlled by a government entity in that foreign jurisdiction and also requires disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and government influence on, such registrants. On May 13, 2021, the PCAOB issued proposed PCAOB Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act for public comment. The proposed rule provides a framework for making determinations as to whether PCAOB is unable to inspect an audit firm in a foreign jurisdiction, including the timing, factors, bases, publication and revocation or modification of such determinations, and such determinations will be made on a jurisdiction-wide basis in a consistent manner applicable to all firms headquartered in the jurisdiction. In November 2021, the SEC approved PCAOB Rule 6100. On December 2, 2021, the SEC adopted amendments to final rules implementing the disclosure and submission requirements of the HFCAA.

 

On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act or AHFCAA, and on February 4, 2022, the U.S. House of Representatives passed the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength (COMPETES) Act of 2022, or the COMPETES Act. If either bill is enacted into law, it would amend the HFCAA and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections or complete investigations for two consecutive years instead of three. As a result, our securities may be prohibited from trading on Nasdaq or over-the-counter markets if our auditor is not inspected by the PCAOB for three consecutive years as specified in the HFCAA or two years if the AHFCAA or the COMPETES Act becomes law, and would reduce the time before our securities may be prohibited from trading or delisted.

 

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On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCAA. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.

 

On December 16, 2021, the PCAOB announced the PCAOB Holding Foreign Companies Accountable Act determinations (the “PCAOB determinations”) relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in mainland China of the PRC or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in the PRC or Hong Kong.

 

The lack of access to the PCAOB inspection or investigation in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, the investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections or investigations of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections and investigations, which could cause existing and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

Our current auditor, Wei, Wei & Co., LLP, an independent registered public accounting firm that is headquartered in the United States, is a firm registered with the U.S. Public Company Accounting Oversight Board (the “PCAOB”), and is required by the laws of the U.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. Wei, Wei & Co., LLP has been subject to PCAOB inspections, and is not among the PCAOB-registered public accounting firms headquartered in the PRC or Hong Kong that are subject to PCAOB’s determination on December 16, 2021 of having been unable to inspect or investigate completely.

 

Notwithstanding the foregoing, if it is later determined that the PCAOB is unable to inspect or investigate our auditor completely, or if there is any regulatory change or step taken by PRC regulators that does not permit our auditor to provide audit documentations located in China or Hong Kong to the PCAOB for inspection or investigation, or the PCAOB expands the scope of the Determination so that we are subject to the HFCAA, as the same may be amended, you may be deprived of the benefits of such inspection. Any audit reports not issued by auditors that are completely inspected or investigated by the PCAOB, or a lack of PCAOB inspections or investigations of audit work undertaken in China that prevents the PCAOB from regularly evaluating our auditors’ audits and their quality control procedures, could result in a lack of assurance that our financial statements and disclosures are adequate and accurate.

 

However, the recent developments would add uncertainties to our offering and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. It remains unclear what further actions the SEC, the PCAOB or Nasdaq will take to address these issues and what impact those actions will have on U.S. companies that have significant operations in the PRC and have securities listed on a U.S. stock exchange (including a national security exchange or over-the-counter stock market). In addition, any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit information could create some uncertainty for investors, the market price of our ordinary shares could be adversely affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement or being required to engage a new audit firm, which would require significant expense and management time.

 

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Newly enacted Holding Foreign Companies Accountable Act, recent regulatory actions taken by the SEC and the Public Company Accounting Oversight Board, and proposed rule changes by Nasdaq calling for additional and more stringent criteria to be applied to China-based public companies could add uncertainties to our capital raising activities and compliance costs.

 

U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud.

 

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. On April 21, 2020, the SEC Chairman and PCAOB Chairman, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China, reiterating past SEC and PCAOB statements on matters including the difficulty associated with inspecting accounting firms and audit work papers in China and higher risks of fraud in emerging markets and the difficulty of bringing and enforcing SEC, Department of Justice and other U.S. regulatory actions, including in instances of fraud, in emerging markets generally.

 

On May 18, 2020, NASDAQ filed three proposals with the SEC to (i) apply minimum offering size requirement for companies primarily operating in a “Restrictive Market”, (ii) prohibit Restrictive Market companies from directly listing on NASDAQ Capital Market, and only permit them to list on NASDAQ Global Select or NASDAQ Global Market in connection with a direct listing, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditors.

 

On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 2, 2020, the U.S. House of Representatives passed the Holding Foreign Companies Accountable Act. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law.

 

On March 24, 2021, the SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the Act. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. The SEC will implement a process for identifying such a registrant and any such identified registrant will be required to submit documentation to the SEC establishing that it is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in the registrant’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant.

 

On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (“AHFCAA”), and on February 4, 2022, the U.S. House of Representatives passed the America Creating Opportunities for Manufacturing Pre-Eminence in Technology and Economic Strength (COMPETES) Act of 2022, or the COMPETES Act. Either bill, if signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the Holding Foreign Companies Accountable Act from three years to two and, would reduce the time before our securities may be prohibited from trading or delisted.

  

On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the Holding Foreign Companies Accountable Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.

 

On December 16, 2021, PCAOB announced the PCAOB Holding Foreign Companies Accountable Act determinations (the “PCAOB determinations”) relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in mainland China of the PRC or Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken by one or more authorities in the PRC or Hong Kong.

 

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The recent regulatory developments would add uncertainties to our offering and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. It remains unclear what further actions the SEC, the PCAOB or Nasdaq will take to address these issues and what impact those actions will have on U.S. companies that have significant operations in the PRC and have securities listed on a U.S. stock exchange (including a national security exchange or over-the-counter stock market). In addition, any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit information could create some uncertainty for investors, the market price of our ordinary shares could be adversely affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement or being required to engage a new audit firm, which would require significant expense and management time.

 

As a result of these scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions, and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on us, our future securities offerings, business and our share price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and defend our Company. Our management would have to divert valuable resources and attention away from our operations and may negatively impact our operations. If such allegations are not proven to be groundless, we and our business operations will be severely affected and you could sustain a significant decline in the value of our shares.

 

Chinese economic growth slowdown may have a negative effect on our business.

 

Since 2014, Chinese economic growth has been slowing down from double-digit GDP speed. The annual rate of growth declined from 7.3% in 2014 to 6.9% in 2015, to 6.7% in 2016, to 6.9% in 2017, to 6.6% in 2018, and to 6.1% in 2019. Due to the impact of COVID-19, China’s economic growth rate in 2020 has slowed to 2.3%, its lowest level in years. While technology-based financial services companies have not been affected by the pandemic on the same level as companies in certain other industries, nevertheless a slow economic growth could adversely affected many of our customers and partners, which in turn may materially adversely affected our financial condition and results of operations.

 

We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us and any tax we are required to pay could have a material and adverse effect on our ability to conduct our business.

 

We are a BVI holding company and we may rely on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and for services of any debt we may incur. Our subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries and our consolidated affiliated entities is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entities in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. These reserves are not distributable as cash dividends. If our PRC subsidiaries 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 limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.

 

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In response to the persistent capital outflow and RMB’s depreciation against U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, the People’s Bank of China issued the Circular on Further Clarification of Relevant Matters Relating to Offshore RMB Loans Provided by Domestic Enterprises, or the PBOC Circular 306, on November 22, 2016, which provides that offshore RMB loans provided by a domestic enterprise to offshore enterprises that it holds equity interests in shall not exceed 30% of the domestic enterprise’s ownership interest in the offshore enterprise. The PBOC Circular 306 may constrain our PRC subsidiaries’ ability to provide offshore loans to us. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries’ dividends and other distributions may be subjected to tighter scrutiny in the future. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

Under the EIT Law and related regulations, dividends, interests, rent or royalties payable by a foreign-invested enterprise, such as our PRC subsidiaries, to any of its foreign non-resident enterprise investors, and proceeds from any such foreign enterprise investor’s disposition of assets (after deducting the net value of such assets) are subject to a 10% withholding tax, unless the foreign enterprise investor’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax. Undistributed profits earned by foreign-invested enterprises prior to January 1, 2008 are exempted from any withholding tax. The BVI, where Nisun International, the parent company of our PRC subsidiaries, is incorporated, does not have such a tax treaty with China. Hong Kong has a tax arrangement with China that provides for a 5% withholding tax on dividends subject to certain conditions and requirements, such as the requirement that the Hong Kong resident enterprise own at least 25% of the PRC enterprise distributing the dividend at all times within the 12-month period immediately preceding the distribution of dividends and be a “beneficial owner” of the dividends. However, if NiSun HK is not considered being the beneficial owner of the dividends paid to it by our WFOE under the tax circulars promulgated in February and October 2009, such dividends would be subject to withholding tax at a rate of 10%. If our PRC subsidiaries declare and distribute profits to us, such payments will be subject to withholding tax, which will increase our tax liability and reduce the amount of cash available to our company.

 

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.

 

China passed an Enterprise Income Tax Law (the “EIT Law”) and implementing rules, both of which became effective 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.

 

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On April 22, 2009, the State Administration of Taxation of China 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 to offshore entities controlled by a Chinese enterprise or group. 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 stamps, board and stockholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management are 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 stockholders.

 

Nisun International does not have a PRC enterprise or enterprise group as its primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of the Notice, so we believe the Notice is not applicable to us. However, in the absence of guidance specifically applicable to us, we have applied the guidance set forth in the Notice to evaluate the tax residence status of Nisun International.

 

We do not believe that we meet some of the conditions outlined. As a holding company, the key assets and records of Nisun International including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that have been deemed a PRC “resident enterprise” by the PRC tax authorities. Accordingly, we believe that Nisun International should not be treated as a “resident enterprise” for PRC tax purposes if the criteria for “de facto management body” as set forth in the Notice were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body” as applicable to our offshore entities, we will continue to monitor our tax status.

 

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 non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Currently, we do not have any non-China source income, so this would have minimal effect on us; however, if we develop non-China source income in the future, we could be adversely affected. Second, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income.” 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 the PRC tax authorities, we would be subject to taxation in both the U.S. and China, but our PRC source income will not be taxed in the U.S. again because the U.S.-China tax treaty will avoid double taxation between these two nations.

 

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PRC regulation of loans and direct investment by offshore holding companies in PRC entities may delay or prevent us from using the proceeds of our securities offerings to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

In utilizing proceeds of our securities offerings, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries.

 

Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are FIEs, to finance their activities cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE. Currently, China is holding more open and tolerant attitude toward FIEs. More open rules and regulations are published in recent years to replace previous ones which are more restrictive. On March 30, 2015, SAFE promulgated Circular 19 which is about Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises) and effective since June 1, 2015. Circular 19 has made some important changes in rules regarding the conversion of foreign exchanges to RMB, which are as follows in particular:

 

  (1) Instead of the payment-based exchange settlement system under previous Circular 142 and Circular 88, new rules of discretional foreign exchange settlement have been established, which means the foreign exchange capital in the capital account of foreign-invested enterprises for which the confirmation of rights and interests of monetary contribution by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks in accordance with Circular 13 as we mentioned in the comment below) has been handled can be settled at the banks based on the actual operational needs of the enterprises, and the proportion of foreign exchange which can be discretionally converted by each FIE is temporarily determined as 100% (SAFE may adjust such scale as necessary). So regulation wise FIEs no longer needs to report the use of its RMB before or after a conversion which are required by previous Circular 142 and Circular 88. However, actually SAFE and the banks are experiencing a transitional period in this regard, so for the time being, most banks still need the FIEs to report their proposed use of the RMB to be converted from foreign exchanges, as well as the actual use of the RMB obtained in the last conversion. Certainly, the transitional period will not be too long and therefore optimistically from the year of 2016, the report obligation will no longer be required.

 

  (2) Foreign currency-denominated capital no longer needs to be verified by an accounting firm before converting into RMB.

 

  (3) As stipulated in Circular 19, the use of capital by FIEs shall follow the principles of authenticity and self-use within the business scope of enterprises, shall not be used for the following purposes:

 

  a) it shall not be directly or indirectly used for the payment beyond the business scope of the enterprises or the payment prohibited by national laws and regulations;

 

  b) it shall not be directly or indirectly used for investment in securities unless otherwise provided by laws and regulations;

 

  c) it shall not be directly or indirectly used for granting the entrust loans in RMB (unless permitted by the scope of business), repaying the inter-enterprise borrowings (including advances by the third party) or repaying the bank loans in Renminbi that have been sub-lent to the third party; and

 

  d) it shall not be used for paying the expenses related to the purchase of real estate not for self-use, except for the foreign-invested real estate enterprises.

 

On May 10, 2013, SAFE released Circular 21, which came into effect on May 13, 2013; also, on February 13, 2015 SAFE published Circular 13 (Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies) to update some measures stipulated in Circular 21. According to Circular 21, SAFE has significantly simplified the foreign exchange administration procedures with respect to the registration, account openings and conversions, settlements of FDI-related foreign exchange, as well as fund remittances. Meanwhile, Circular 13 has further simplified foreign exchange administration procedures, most important among which is that SAFE delegated foreign exchange registration to the banks, meanwhile the related registration approval by SAFE has been annulled.

 

Even with more and more open policy toward FDI and FIEs, the Circulars mentioned above may still have some limit our ability to convert, transfer and use the net proceeds from our securities offerings and any offering of additional equity securities in China, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

 

We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be approved by the Ministry of Commerce of China, or MOFCOM, or its local counterpart. We may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals, we will not be able to use the proceeds of our offerings and capitalize our PRC operations, which could adversely affect our liquidity and our ability to fund and expand our business.

 

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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

 

The Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles, or SAFE Circular No. 75, and a series of implementation rules and guidance issued by SAFE, including the circular relating to operating procedures that took effect in July 2011, required PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment in an overseas special purpose vehicle, or SPV, for the purposes of overseas equity financing activities, and to update such registration in the event of any significant changes with respect to that offshore company. SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, on July 4, 2014, which replaced the SAFE Circular No. 75. SAFE Circular No. 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular No. 37 as a “special purpose vehicle.” The term “control” under SAFE Circular No. 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by the PRC residents in the offshore special purpose vehicles or PRC companies by such means as acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. SAFE Circular No. 37 further requires amendment to the registration in the event of any changes with respect to the basic information of the special purpose vehicle, such as changes in a PRC resident individual shareholder, name or operation period; or 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. If the shareholders of the offshore holding company who are PRC residents do not complete their registration with the local SAFE branches, the PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the offshore company, and the offshore company may be restricted in its ability to contribute additional capital to its PRC subsidiaries. Moreover, failure to comply with SAFE registration and amendment requirements described above could result in liability under PRC law for evasion of applicable foreign exchange restrictions. On February 28, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. In accordance with SAFE Notice 13, entities and individuals are required to apply for foreign exchange registration of foreign direct investment and overseas direct investment, including those required under the SAFE Circular No. 37, with qualified banks, instead of SAFE. The qualified banks, under the supervision of SAFE, directly examine the applications and conduct the registration.

 

Our shareholders that are PRC entities are required to complete their overseas direct investment filings according to applicable laws and regulations regarding the overseas direct investment by PRC entities, including certificates, filings or registrations with the MOFCOM and the NDRC, or the local branch of the MOFCOM and NDRC based on the investment amount, invested industry or other factors thereof, and shall also update or apply for amendment in respect to the certificates, filings or registrations in the event of any significant changes with respect to the offshore investment.

 

We have notified our shareholders whom we know are PRC residents to register with the local SAFE branch and update their registrations as required under the SAFE regulations described above. We believe that such PRC resident shareholders either have registered and updated registration when required, or are in the process of the registration, with the relevant local SAFE branch. We, however, cannot provide any assurances that all of our shareholders who are PRC residents have filed or will file all applicable registrations or update previously filed registrations as required by these SAFE regulations. The failure or inability of our PRC resident shareholders to comply with the registration procedures or other applicable PRC regulations may subject the PRC resident shareholders to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends to or obtain foreign exchange-dominated loans from our company.

 

As it is uncertain how the SAFE regulations described above will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

 

Failure to comply with the Individual Foreign Exchange Rules relating to the overseas direct investment or the engagement in the issuance or trading of securities overseas by our PRC resident stockholders may subject such stockholders to fines or other liabilities.

 

Other than Notice 37, our ability to conduct foreign exchange activities in the PRC may be subject to the interpretation and enforcement of the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January 2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with SAFE provisions. PRC individuals who fail to make such registrations may be subject to warnings, fines or other liabilities.

 

We may not be fully informed of the identities of all our beneficial owners who are PRC residents. For example, because the investment in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are PRC residents. Furthermore, we have no control over any of our future beneficial owners and we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the Individual Foreign Exchange Rules.

 

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It is uncertain how the Individual Foreign Exchange Rules will be interpreted or enforced and whether such interpretation or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure by any of our PRC resident stockholders to make the required registration will subject our PRC subsidiaries to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of our securities offerings into the PRC, restriction on remittance of dividends or other punitive actions that would have a material adverse effect on our business, results of operations and financial condition.

 

Governmental control of currency conversion may affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income will currently only be derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. 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. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our security-holders.

 

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

 

Changes in the value of the RMB against the U.S. dollar, Euro and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on our shares in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from our securities offerings into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of paying dividends on our common shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations of the RMB against other currencies may increase or decrease the cost of imports and exports, and thus affect the price-competitiveness of our products against products of foreign manufacturers or products relying on foreign inputs.

 

Since July 2005, the RMB is no longer 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.

 

We reflect the impact of currency translation adjustments in our financial statements under the heading “accumulated other comprehensive income (loss).” For the years ended December 31, 2021, 2020 and 2019, we had foreign currency translation gain of $2.0 million, foreign currency gain of $5.5 million and foreign currency translation loss of $0.6 million, respectively. 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 gains and losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

 

Shareholders may experience difficulties in effecting service of legal process, enforcing foreign judgments, including those obtained in the U.S., or bringing actions in China against us or our management based on foreign laws.

 

We are a holding company incorporated under the laws of the British Virgin Islands. We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, all our key employees and all, but one, directors are PRC residents and reside within China. As a result, it may be difficult for our shareholders to effect service of process upon us or those persons inside mainland China, including our management. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the British Virgin Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions, including the U.S., in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.

 

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There are uncertainties under the PRC laws relating to the procedures for U.S. regulators to investigate and collect evidence from companies located in the PRC.

 

Shareholder claims that are common in the U.S., including securities law class actions and fraud claims, among other matters, generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for shareholder investigations or litigation outside China or otherwise with respect to foreign entities. Although the local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory cooperation with the securities regulatory authorities in the Unities States have not been efficient in the absence of mutual and practical cooperation mechanism. According to Article 177 of the PRC Securities Law, which became effective in March 2020, or Article 177, the securities regulatory authority of the State Council may collaborate with securities regulatory authorities of other countries or regions in order to monitor and oversee cross border securities activities. Article 177 further provides that overseas securities regulatory authorities are not permitted to carry out investigation and evidence collection directly within the territory of the PRC, and that any Chinese entities and individuals are not allowed to provide documents or materials related to securities business activities to overseas agencies without prior consent of the securities regulatory authority of the State Council and the competent departments of the State Council.

 

Our principal business operations are conducted in the PRC. In the event that the U.S. regulators carry out investigations with respect to our business and need to conduct investigation or collect evidence within the territory of the PRC, the U.S. regulators may not be able to carry out such investigation or evidence collection directly in the PRC under the PRC laws. The U.S. regulators may consider cross-border cooperation with securities regulatory authority of the PRC by way of judicial assistance, diplomatic channels or regulatory cooperation mechanism established with the securities regulatory authority of the PRC. However, there can be no assurance that the U.S. regulators could succeed in establishing such cross-border cooperation in a specific case or could establish the cooperation in a timely manner. If U.S. regulators are unable to conduct such investigations, such U.S. regulators may determine to suspend and ultimately delist our common shares from the Nasdaq Capital Market or choose to suspend or de-register our SEC registration.

 

Labor laws in the PRC may adversely affect our results of operations.

 

On June 29, 2007, the PRC government promulgated a new labor law, namely, the Labor Contract Law of the PRC, which became effective on January 1, 2008, which was further amended on December 28, 2012 (effective July 1, 2013). The Labor Contract Law imposes greater liabilities on employers and significantly affects the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations. The Labor Contract Law also mandates that employers provide social welfare packages to all employees, increasing our labor costs. To the extent competitors from outside China are not affected by such requirements, we could be at a competitive disadvantage.

 

Additional factors outside of our control related to doing business in China could negatively affect our business.

 

Additional factors that could negatively affect our business include a potential significant revaluation of the Renminbi, which may result in an increase in the cost of commodity or products in the PRC supply chain industry, labor shortages and increases in labor costs in China as well as difficulties in moving products manufactured in China out of the country, whether due to infrastructure inadequacy, labor disputes, slowdowns, PRC regulations and/or other factors. Prolonged disputes or slowdowns can negatively impact both the time and cost of goods. Natural disasters or health pandemics impacting China can also have a significant negative impact on our business. Further, the imposition of trade sanctions or other regulations against products supplied or sold in the supply chain industry transactions for which we provide solutions or the loss of “normal trade relations” status with China could significantly affect our operating results and harm our business.

 

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Risks Related to Our Corporate Structure

 

Uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure and business operations.

 

The National People’s Congress promulgated the Foreign Investment Law on March 15, 2019 and the State Council adopted the Regulation on Implementing the Foreign Investment Law (the “Implementation Regulations”) on December 12, 2019, effective from January 1, 2020, to replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations.

 

If the PRC government finds that the contractual arrangements that establish the structure for operating our business do not comply with PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Foreign ownership of internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider (except e-commerce) and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Special Administrative Measures (Negative List) for Foreign Investment Access (2020 Edition) issued on June 23, 2020 and effective on July 23, 2020, by the National Development and Reform Commission, or the NDRC, and the PRC Ministry of Commerce, and other applicable laws and regulations.

 

We are a British Virgin Islands company. To comply with PRC laws and regulations, we conduct our financing solutions and supply chain service operations in China through a series of contractual arrangements entered into between our subsidiaries and VIEs and shareholders of the VIEs. As a result of these contractual arrangements, we exert control over VIEs and their subsidiaries and consolidate the VIEs’ operating results in our financial statements under U.S. GAAP. We believe our current ownership structure and the contractual arrangements among our subsidiaries, VIEs and the shareholders of the VIEs are not in violation of existing PRC laws, rules and regulations; and those contractual arrangements are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect. However, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent with our opinion.

 

It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entities structures will be adopted or if adopted, what they would provide. In particular, in January 2015, the Ministry of Commerce, or MOFCOM, published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or an FIE. Under the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. In December 2018, the Standing Committee of the National People’s Congress published a discussion draft of a new proposed Foreign Investment Law, aiming to replace the major existing laws governing foreign direct investment in China. On January 29, 2019, the discussion draft with slight revisions, or the New Draft Foreign Investment Law, was submitted for review. Pursuant to the New Draft Foreign Investment Law, foreign investments shall be subject to the negative list management system. However, the New Draft Foreign Investment Law does not mention “actual control” as regulated in the previous draft and the position to be taken with respect to the existing or future companies with the “variable interest entities” structure. On March 15, 2019, the Foreign Investment Law of the People’s Republic of China, or the Final Foreign Investment Law, with slight revision, was finally issued and became effective on January 1, 2020.

 

Although variable interest entities structures are not included in the Final Foreign Investment Law, it is uncertain whether any interpretation and implementation of the Final Foreign Investment Law or new PRC laws, rules or regulations relating to variable interest entities structures will be adopted or if adopted, what they would provide. If the ownership structure, contractual arrangements and business of our PRC subsidiary or its consolidated VIEs are found to be in violation of any existing or future PRC laws or regulations, or our PRC subsidiary fails to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating its income or the income of its PRC subsidiary or consolidated variable interest entities, revoking the business licenses or operating licenses of its PRC subsidiary or consolidated variable interest entities, discontinuing or placing restrictions or onerous conditions on its operations, requiring our PRC operations to undergo a costly and disruptive restructuring and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our financial service business operations and severely damage its reputation, which would in turn materially and adversely affect its business, financial condition and results of operations. If any of these occurrences results in its inability to direct the activities of its consolidated variable interest entities, and/or its failure to receive economic benefits from its consolidated variable interest entities, we may not be able to consolidate our VIEs’ results into our consolidated financial statements in accordance with U.S. GAAP.

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We rely on our contractual arrangements with VIEs and the shareholder of VIEs for our business operations, which may not be as effective as direct ownership in providing operational control.

 

We have relied and expect to continue to rely on contractual arrangements with Fintech, Hengpu and Nami to operate our SME financing solutions, supply chain and other financing solutions business in the future. These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated affiliates. For example, VIEs and their shareholders could breach their contractual arrangements by, among other things, failing to conduct their operations, in an acceptable manner or taking other actions that are detrimental to our interests.

 

If we had direct ownership of the VIEs, we would be able to exercise our rights as a shareholder to effect changes in the VIEs. However, under the current contractual arrangements, we rely on the performance by the VIEs and their shareholders of their obligations under the contracts to exercise control over our consolidated entities. The shareholders of VIEs may not act in the best interests of ours or may not perform their obligations under these contracts. Such risks exist throughout the period in which we operate our business through the contractual arrangements with the VIEs. Although we have the right to replace any shareholder of the consolidated variable interest entities under the contractual arrangement, if any shareholder of such entity is uncooperative or any dispute relating to these contracts remains unresolved, we will have to enforce the rights under the contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, the contractual arrangements with VIEs may not be as effective in ensuring our control over the relevant portion of its business operations as direct ownership would be.

 

Shareholders of VIEs may have potential conflicts of interest with ours, which may materially and adversely affect our business and financial condition.

 

The equity interests of the VIEs are beneficially owned by several individual shareholders through holding companies. Such VIE shareholders’ interests in VIE may differ from the interests of our Company as a whole. VIE shareholders may breach, or cause VIEs to breach, the existing contractual arrangements between us and VIEs, which would have a material adverse effect on our ability to effectively control the consolidated variable interest entities and receive economic benefits from them. For example, shareholders of VIEs may be able to cause the VIE agreements with the VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to our subsidiaries on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of VIE shareholders will act in the best interests of our Company or such conflicts will be resolved in our favor.

 

Currently, we do not have any arrangements to address potential conflicts of interest between VIE shareholders and ours, except that we could exercise the purchase option under the exclusive option agreements with these shareholders to request them to transfer all of their equity interests in the VIE to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve any conflict of interest or dispute with the shareholders of the VIE, we would have to rely on legal proceedings, which could result in the disruption of its business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

Contractual arrangements in relation to our consolidated variable interest entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated variable interest entities owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between NingChen and Naqing, our wholly-owned subsidiaries in China, consolidated VIEs in China, and the shareholders of the VIEs were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the VIEs’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by VIEs for PRC tax purposes, which could in turn increase its tax liabilities without reducing tax expenses of NingChen and Naqing. In addition, if NingChen or Naqing requests the shareholders of VIEs to transfer their equity interests in the VIEs at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject the VIEs to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on the VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our consolidated variable interest entities’ tax liabilities increase or if they are required to pay late payment fees and other penalties.

 

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We may lose the ability to use and enjoy assets held by our consolidated VIEs that are material to the operation of our business if the VIE goes bankrupt or becomes subject to a dissolution or liquidation proceedings.

 

The VIE holds certain assets that are material to the operation of our financial services business, including domain names and equipment for our financial technology platform. Under the contractual arrangements, VIEs may not and VIE shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of their assets or their legal or beneficial interests in the business without its prior consent. However, in the event a VIE shareholder breaches these contractual arrangements and voluntarily liquidates the VIE or the VIE declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without NingChen’s or Naqing’s consent, it may be unable to continue some or all of its business activities, which could materially and adversely affect its business, financial condition and results of operations. If the VIE undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of their assets, thereby hindering our ability to operate its business, which could materially and adversely affect its business, financial condition and results of operations.

 

Risks Related to Ownership of Our Common Shares

 

We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies, which may make it more difficult for you to evaluate our performance and prospects.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

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British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.

 

British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. This means that even if shareholders were to sue us successfully, they may not be able to recover anything to make up for the losses suffered.

 

The laws of the British Virgin Islands provide little protection for minority shareholders, and minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.

 

Under the law of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Business Companies Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our amended and restated memorandum and articles of association. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law and the articles and memorandum.

 

There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum and articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.

 

The market price of our Class A common shares may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares.

 

The trading price for our Class A common shares has fluctuated since we first listed our common shares. The trading price of our Class A common shares has ranged from $3.02 to $21.47 per share for the year ended December 31, 2021, and the last reported trading price on May 13, 2022 was $0.63 per Class A common share. The market price of our common shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  actual or anticipated fluctuations in our revenue and other operating results;

 

  the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

  actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

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  announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

  price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

  lawsuits threatened or filed against us; and

 

  other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

 

We do not intend to pay dividends for the foreseeable future.

 

We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, you may only receive a return on your investment in our Class A common shares if the market price of our Class A common shares increases.

 

If we continue to be unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common shares may decline.

 

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, beginning with the first annual report on Form 20-F, we have been required to furnish a report by management on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. If we continue to identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common shares could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

Our staggered board structure may prevent a change in control of our company.

 

Our board of directors is divided into three classes of directors. The current terms of the directors expire in 2021, 2022 and 2023. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year the shareholders elect one class of directors. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interest of our shareholders.

 

The requirements of being a public company may strain our resources and divert management’s attention.

 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the securities exchange on which we list, and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our management, legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, semiannual, and current reports with respect to our business and operating results.

 

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As a result of disclosure of information in this annual report on Form 20-F and in filings required of a public company, our business and financial condition are more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

We incur increased costs as a result of being a public company.

 

As a public company, we incur legal, accounting and other expenses that we did not incur as a private company. For example, we must now engage U.S. securities law counsel and U.S. GAAP auditors that we did not require as a private company, and we will have annual payments for listing on a stock exchange if we are so listed. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and NASDAQ, has required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we incur additional costs associated with our public company reporting requirements. While it is impossible to determine the amounts of such expenses in advance, we expect that we will incur additional expenses of between $500,000 and $1 million per year that we did not experience as a private company.

 

Item 4. Information on the Company

 

A. History and Development of the Company

 

NISUN INTERNATIONAL ENTERPRISE DEVELOPMENT GROUP CO., LTD, formerly Hebron Technology Co., Ltd. (“Nisun International” or the “Company”) was established under the laws of the British Virgin Islands (“BVI”) on May 29, 2012 as a company limited by shares. The Company is a holding company and conducts its business through its subsidiaries, variable interest entities (“VIEs”) and subsidiaries of VIEs in the People’s Republic of China (“PRC’’).

 

We have had three major reorganizations since our inception. In connection with our initial public offering, we consummated the first reorganization to acquire our equipment and engineering business (the “IPO Reorganization”) in 2016. We became the ultimate parent company of Hong Kong Xibolun Technology Limited (“Xibolun HK”) and its PRC subsidiaries, Wenzhou Xibolun Fluid Equipment Co., Limited (“Xibolun Equipment”) and Zhejiang Xibolun Automation Project Technology Co., Ltd. (“Xibolun Automation”) (collectively referred to as the “Xibolun Group”), which before the IPO Reorganization, were all controlled by Mr. Anyuan Sun, our former Chairman of the Board and CEO. The Xibolun Group conducts equipment and engineering services operations focusing on the research, development and manufacture of valves, pipe fittings fluid equipment, with an emphasis on the manufacture and installation of intelligent valves used in the pharmaceutical, biological, food and beverage, and other clean industries in the PRC.

 

We commenced the second corporate restructure in July 2019 for the acquisition of our financial services business. We expanded our operations into the financial services industry through the acquisition of NiSun International Enterprise Management Group (British Virgin Islands) Co., Ltd. (“NiSun BVI”), its subsidiaries and consolidated affiliate, Fintech (Shanghai) Digital Technology Co., Ltd. (“Fintech”), and subsidiaries of Fintech (collectively, “Fintech” or “Fintech Subsidiary Group”). In 2019, Fintech provided comprehensive financing solution services to SMEs primarily in connection with SME financings sponsored or underwritten by financial institutions and also provided distribution and management services for direct banking products issued by small- and medium-sized commercial banks in China.

 

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Since July 2019, our financial services industry operations have experienced significant growth through several subsequent acquisitions and organizational changes. In December 2019, we acquired a controlling interest in Beijing Hengtai Puhui Information Service Co. Ltd., a PRC company, and its subsidiaries (collectively, “Hengpu” or “Hengpu Subsidiary Group”) through certain contractual arrangements. Hengpu provides a full set of financing solution services in SME financings. In May 2020, we acquired Nami Holding (Cayman) Co., Ltd., a Cayman Islands exempted company (“Nami Cayman”), and its subsidiaries and consolidated affiliated entity (collectively, “Nami” or “Nami Subsidiary Group”) pursuant to a share purchase agreement. Nami provides financial advisory and intermediary financing solutions services matching small- and mid-sized enterprises and high quality investors in China.

 

On September 22, 2020, we changed our corporate name from “Hebron Technology Co., Ltd.” to “Nisun International Enterprise Development Group Co., Ltd” and in connection with the name change, the trading symbol of our Class A common shares on the Nasdaq Capital Market was changed to “NISN” from “HEBT,” effective on November 16, 2020. The new corporate name reflects our Company’s current core financial services business and enables different service business to integrate various brands under one corporate identity.

 

In December 2020, based on a preliminary agreement with the local government, we established a wholly owned subsidiary, Nisun (Shandong) Industry Development Co., Ltd (“Nisun Shandong”), in Tai’an, Shandong province. Nisun Shandong is a holding company for our existing PRC operating subsidiaries and is expected to be a key operations platform. In 2020, we also formed several operating subsidiaries in different regions of China in response to the operational demands in our supply chain solutions and SME financing solutions services.

 

On November 30, 2020, to streamline our businesses, we completed the third corporate restructure whereby we sold all of our equity interest in Xibolun HK to Wise Metro Development Co., Ltd., an entity controlled by our former Chairman and CEO, Mr. Anyuan Sun (“Wise Metro”). The disposition of Xibolun HK (the “Disposition”) was consummated pursuant to a Call Option Agreement we entered on April 16, 2019 with Wise Metro under which Wise Metro was granted an option to purchase all of the equity of the Xibolun Group for a period beginning six months after the effective date of the Call Option Agreement and expiring two years and six months after the agreement effective date. Upon exercise, the purchase price to exercise the Call Option Agreement would be equal to the fair market value of the Xibolun Group at the time of exercise of the Call Option as determined by a qualified and experienced business appraisal firm appointed by us and Wise Metro. On June 14, 2019, our shareholders approved our entry into the Call Option Agreement. On May 11, 2020, Wise Metro exercised the Call Option to acquire the Xibolun Group. We completed the Disposition on November 30, 2020.

 

Through the transfer of Xibolun HK and the resulting divestiture of our interests in Xibolun HK’s operating subsidiaries, Xibolun Automation and Xibolun Equipment, we discontinued our legacy equipment and engineering business and disposed of our minority interest in Xuzhou Weijia Biotechnology Co., Ltd. We sold the legacy businesses for a gain of approximately $0.14 million.

 

On March 24, 2021, we completed the latest subsidiary reorganization whereby Nami Cayman and its Hong Kong subsidiary transferred all of the equity they held in Naqing and the economic interests in Nami Shanghai to Nisun Shandong. Following the transaction, Naqing became a wholly-owned subsidiary of Nisun Shandong, which holds a controlling interest in Nami Shanghai.

 

Corporate Information

 

Our principal executive offices are located at 99 Danba Road, Bldg C9, Putuo District, Shanghai, People’s Republic of China. Our telephone number is +86-21-2357-0055.

 

The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. We maintain our websites at https://www.fintaike.com for Fintech, at https://www.ihengpu.com for Hengpu, and at www.namizx.com.cn for Nami.

 

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Principal Corporate Activities

 

Below is a brief summary of principal activities of our Company since its formation.

 

  January 25, 2005, Xibolun Equipment was incorporated.

 

  June 14, 2011, Xibolun HK was formed in accordance with laws and regulations of Hong Kong.

 

  July 21, 2011, Xibolun HK acquired 30% ownership interest of Xibolun Equipment.

 

  May 29, 2012, Hebron Technology was established under the laws of the British Virgin Islands as a holding company.

 

  September 24, 2012, Xibolun Automation was incorporated.

 

  December 5, 2012, Xibolun HK acquired 100% ownership interest of Xibolun Automation from Hebron Technology, Xibolun Equipment, and Zhejiang Xibolun.

 

  October 22, 2012, Hebron Technology acquired 100% ownership interest of Xibolun HK. As a result, Xibolun HK became a wholly owned subsidiary of Hebron Technology.

 

  July 29, 2013, Mr. Anyuan Sun transferred his 70% ownership interest in Xibolun Equipment to Xibolun Automation.

 

  December 27, 2016, Hebron Technology completed an initial public offering of 2,695,347 common shares. The offering was completed at an issuance price of $4.00 per share. Prior to the offering, the Company had 12,000,000 issued and outstanding shares, and after the offering, the Company had 14,695,347 issued and outstanding shares. The Company issued to the placement agent in the initial public offering, warrants to purchase 134,768 common shares for an exercise price of $4.80 per share. The placement agent’s warrants have a term of three years.
     
  March 7, 2018, Hebron Technology re-classified and re-designated our common shares into Class A common shares and Class B common shares by filing the Third Amended and Restated Memorandum of Association with the BVI Registrar of Corporate Affairs. Pursuant to the Third Amended and Restated Memorandum of Association, our authorized shares are re-classified and re-designated into 50,000,000 common shares of par value of US$0.001 each, of which 40,000,000 share are designated as Class A common shares of par value of US$0.001 each and 10,000,000 shares are designated as Class B common shares of par value of US$0.001 each. Each Class A common share is entitled to one vote and each Class B common share is entitled to five votes on all matters subject to vote at our shareholders’ meetings. After the reclassification and re-designation, 6,916,947 Class A common shares and 7,778,400 Class B common shares were issued and outstanding. Our former Chief Executive Officer, Mr. Anyuan Sun, beneficially owns all of the 7,778,400 Class B common shares. The Nasdaq marketplace effective date is March 12, 2018.
     
  March 10, 2018, Hebron Technology entered into a share acquisition agreement with the sole shareholder of Xuzhou Weijia Bio-Tech Co., Ltd. (“Weijia Bio-Tech”) and Weijia Bio-Tech to acquire 49% of the equity in Weijia Bio-Tech. As consideration, we were obligated to issue 1,442,778 unregistered Class A common shares (based on an agreed value of $2.00 per share) to the individuals designated by the selling shareholder of Weijia Bio-Tech within 20 business days after signing the agreement. On April 17, 2018, the parties signed an addendum to extend 20 business days to 40 business days. Effective as of April 9, 2018, we issued 1,442,778 unregistered Class A common shares pursuant to the agreement. On or about April 11, 2018, we completed the acquisition of the 49% equity interest in Weijia Bio-Tech.

 

  April 16, 2019, Hebron Technology entered into a securities purchase agreement with Wise Metro Development Co., Ltd. (“Wise Metro”), Zuoqiao Sun Zhang (“Sun Zhang”; and together with Wise, “Sellers”) and NiSun Cayman, pursuant to which NiSun Cayman would acquire 7,778,400 Class B Common Shares from the Sellers. Upon the consummation of the share purchase transaction in July 2019, all of the Class B common shares were automatically converted into Class A common shares.

 

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  July 12, 2019, Hebron Technology acquired all of the equity of NiSun BVI for a consideration of $7 million. NiSun BVI effectively controls Fintech through a series of variable interest agreements. At acquisition, Fintech was the parent company of Khorgos Fintech Network Technology Co., Ltd (“Khorgos”), Jilin Lingang Trade Co., Ltd (“Jilin”) and NiSun Family Office (Guangzhou) Co., Ltd (“Guangzhou”).

 

  November 8, 2019, NiSun BVI entered into a cooperation agreement with Tai’an Keyuan Infrastructure Investment Construction Co., Ltd. (“Keyuan”) to form a joint venture entity, Shandong Taiding International Investment Co., Ltd (“Taiding”), of which NiSun BVI and Keyuan hold 80% and 20%, respectively, of the equity interest in Taiding. Taiding was formed on November 12, 2019.
     
  December 15, 2019, Hebron Technology entered into a share exchange agreement with Hengpu and shareholders of Hengpu to acquire a controlling interest in Hengpu in exchange for issuance of 1,440,894 Class A Common Share of the Company to Hengpu’s shareholders. The Company, through its subsidiary NingChen, obtained an effective control of Hengpu upon the entry into a series of VIE agreements with Hengpu. At acquisition, Hengpu owned a 92% equity interest of Hangzhou Fengtai Technology Co., Ltd (“Fengtai”) and 100% equity interest of Dunhua Midtown Assets Management Registration Center Co., Ltd.
     
  May 31, 2020, Hebron Technology acquired Nami Cayman, and its subsidiaries and consolidated affiliated entity (collectively, “Nami” or “Nami Subsidiary Group”) pursuant to a share purchase agreement. At acquisition, Nami Cayman owned all of the equity in Nami HK and Naqing, and Naqing controlled Nami Shanghai through a series of VIE agreements. Nami provides financial advisory and intermediary financing solutions services matching small- and mid-sized enterprises and high quality investors in China.
     
  September 22, 2020, we changed our corporate name from “Hebron Technology Co., Ltd.” to “Nisun International Enterprise Development Group Co., Ltd” and in connection with the name change, the trading symbol of our Class A common shares on the Nasdaq Capital Market was changed to “NISN” from “HEBT,” effective on November 16, 2020. The new corporate name reflects our Company’s current core business and enables different service business to integrate various brands under one corporate identity.
     
  November 30, 2020, to streamline our businesses, we disposed of Xibolun HK to Wise Metro, an entity controlled by our former Chairman and CEO, Mr. Anyuan Sun. The disposition of Xibolun HK (the “Disposition”) was consummated pursuant to a Call Option Agreement we entered on April 16, 2019 with Wise Metro under which Wise Metro was granted an option to purchase all of the equity of the Xibolun Group for a period beginning six months after the effective date of the Call Option Agreement and expiring two years and six months after the agreement effective date. Upon exercise, the purchase price to exercise the Call Option Agreement would be equal to the fair market value of the Xibolun Group at the time of exercise of the Call Option as determined by a qualified and experienced business appraisal firm appointed by us and Wise Metro. On June 14, 2019, our shareholders approved our entry into the Call Option Agreement. On May 11, 2020, Wise Metro exercised the Call Option to acquire the Xibolun Group. We completed the Disposition on November 30, 2020.
     
  December 15, 2020, based on a preliminary agreement with the local government, the Company established a wholly owned subsidiary, Nisun (Shandong) Industry Development Co., Ltd (“Nisun Shandong”), in Tai’an, Shandong province. Nisun Shandong is a holding company for our PRC operating subsidiaries and is expected to be a key operations platform.
     
  December 21, 2020, the Company announced that Fintech entered into a strategic collaboration agreement with Shanghai Petroleum and Natural Gas Exchange (“SHPGX”). SHPGX is a national-level energy trading platform for energy products approved by the Shanghai municipal government and operates under the direct guidance of the National Development and Reform Commission and the National Energy Administration. Under the agreement, Fintech and SHPGX agreed to join forces to expand technology support services to members of SHPGX’s trading platform through the provision of supply chain management and financial services, targeting upstream and downstream enterprises in the energy industry.

 

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  August through December 2020, Fintech formed a number of operating subsidiaries in different regions of China in response to the operational demands in our supply chain solutions services, including:

 

  Fintech (Henan) Supply Chain Management Co., Ltd. (“Fintech Henan”), a wholly owned subsidiary of Fintech;

 

  Fintech (Jiangsu) Supply Chain Management Co., Ltd. (“Fintech Jiangsu”), a wholly owned subsidiary;

 

  Fanlunke Supply Chain Management (Shanghai) Co., Ltd. (“Fanlunke”), a wholly owned subsidiary;

 

  Fintech Supply Chain Management (Ningbo) Co., Ltd, a wholly owned subsidiary;

 

  Nanjing Nisun Gold Co., Ltd. (“Nisun Gold”), a wholly owned subsidiary;

 

  Fintech Supply Chain Management (Shandong) Co., Ltd. (“Fintech Shandong”), a wholly owned subsidiary;

 

  Jilin Province Lingang Hengda Supply Chain Management Co., Ltd. (“Lingang Hengda”), a wholly owned subsidiary of Jilin Province Lingang Supply Chain Management Co., Ltd, a wholly owned subsidiary of Fintech;

 

  Shanxi Fintech Supply Chain Management Co., Ltd (“Fintech Shanxi”), a wholly owned subsidiary;

 

Inner Mongolia Fintech Supply Chain Management Co., Ltd (“Fintech Inner Mongolia”), a 70%-owned subsidiary.

 

December 29, 2021, Nisun HK formed Zhumadian NiSun Supply Chain Management Co., Ltd. (“Nisun ZMD”), a wholly owned PRC operating subsidiary;

 

  July 30, 2021, Nisun HK formed NiSun Ocean (Qingdao) Supply Chain Investment Co., Ltd. (“Nisun Ocean”), a wholly owned PRC operating subsidiary;

 

  May through October 2021, Fintech formed the following the operating subsidiaries:

 

  Jiangxi Fintech Supply Chain Management Co., Ltd. (“Fintech Jiangxi”), a wholly owned subsidiary;

 

  Fintech Supply Chain Management (Shanxi) Co., Ltd. (“Fintech SX”), a wholly owned subsidiary;

 

  Liaogang NiSun (Yingkou) Supply Chain Management Co., Ltd.(“Liaogang Yingkou”), a 51%-owned subsidiary;

 

  Liaogang NiSun (Shanghai) Supply Chain Management Co., Ltd.(“Liaogang SH”), a wholly owned subsidiary of Liaogang Yingkou; and

 

  Fintech (Zibo) Supply Chain Management Co., Ltd.(“Fintech Zibo”), a wholly owned subsidiary.

 

  In December 2021, the Company closed a firm commitment underwritten public offering of 19.25 million Class A common shares and pre-funded warrants to purchase Class A common shares, with gross proceeds to the Company of $77 million, before deducting underwriting discounts and commissions and other expenses. The pre-funded warrants were offered at the same $4.00 price per share as the common shares, less the $0.001 per share exercise price of each pre-funded warrant.

 

  January 13, 2022, the Company adopted the Amended and Restated Memorandum and Articles of Association (the “Amended M&A”) to increase the number of Class A common shares the Company was authorized to issue. Pursuant to the Amended M&A, the Company is authorized to issue a maximum of 310,000,000 common shares divided into (i) 300,000,000 Class A common shares of par value of $0.001 each, and (ii) 10,000,000 Class B common shares of par value of $0.001 each.
  January 2022, Fintech Henan acquired a 51% equity interest in Henan Youjiatian Agricultural Technology Co., Ltd (“Youjiatian”) from its sole shareholder, Guifeng Xu, for a cash consideration of RMB0.51 million (approximately $80,280).

 

B. Business Overview

 

We are a technology-driven, integrated supply chain solutions and financial services provider focused on transforming China’s corporate finance industry. Leveraging our rich industry experience, we provide supply chain solutions to both PRC and non-PRC enterprises and financial institutions. Our full range of service solutions span from technology supply chain management, to technology asset routing, and digital transformation of technology and financial institutions, enabling the industries we serve to strengthen and grow. Further, we offer a wide range of technology-driven customized financing solutions to small- and mid-sized enterprises (SMEs) in China to improve SMEs’ access to capital through our closed-loop ecosystem built on fintech platforms. Furthermore, we provide direct banking solutions to small- and medium-sized commercial banks and other financial institutions in their distribution and management of direct banking and other financial products. Built on our proprietary financial technology, our fintech platforms offer specialized asset allocation and financial planning services to institutional and individual investors.

 

Prior to the disposition of the Xibolun Group in November 2020, we conducted our business operations primarily in two industries, our legacy equipment and engineering and the financial services. Following the disposition, we no longer operate in the equipment and engineering industry, and the financial services industry and its related industries are the only sector of the PRC economy we serve. Our financial services operations have experienced rapid growth since July 2019 and have quickly evolved to become our core business, while the performance of our legacy equipment and engineering business had not met management expectations in the prior several years before the disposition.

 

In 2019, we provided comprehensive financing solution services to SMEs primarily in connection with SME financings sponsored or underwritten by financial institutions (previously referred to by us as underwriting related advisory services) and also provided distribution and management service for direct banking products issued by small- and medium-sized commercial banks in China. SME financing solution services are operated by Fintech and Hengpu. Nami provides financial advisory and intermediary financial services matching SMEs and high quality investors in China. Fintech also provides banking product distribution and management services.

 

We commenced our supply chain solutions business in January 2020. Fintech and its subsidiaries provide our customers with professionally tailored solutions for supply chain management, technology asset routing, and digital transformation of technology and financial institutions. With a focus on finance and industry linkage, we serve the upstream and downstream enterprises and transactions of the supply chain industry while facilitating supply-side sub-sector reforms. Our digitally linked platform connects commercial banks, securities firms, trusts, funds, insurance companies, state-owned enterprises and other participants in the supply chain industry.

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Our business operations are comprised of three main service models: SME Financing Solutions, Supply Chain Solutions and Other Financing Solutions. We earn one-time advisory fees for our services provided to SMEs for offerings on PRC provincial or national financial assets exchanges or other designated capital markets underwritten by financial institutions in accordance with the service agreements with underwriters, financial institutions or financial product providers. In addition, we also provide ongoing customer management services to small and medium commercial banks and financial institutions in distributing and sourcing funds for their direct banking and other financial products in exchange for recurring service fees. Our intermediary matching service fee is earned upon the purchase of the financial products.

 

We use cutting-edge technologies, including big data, artificial intelligence, Internet of Things, and blockchain in the financial service. We are committed to leveraging our open fintech platforms and ecosystem and providing comprehensive financial solutions to facilitate digital transformation of financial institutions and enterprise customers.

 

Our Strengths

 

We believe our following strengths enable us to seize the opportunities in China’s financial services and supply chain industries:

 

  Scale and capacity to offer a comprehensive set of financial solutions to SMEs by leveraging our closed-loop finance ecosystem. We have built multi-faceted integrated closed-loop finance ecosystems in which each line of our operations complements the services provided by other subsidiaries while our customers benefit from the combined service capacity and a full set of financing solutions we offer. Our systems of comprehensive solutions enable SMEs to acquire financings in an efficient and customized manner to facilitate a healthy enterprise development process.

 

  In-depth understanding of the supply chain industry. As a key intermediary to facilitate every step of the transaction in the procurement process, we understand the complexity of the supply chain system and the needs of core enterprises, suppliers, buyers and other parties in the procurement process, and our expertise insight enables us to design tailored supply chain solutions for our customers and build mutually benefited relationships with the industry participants.

 

  Data intelligence and technology capability affording added value to SMEs. Our data processing and analytical capacity help industry participants optimize their decision making in their transaction and financing processes. Supported by big data, artificial intelligence, Internet of Things, blockchain and other cutting-edge technologies, we are well positioned to support the enterprise development of SMEs and other industry participants, help tackle challenges of corporate capital turnover, reduce financing costs, and improve business efficiency.

 

  Diversified high-quality customers. Our core customers are government-owned enterprise (GOEs), which have high quality accounts receivable, capital resources and favorable customer profiles as relative to other businesses. We form strategic partnerships and cooperation relationships with GOEs and other credit-worthy entities in selected industries. As our supply chain solutions business model is suitable for commodity-based industries, and GOEs and other well-funded companies generally play a dominant role in such industries, we expect our supply chain industry solutions will continue to attract high quality customers to join our finance ecosystem platforms aiming to serve different industries.

 

  Controlled risk exposure. As we facilitate GOEs, financial institutions and other credit-worthy customers to execute the transactions in the procurement process, we are not only able to decrease contract processing costs and improve working capital for core enterprises and other transaction parties, but also are positioned to keep track the status of the transaction and the financial health of the buyer and the supplier and as a result, achieve risk controls for all parties involved in the transaction.

 

  Experienced management team with proven track record of delivering value and growth. Our experienced management team is comprised of professionals from both fintech market leaders and financial industry experts who bring insights from different aspects of the financial industry and abundant customer resources. The foresight of our management team, combined with their industry experience and strong execution capabilities, has been a key driver for the rapid transformation and operational resilience against the backdrop of the changing regulatory landscape in China.

 

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Our Strategy

 

Our mission is to transform the corporate finance industry by promoting a finance ecosystem of openness and empowerment. We intend to achieve our growth and strengthen our competitive position by implementing the following strategies:

 

  Grow the scale of our supply chain solutions and SME financing services ecosystems. We have established development expertise and capabilities in the SME financing and supply chain solutions business. We strive to become a leader in the corporate finance industry and transform the industries we serve through leveraging the our closed-loop finance ecosystems, promote the application of our developed advanced financing solutions to new customers and grow the scale of our solutions ecosystems.

 

  Focus on industry segmentation through the integration of industry and finance. We seek to expand supply chain management and financial services to certain targeted industries in which fintech finance has played an increasingly important and effective role in the procurement and distribution processes. We aim to build supply chain platforms that link commercial banks, securities firms, trusts, funds, insurance companies and state-owned enterprises through the continued introduction of big data, artificial intelligence, Internet of Things, blockchain and other cutting-edge technologies into those industry supply chains.

 

  Deepen market penetration by cultivating existing relationships with GOEs and cooperation partners while forge new collaborations in targeted industries. Most recently we expanded our supply chain management and financial services to the energy industry by entering into a strategic collaboration relationship with Shanghai Petroleum and Natural Gas Exchange, a national energy trading platform for energy products. We intend to continue to explore strategic cooperation relationships with prominent players in selected industries.

 

  Continue to innovate and advance cutting-edge financial technologies to enhance our ability to adapt and respond to rapid industry and technology changes. Innovation is part of our long-term growth strategy and is key to improving our technology solution products and developing new technologies to meet the ever-changing customer needs. We have made and will continue to make significant investments in our technology infrastructure and research and development efforts to enhance our competitiveness and ability to adapt in response to the customer and industry changes in a timely and effective manner.

 

  Pursue strategic acquisitions and growth opportunities. In addition to growing our business organically, we consider it a growth strategy to continue to pursue strategic alliances, investments and potential acquisitions that are complementary to our business and operations, including opportunities that further promote our brand, expand product and solution offerings on our or partners’ platforms, strengthen our technology infrastructure and capabilities, or expand our geographic reach.

 

Contractual Arrangements with Our Consolidated Affiliated Entities and the Nominee Shareholders

 

We conduct our business through our PRC subsidiaries, three VIEs, Fintech, Hengpu and Nami, and VIE subsidiaries. Our relationships with the VIEs and their respective nominee shareholders are governed by a series of contractual arrangements, including:

 

Trademarks, Technologies & Management and Consulting Services Agreements (the “Consulting Services Agreement”)

 

Under the Consulting Services Agreement, NingChen and Naqing have the exclusive right to provide management and consulting and other services to their respective VIEs for a consulting service fee from VIEs and to authorize the VIEs to use our trademarks, technologies and related intellectual property rights. VIEs agree to pay NingChen and Naqing or their designated agents for the management and consulting service in the amount equivalent to VIEs’ net profits after tax. The agreement shall be effective as of the date of agreement and shall remain effective until the date when NingChen and Naqing terminate such agreements or a VIE ceases to exist.

 

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Equity Interest Pledge Agreements

 

Pursuant to the Equity Interest Pledge Agreements, each shareholder of the VIEs agreed to pledge his equity interest in the VIEs to NingChen and Naqing, respectively, to secure nominal loans provided to the shareholders of VIEs for a loan term of 100 years. Each shareholder of VIEs agrees that the repayment of loan can only happen on loan maturity date or NingChen or Naqing agrees to collect the loan repayment. If VIEs or their shareholders breach their contractual obligations under these agreements, NingChen and Naqing, as pledgees, will have the right to dispose of the pledged equity interests and will have priority in receiving the proceeds from the auction or sale of the pledged equity interests. NingChen and Naqing are entitled to any dividends declared or paid in connection with the pledged equity interests during the term of this agreement. The VIEs and their shareholders have further agreed that they will not transfer or encumber the pledged equity interests without the prior written consent from NingChen or Naqing during the term of this agreement. The Equity Interest Pledge Agreement remains effective and no provision of this agreement may be amended, modified, supplemented discharged or terminated unless all parties consent thereto in writing.

 

Equity Interest Holders’ Voting Rights Proxy Agreements (the “Voting Rights Proxy Agreements”)

 

Under the Voting Rights Proxy Agreements, each shareholder of the VIEs irrevocably authorizes NingChen and Naqing, respectively, to exercise rights and powers as the shareholders of the VIEs, including but not limited to, convening and attending shareholders’ meetings, voting on all matters of the VIEs requiring shareholder approval and appointing directors and senior management members. The Voting Rights Proxy Agreement will remain in force unless otherwise terminated in writing by NingChen or Naqing or with the written consent of all parties.

 

Exclusive Right and Option to Purchase Agreements (the “Exclusive Call Option Agreements”)

 

Under the Exclusive Call Option Agreements, the VIEs and their shareholders have irrevocably granted NingChen and Naqing, respectively, an exclusive option to purchase, or authorize their designated persons to purchase all or part of each shareholder’s equity interests in VIEs. The purchase price shall be equal to the minimum price required by the relevant PRC laws. Without prior written consent of NingChen and Naqing, VIEs shall not to, among other things, amend their articles of association, sell or otherwise dispose of their assets or beneficial interests, enter into transactions which may adversely affect their assets, liabilities, business operations, equity interests and other legal interests, or merge with any other entities or make any investments, or distribute dividends. NingChen and Naqing have rights to transfer the rights and obligations pursuant to the Exclusive Call Option Agreements to any third party, which does not require any prior consent of VIEs and their shareholders. The Exclusive Call Option Agreements will remain effective until NingChen or Naqing terminates this agreement with 30 days advance notice.

 

Those contractual arrangements enable us to exercise effective control over our VIEs, have the right to all net profits earned by the VIEs, is obligated to absorb all of net losses borne by VIEs, and have an exclusive option to purchase 100% of the equity interest in our VIEs, when and to the extent permitted by PRC law. Through such arrangements, our VIEs have become our contractually controlled affiliates and their financial statements are consolidated with that of our Company for financial reporting purposes.

 

Discontinued Operations -- Equipment and Engineering Business

 

Prior to the disposition of our legacy equipment and engineering business in November 2020, we also engaged in the research, development and manufacture of fluid equipment including valves, pipe fittings and others, with an emphasis on the manufacture and installation of intelligentized valves, used in the pharmaceutical, biological, food and beverage, and other clean industries. A significant majority of our revenues from equipment and engineering service had come from these installation services.

 

Xibolun Group developed, manufactured and provided customized installation of valves and pipe fittings for use in the pharmaceutical, biological, food and beverage, and other clean industries. Xibolun Group offered customers comprehensive pipeline design, installation, construction, ongoing maintenance services as well as holistic solution services. Xibolun Group provided our installation services and valve and pipe fitting products in the following areas: pharmaceuticals, biology, food and beverage. The sales network had presence in Shanghai, Wenzhou and Taiwan. Xibolun Group mainly provided installation services for the customers, although it also sold our products to third parties for installation. A significant majority of the revenues have come from these installation services. The profit margins associated with installing our customized valve and pipe fitting designs have historically been higher than those associated with the sale of our products for installation by third parties.

 

Prior to November 30, 2020, our offices and facilities for the equipment and engineering business was in Wenzhou in the South-eastern Zhejiang Province.

 

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Our Products and Services

 

SME Financing Solutions

 

We provide a system of technology-driven customized financing solutions to small- and mid-sized enterprises (SMEs) in China to improve SMEs’ access to financing and innovative solutions to unlock sources of capital. Each of our three subsidiary groups, Hengpu, Fintech and Nami, is an integral and indispensable part of our SME financing solutions operations. Fintech provides comprehensive financing solution services, such as designing debt financial products, preparing product descriptions and other related advisory services, to underwriters and financial institutions in SME issuers’ offerings of debt securities on PRC provincial and municipal financial assets exchanges or other designated markets. Hengpu provides a full set of financing solution services, such as due diligence investigation, government registration, customer recommendation, investor education and maintenance, and other related services. Nami matches the SMEs with institutional and individual investors based on SMEs’ financing needs. We help SMEs channel working capital and liquidity resources by utilizing funds supplied by investors from Henpu’s original three-board equity pledge financing-based intermediary services and high-quality investors from Nami’s financial advisory and intermediary matching services.

 

 

By connecting the asset and capital ends and solving risk control issues in the financing process, we leverage our closed-loop system in the financings of SMEs and provide a full set of financial solutions to SMEs. Our comprehensive solutions enable SMEs to acquire financings in an efficient and customized manner to facilitate a healthy enterprise development process starting from the birth to the growth and mature development stages of the SMEs.

 

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Supply Chain Solutions

 

We launched our technology-driven integrated supply chain solutions business in January 2020, which has become the fastest growing among all of our operations. We provide multi-level financing and supply chain solutions to core enterprises and SMEs by focusing on industry and finance integration and industry segmentation. Our supply chain solutions services mainly target the agriculture, infrastructure, maritime logistics, energy and plastics products markets. We streamline the supply chain finance process, participate as an intermediary and a partner in the merchandise flows in the procurement and distribution transactions, automate the transaction payments and offer the most favorable trading terms to both suppliers and buyers.

 

Our supply chain industry services provide cash flow solutions to help businesses free up working capital locked in the supply chains. Our offerings cover a broad category of trade financing solutions encompassing all the financing opportunities across a supply chain. We facilitate merchandise purchases from suppliers with payment terms desirable to the suppliers who can access working capital quickly and at a lower cost. Meanwhile our collaborations with merchandise buyers enable the buyers to make payments on a delayed basis often with an extended trade credit. Our solutions optimize working capital and allow for buyers to extend payments on supplies at no cost to the supplier. Pursuant to the agreements with our supply chain customers, we earn service fees when suppliers receive their financings, and our service fees are calculated as a fixed charge rate on the financing amount. Our services allow both suppliers and buyers to unlock working capital as well as reduce the risks associated with merchandise flows.

 

In the first half of 2020, our supply chain solutions services were mainly focused on the agriculture, infrastructure, and maritime logistics markets. In December 2020, we expanded our services into the energy industry through a strategic collaboration with Shanghai Petroleum and Natural Gas Exchange (“SHPGX”), a national trading platform for energy products. This partnership provides us with the opportunity to offer the supply chain management and financing solutions services to members of SHPGX’s trading platform and establish our presence and market share in the energy industry. Based on this cooperation, we have developed a new “supply chain +” business model, which will be applied in our services to clients in other industries.

 

We aim to build supply chain platforms that link commercial banks, securities firms, trusts, funds, insurance companies and state-owned enterprises through the continued introduction of big data, artificial intelligence, Internet of Things, blockchain and other cutting-edge technologies into the supply chain industry. In supply chain procurement and sales transactions, we play an instrumental role in reducing the purchase cost, communication cost and financial risks for core enterprises, buyers and suppliers.

 

Supply Chain Trading

 

Since the launch of our supply chain solutions business, we have connected with supply chain participants from different sectors through our supply chain platforms and developed high quality customers in various industries, especially in agriculture, coal, new energy technology, construction, e-commerce, retail, and food and vegetable industries.

 

As our supply chain solution business grew substantially in size, we launched supply chain trading business in 2021, further expanding our product offerings and leveraging our supply chain technology platforms and high-quality customers connections. Complementary to supply chain solutions services, which primarily are focused on the financing aspect of the supply chain business, we have begun to participate in the procurement and distribution process as a trading partner, purchasing and selling merchandise, such as chemicals, food and agricultural products, directly to customers through our supply chain platforms and system. Empowered by our AI technology, we have developed an intelligent matching system through which we connect the upstream suppliers and the downstream customers through our procurement services. After a customer posts their product purchase inquiries on our platform, we are able to screen and identify the products with the most suitable suppliers in our supplier database via our intelligent matching system. When a customer places an order, we purchase products from a pre-selected supplier as an independent vendor and arrange delivery from the supplier directly to the customer. In the supply chain trading operations, we have developed supply chain logistics, inventory and warehousing capacities and also bear a vendor’s risks associated with turnovers of inventories.

 

Other Financing Solutions (Director Banking Solutions)

 

Fintech provides direct banking solutions to small- and medium-sized commercial banks and other financial institutions in their distribution and management of direct banking and other financial products. Our banking customers launch various financial products on Fintech’s online platform, “Huijingshe” (the “Huijingshe Platform”), directly reaching institutional and individual investors, market their banking financial products, and complete sales to investment institutions and individuals. Leveraging our proprietary financial technology, Huijingshe Platform offers specialized asset allocation and financial planning services to institutional and individual investors. It optimizes risk controls and asset management procedures to meet the investors’ financial planning needs and minimize their investment risks.

 

The Huijingshe Platform, through integrating four-dimensional elements of Internet finance, Internet plus, finance and advanced technology, builds a fintech ecosystem platform serving banks, investment institutions and individuals. The Huijingshe Platform features the following functionality:

 

  Customer financial needs and bank financial products matching

 

  API direct connection, one-click account opening, improved user experience

 

  Unified interface of cooperation channels

 

  Precision marketing of banking products

 

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Fintech provides ongoing customer management services to small and medium commercial banks and other financial institutions in their distribution and management of direct banking and other financial products through the Huijingshe Platform that Fintech owns. The Huijingshe Platform provides specialized asset allocation and financial planning services for various institutions or individual investors. In the meantime, the Huijingshe Platform optimizes and improves risk and asset management procedures to meet the investors’ financial planning needs and minimize their investment risks. The Huijingshe Platform focuses on helping our clients, licensed small and medium commercial banks, to achieve the best matching and configuration of directing bank financial product and distributes and manages financial products. By connecting with the Huijingshe Platform, those licensed small and medium commercial banks can launch various financial products through our online channels, directly reach various institutional or individual investors, efficiently market the banking financial products and effectively match with investment institutions and individuals.

 

Khorgos, a subsidiary of Fintech, and Hengpu provide consulting and advisory services to investment companies, financial institutions and SME issuers of debt financial products on PRC provincial and municipal financial assets exchanges or other designated markets. In general, a service provider is required to register as a member of these municipal or provincial financial asset exchanges to provide full services of underwriting for financial product issuance and distribution. Khorgos, a participating member of several local financial assets exchanges, provides underwriting related services, such as designing debt financial products, preparing product descriptions and other related advisory services, to underwriters or financial institutions. Hengpu, also a member of a number of provincial or municipal asset exchanges, provides full services in connection with financial product underwriting, such as due diligence investigations, government registration, customer recommendations, investor education and maintenance, and other related services.

 

The financial assets products traded on the assets exchanges are backed by financial assets of registered members of those assets exchanges and issued by exchange designated product issuers (typically investment or asset management companies). The financial assets exchanges list qualified financial products for trading after evaluation and provide payment clearance and settlement, credit rating and custodian services. The underlying listed products administered by these exchanges primarily include commercial loans, receivables, creditors’ right and other financial products.

  

Distribution Channels and Methods of Competition

 

Domestic Markets and Customers

 

Our marking network has a presence in different regions in China, including several main offices such as Shanghai, Tai’an, Shandong, and Khorgos, Xinjiang.

 

International Markets

 

All of our products and services are available for international markets. We may explore the international market, though there is no guarantee that we will be able to materialize the plan. We intend to focus our growth efforts within China with regards to the services we provide as a result of the Company’s assessment of current market opportunities.

 

Activity Distribution of Revenues 

 

The chart below is a breakdown of total revenues by activities for the years ended December 31, 2021, 2020 and 2019, respectively.

 

   Fiscal
2021
   Fiscal
2020
   Fiscal
2019
 
Revenue generated from service            
SME Financing Solutions   54%   97%   100%
Supply Chain Solutions   3%   3%   -%
Other Financing Solutions   -%   -%   -%
Total revenue generated from service   57%   100%   100%
Revenue from supply chain trading   43%   -%   -%
Total revenue   100%   100%   100%

 

All the Company’s revenue were generated in the PRC.

 

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Customer Concentration

 

For the year ended December 31, 2021, two customers accounted for 37% and 15% of our total revenue from the financial services business, and two customers accounted for 71% and 10% of our total revenue from supply chain trading business.

 

For the year ended December 31, 2020, three customers accounted for 31%, 21% and 12% of our total financial service revenue, respectively.

 

For the year ended December 31, 2019, one customer accounted for approximately 100% of our total financial service revenue from financial services.

 

Methods of Competition

 

We plan to compete domestically by establishing new branch offices in more cities in China. We will also promote more products and services through our platforms, which will enable our customers to communicate with us online and order, purchase and have our products and services delivered in a more convenient and faster manner.

 

Most of our service customers are SMEs in the supply chain, financial institutions and corporate clients, which has great development potential and customer demand in China. We compete on the basis of the experience and technology we have developed in serving customers.

 

Our Competitive Position

 

We have set forth our assessment of our Company’s relative strengths and challenges. The tables below represent our belief about our competitive position and is based on our observations, rather than objective data. Our assessment may not be shared by others, including such competitors, but it does represent management’s assessment of our industry position.

 

We compete with the following listed companies in different areas. Currently there is no competitor that competes with us in all areas.

 

Competitors   Services   Comparative Strengths/Challenges

Client Service International Inc

(“Client Service”) 

  Financial software and
financial solution service
provider 
  Client service focuses on providing financial software development
    Fintech integrates the financial product management service with technology service.
    Fintech assists the commercial banks to analyze and gain better understanding of their business needs, while Client Service only develops software to meet client needs
           
Orbian   Supply Chain Finance
Provider
  Unlimited funding capacity (true multi-bank, source-agnostic funding)
    Multi-currency capacity
    True sale, non-recourse cash purchase of receivable(ensure payables treatment)
           

Beijing Udomedia Advertising Co., Ltd.

(“Udomedia”) 

  Financial product
recommendation
  Amarsoft focuses on providing financial product comparison and recommendations to investors
    Fintech offers asset-side options to financial institutions as well as the financial planning service to investors
    Fintech competes against Amarsoft on financial product distribution service
           

PUYI INC.

(“PUYI”)

 

  Third-party wealth management services provider   The business goal of PUYI is to provide investor various financial product and asset allocation service to investor, which is similar to the goal of Hengpu
    PUYI is mainly engaged in private fund, and supply chain financing
    Hengpu is primarily engaged in underwriting related service for debt financial product

 

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Research and Development

 

We are committed to researching and developing financial technologies in financial services, supply chain and other relevant industries. We believe scientific and technological innovations will help our Company achieve its long-term strategic objectives. Our research and development efforts are an integral part of our operations and the crux of its competitive advantage and differentiation strategy.

 

For the years ended December 31, 2021, 2020 and 2019, we spent $1,599,728, $817,770 and $155,216, respectively, on R&D. The R&D expenses in 2021 were primary used to maintain and develop our supply chain financing and other financing services APPs and platform. We anticipate that we will continue to focus our research and development efforts on developing new technology and improving existing products in the coming years.

 

Our Intellectual Property

 

We have the right to use the following trademark registrations issued in the PRC:

 

Trademarks   Reg. No.   Issue
Date
  Expiration
Date
  Owner   Goods/Services
    26449617   9/7/2018   9/6/2028   Hengpu   Arrange and organize the conference; Translated; Planning a party (entertainment); Provide online electronic publications (non-download); Manuscript writing; Journalist Service; Zoo Service; Online publishing of e-books and magazines; Arrange and organize seminars; Arrange and organize on-site education forum
                     
  26432309   9/7/2018   9/6/2028   Hengpu   Insurance Broker; Real estate agency; Guarantee; Raise Charity Fund; Fiduciary management; Pawn; Finance lease; Financial Information; Coin valuation; Brokerage
                     
  26434423   9/7/2018   9/6/2028   Hengpu   Downloadable mobile application software; Computer program (downloadable software); Computer peripherals; Animation; Electronic Notepad; Automatic Teller Machine (ATM); Portable media player; Interactive touch screen terminal; Computer software (recorded); Mobile phone; Automatic teller machine (ATM)
                     
  26428912   9/7/2018   9/6/2028   Hengpu   Online publishing of e-books and magazines; Translated; Arrange and organize the conference; Journalist Service; Planning a party (entertainment); Provide online electronic publications (non-download); Arrange and organize seminars; Arrange and organize on-site education forum; Zoo Service; Manuscript writing
                     
  26438038   10/28/2018   10/27/2028   Hengpu   Interactive touch screen terminal; Computer software (recorded); Computer peripherals; Automatic Teller Machine (ATM); Portable media player; Animation; Downloadable mobile application software; Electronic Notepad; Mobile phone; Computer program (downloadable software)

 

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  26449606   3/14/2020   9/6/2028   Hengpu   Urban planning; Computer Programming; Data Security Consulting; Technical Studies; Cloud computing; Art identification; Intangible assets assessment; Energy audit; Provide Internet Search Engine Information Technology Consulting Services; Intangible assets evaluation (-)
                     
  26434403   10/28/2019   10/27/2029   Hengpu   Technical Studies; Urban planning; Energy audit; Data Security Consulting; Art identification; Intangible assets assessment; Information Technology Consulting Services; Cloud computing; Computer Programming; Provide Internet Search Engine; Intangible assets evaluation (-)
                     
  26438039   10/28/2018   10/27/2028   Hengpu   Provide Internet chat rooms; Digital file transfer; Provide database access service; Data streaming; Telephone service; Provide online forums; Information transmission; Email transmission; Provide telecommunications connection services with global computer networks; Video on demand transmission
                     
  26448031   3/14/2020   9/6/2028   Hengpu  

Looking for sponsorship; Purchasing for others (purchasing goods or services for other companies); Marketing; Retail or wholesale services of pharmaceutical, veterinary, hygienic preparations and medical supplies (-); Franchise business management; Sell for others; Advertising; Online advertising on computer networks;

 

Import and export agent; Provide online markets for buyers and sellers of goods and services

                     
  26438032   1/14/2019   1/13/2029   Hengpu   Electronic Notepad; Animation; Computer software (recorded); Computer program (downloadable software); Computer peripherals; Mobile phone; Portable media player Automatic Teller Machine (ATM); Interactive touch screen terminal; Downloadable mobile application software
                     
  26443894   9/7/2018   9/6/2028   Hengpu   Information transmission; Telephone service; Provide Internet chat rooms Provide online forums; Provide telecommunications connection services with global computer networks; Digital file transfer; Video on demand transmission; Email transmission; Provide database access service; Data streaming

 

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  26428917   10/28/2018   10/27/2028   Hengpu   Technical Studies; Information Technology Consulting Services; Cloud computing; Art identification; Intangible assets assessment; Urban planning; Energy audit; Computer Programming; Provide Internet Search Engine; Data Security Consulting
                     
  26434429   10/28/2018   10/27/2028   Hengpu   Online advertising on computer networks; Purchasing for others (purchasing goods or services for other companies); Provide online markets for buyers and sellers of goods and services; Marketing; Looking for sponsorship; Advertising; Retail or wholesale services of pharmaceutical, veterinary, hygienic preparations and medical supplies (-); Franchise business management; Import and export agent; Sell for others
                     
  26439293   10/28/2018   10/27/2028   Hengpu   Guarantee; Fiduciary management; Financial Information; Brokerage; Pawn; Insurance Broker; Finance lease; Coin valuation; Real estate agency; Raise Charity Fund
                     
  26443885   01/28/2019   01/27/2029   Hengpu   Interactive touch screen terminal; Computer program (downloadable software); Electronic Notepad; Mobile phone; Portable media player; Downloadable mobile application software; Computer software (recorded); Automatic Teller Machine (ATM); Animation; Computer peripherals
                     
  26428913   1/14/2019   1/13/2029   Hengpu   Coin valuation; Pawn; Fiduciary management; Finance lease; Real estate agency; Guarantee; Brokerage (3605) Financial Information (3602) Raise Charity Fund (3607)
                     
  20689649   9/14/2017   9/13/2027   Hengpu   Insurance Underwriting; Financial Services; Financial Management; Financial loans; Art valuation; Real estate management; Brokerage; Guarantee; Raise Charity Fund; Pawn

 

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  17764453   12/21/2016   12/20/2026   Hengpu   Quality assessment; Technical Project Research; Hosted computer station (website); Provide Internet Search Engine; Computer system remote monitoring; Create and maintain websites for others; Art identification; Intangible assets assessment; Intangible assets evaluation (-)
                     
  26008168   10/28/2018   10/27/2028   Fintech   Looking for sponsorship; Provide online markets for buyers and sellers of goods and services; Accounting; Provide business information through the website; Business intermediary services; Personnel management consulting; Advertising; Commercial enterprise relocation; Update and maintain data in computer databases; Sell for others; Franchise business management.
                     
  26008168   10/28/2018   10/27/2028   Fintech   Provide global computer network user access service; Telephone communication; TV broadcast; Communication equipment rental; Computer terminal communication; Satellite transmission; Provide database access service; Provide telecommunications connection services with global computer networks; Provide Internet chat rooms; Wireless broadcasting
                     
  26008168   10/28/2018   10/27/2028   Fintech   Internal communication device; Electronic monitoring device (-) Downloadable computer application software; Computer software (recorded); Computer program (downloadable software); Recorded computer program; Cash register; Remote control device; Electronic Publication (-); Electronic Notepad; Electronic Note (-); cashier(-); Electronic monitoring device (-) Remote control device (-)
                     
  26008168   10/28/2018   10/27/2028   Fintech   Credit card related investigations Financial loans; Art valuation; Real estate agency; Brokerage; Insurance Underwriting; Guarantee; Raise Charity Fund; Fiduciary management; Capital investment; Organize collections; Financial Information; Provide financial information through the website Insurance information; Pawn; Trust; Financial Management; Financial Consulting; Bank; Jewelry valuation

 

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  26008168   10/28/2018   10/27/2028   Fintech   Adoption Agent; Security and anti-theft alarm system monitoring; Open the safety lock Clothing rental; Computer Software License (Legal Service); Social companionship; Online social networking services; Lost and Found; Dating Service; Safe rental; Adoption agents; security and anti-theft alarm system monitoring; unlocking locks; clothing rental; computer software licensing (legal services); social companionship; online social networking services; lost and found; dating services; safe rental (-)
                     
  26008168   10/28/2018   10/27/2028   Fintech   Quality system certification; Convert tangible data or files into electronic media; Technical Studies; Computer system remote monitoring; Interior Design; Computer Software Design; Electronic data storage; Cosmetic Research; Industrial design; Intangible assets assessment
                     
  48343254   06/21/2019   06/20/2029   Nami   Insurance Broker; Insurance coverage; Life insurance underwriting; Insurance consultation; Insurance information; Rental of real estate; Real estate agency; Real estate brokerage; Real estate valuation; Real estate management
                     
  32919214   08/28/2019   8/27/2029   Nami   Business management consulting Commercial intermediary services Provide business information through website; Market intelligence service; Temporary business management; Appointment service (office affairs); Registration of written messages and data accounting; Draw up bill and account report marketing management; Appointment service (Office affairs)
                     
  48343254   04/14/2021   04/13/2031   Nami   Financial audit; Business administration assistance advertisement; Personnel management consulting; Business management consulting; Management service of business enterprise migration marketing management; Sell for others; Looking for sponsorship; Appointment service (office affairs)

 

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We own the following copyrights:

 

Copyright Name   Reg. No.   Completion
Date
  Owner
Hengpu online RMB withdrawal system   2020SR1554067   11/09/2020   Hengpu
             
Hemp Online Mobile Investment System   2020SR1554106   11/09/2020   Hengpu
             
Hengpu online RMB recharge system   2020SR1554066   11/09/2020   Hengpu
             
Hengpu online authentication system   2020SR1554072   11/09/2020   Hengpu
             
Hengpu online entrusted trading system   2020SR1554073   11/09/2020   Hengpu
             
Hengpu Fund Information Display System   2020SR0774260   07/15/2020   Hengpu
             
Hemp Fund Mobile Redemption System   2020SR0776761   07/15/2020   Hengpu
             
Hengpu Fund Management System   2020SR0774255   07/15/2020   Hengpu
             
Hengpu Fund Trading System   2020SR0774266   07/15/2020   Hengpu
             
Hengpu Fund Mobile Requisition System   2020SR0769122   07/14/2020   Hengpu
             
Huijingshe CRM customer management system   2020SR0331868   04/14/2020   Fintech
             
Jetcom wallet background management system   2020SR0330745   04/14/2020   Fintech
             
Huijingshe Financial Management System   2020SR0332562   04/14/2020   Fintech
             
Huijingshe Financial Products Management Platform   2020SR0332553   04/14/2020   Fintech
             
Huijingshe sales channel cost accounting and operation management system   2020SR0332191   04/14/2020   Fintech
             
Huijingshe integrated financial management APP system   2020SR0332195   04/14/2020   Fintech
             
Equity trading system   2020SR0332587   04/14/2020   Fintech
             
Huijingshe website content management system   2020SR0331400   04/14/2020   Fintech
             
Huijing Fund Finance APP System   2020SR0332558   04/14/2020   Fintech
             
Huijingshe system monitoring alarm management platform   2020SR0331454   04/14/2020   Fintech
             
Employee loan system   2020SR0331462   04/14/2020   Fintech
             
Huijingshe distributed message management platform   2020SR0332591   04/14/2020   Fintech
             
Huijingshe Insurance APP System   2020SR0331872   04/14/2020   Fintech
             
Huijingshe risk control management system   2020SR0331518   04/14/2020   Fintech

 

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Huijingshe Financial Leasing System   2020SR0330193   04/14/2020   Fintech
             
Jetcom wallet back-office management system   2020SR0332521   04/14/2020   Fintech
             
Huijingshe Big Data Reporting Platform   2020SR0332497   04/14/2020   Fintech
             
New three board data mobile display system   2019SR0914974   9/3/2019   Hengpu
             
Hengpu offline financial management system   2019SR0914982   9/3/2019   Hengpu
             
Application and display system of equity pledge financing   2019SR0915056   9/3/2019   Hengpu
             
Hengpu offline financing mobile investment system   2019SR0912121   9/2/2019   Hengpu
             
Hengpu offline financial investment system   2019SR0912070   9/2/2019   Hengpu
             
Hengpu Financial RMB Withdrawal System   2018SR498978   6/28/2018   Hengpu
             
Hengpu Financial Bank Depository Docking System   2018SR269474   4/20/2018   Hengpu
             
Hengpu Financial Mobile Investment System   2018SR265882   4/19/2018   Hengpu
             
Hengpu Financial Transaction Return System   2018SR265875   4/19/2018   Hengpu
             
Hengpu financial product search recommendation system   2018SR265870   4/19/2018   Hengpu
             
Hengpu Financial Identity Verification System   2018SR178293   3/19/2018   Hengpu
             
Hengpu financial investment marketing activity system   2018SR178208   3/19/2018   Hengpu
             
Hengpu Financial Virtual Account System   2018SR178316   3/19/2018   Hengpu
             
Hengpu Financial Commission Trading System   2018SR178319   3/18/2019   Hengpu
             
Hengpu Financial Personal Name Coin Recharge System   2018SR178295   3/19/2018   Hengpu
             
Huijingshe APP platform   2018SR241757   4/10/2018   Fintech

 

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Our Employees

 

As of December 31, 2021, we employed total of 178 full-time employees in the following functions:

 

Department  December 31,
2021
   December 31,
2020
   December 31,
2019
 
Management and administration   50    120    28 
Research and Development   10    10    33 
Production and operation   67    111    50 
Sales   51    571    31 
Total   178    812    142 

 

Note: The total number of our employees was significantly higher in 2020 than 2019 as a result of our acquisition of Nami Cayman and its subsidiaries and consolidated VIE, which had a large workforce. During 2021, Nami management decided to reduce the number of employees to reduce labor costs and hired third party contractors to perform certain job functions.

 

We had no part-time employees in 2021.

 

Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages.

 

We are required under PRC law to make contributions to employee benefit plans at specified percentages of our after-tax profit. In addition, we are required by PRC law to cover employees in China with various types of social insurance. We believe that we are in material compliance with the relevant PRC employment laws.

 

Regulation

 

We operate in an increasingly complex legal and regulatory environment. We are subject to a variety of PRC and foreign laws, rules and regulations across numerous aspects of our business. This section sets forth a summary of the principal PRC laws, judicial interpretations, rules and regulations relevant to our business and operations in the PRC.

 

Regulations Relating to Foreign Investment

 

The establishment, operation and management of corporate entities in the PRC, including foreign-invested companies, are subject to the Company Law of the PRC, or the Company Law, which was issued by the Standing Committee of the National People’s Congress, or the NPC Standing Committee, on December 29, 1993 and took effect on July 1, 1994. It was last amended on October 26, 2018. Unless otherwise provided in the PRC’s foreign investment laws, the provisions of the Company Law shall prevail.

 

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We are a British Virgin Islands company and thus, we are classified as a foreign enterprise under the PRC laws. On March 15, 2019, the NPC promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation, and failure to take timely and appropriate measures to cope with the regulatory-compliance challenges could result in material and adverse effect on us. For instance, though the Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, it contains a catch-all provision under the definition of “foreign investment”, which includes investments made by foreign investors in China through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the Stale Council to provide for contractual arrangements as a form of foreign investment, at which time it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment in the PRC and if so, how our contractual arrangements should be dealt with. In addition, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. In the worst-case scenario, we may be required to unwind our existing contractual arrangements and/or dispose of the relevant business operations, which could have a material and adverse effect on our current corporate structure, corporate governance, business, financial condition and results of operations.

 

Investments in the PRC by foreign investors and foreign-invested enterprises are regulated by the Catalogue of Industries in which Foreign Investment is Encouraged (2020 Edition), or the 2020 Catalog, and the Special Administrative Measures for Foreign Investment Access (Negative List 2021), or the 2021 Negative List. The establishment of wholly foreign-owned enterprises is generally allowed in industries not included in the Negative List. Industries not listed in the Negative List are generally open to foreign investment unless specifically restricted by other applicable Chinese regulations. Under the 2021 Negative List, foreign equity in companies providing value-added telecommunications services, excluding e-commerce, domestic multi-party communications, data collection and transmission services, and call centers, should not exceed 50%. Part of our business is subject to such 50% foreign invested equity cap.

 

On December 26, 2019, the State Council promulgated the Implementation Regulations for the Foreign Investment Law, which became effective on January 1, 2020. The Implementation Regulations for the Foreign Investment Law implement the legislative principles and purpose of the Foreign Investment Law, emphasize on promoting the foreign investment and refine the specific measures, and also replaced the implementation rules of the Law of the PRC on Sino-foreign Equity Joint Ventures, the Wholly Foreign-owned Enterprise Law of the PRC and the Law of the PRC on Sino-foreign Cooperative Joint Ventures. On December 26, 2019, the Supreme People’s Court issued an Interpretation on Several Issues Concerning the Application of the Foreign Investment law of the PRC, which also came into effect on January 1, 2020. The interpretation applies to any contractual dispute arising from acquisition of the relevant rights and interests by a foreign investor through gift, division of property, merger of enterprises, division of enterprises, etc. On December 30, 2019, MOFCOM and the SAMR jointly issued the Measures on Reporting of Foreign Investment Information, which replaced the existing filing and approval procedures regarding the establishment and change of foreign-invested companies. On December 31, 2019, MOFCOM issued the Announcement on Matters Relating to Foreign Investment Information Reporting, emphasized the information reporting requirements provided by the Measures on Reporting of Foreign Investment Information, and stipulated the forms for information reporting.

 

On December 19, 2020, NDRC and the Ministry of Commerce jointly issued the Measures which became effective on January 18, 2021. According to the Measures, a working mechanism shall be established for organizing, coordinating, and guiding the security review of foreign investments, and the office in charge of the security review work will be set up by the NDRC and the Ministry of Commerce. Furthermore, the Measures provide that if foreign investors or their related parties in China engage in any foreign investment in industry with national security concerns such as information technology, internet products and services, or financial services, they shall make applications to the office in charge of the security review work in advance of national security review.

 

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Regulations Relating to Value-Added Telecommunication Services

 

The Telecommunications Regulations of the PRC, or the Telecommunications Regulations, issued by the State Council of the PRC on September 25, 2000 and last amended on February 6, 2016, provide the general framework for the provision of telecommunication services by PRC companies. It requires a telecommunication service provider in China to obtain an operating license from the Ministry of Industry and Information Technology, or MIIT, or its provincial counterparts, prior to commencement of operations.

 

The Telecommunications Regulations categorize telecommunication services in China as either basic telecommunications services or value-added telecommunications services. According to the Catalog of Telecommunications Business, attached to the Telecommunications Regulations and issued by MIIT, on December 28, 2015 and last amended on June 6, 2019, online data processing, transaction processing and information services provided via fixed network, mobile network and internet, call center service and internet data center services are value-added telecommunication services.

 

On July 3, 2017, MIIT issued the Administrative Measures for Telecommunications Business Operating Permit, or the Telecom Permit Measures, which took effect on September 1, 2017. The Telecom Permit Measures set forth more specific provisions regarding the types of licenses required to operate value-added telecommunications services, the qualifications and procedures for obtaining the licenses and the administration and supervision of these licenses. Operators are required to submit an application within the prescribed period to the original permit-issuing authority with respect to changes in the business scope or the operating entity resulting from shareholder changes or the merger and division of the company as prescribed under relevant regulations.

 

On June 8, 2020, MIIT issued the Notice of Strengthening the Administration of Call Center Service, which provides that any entities engaging in call center service shall obtain corresponding business permits as required by the relevant laws and regulations, and shall conduct the business subject to the Catalog of Telecommunications Business.

 

Regulations on Foreign Investment in the Value-Added Telecommunications Industry

 

Foreign direct investment in telecommunications companies in China is governed by the Administrative Rules on Foreign-invested Telecommunications Enterprises, or the FITE Regulations, which was issued by the State Council on December 11, 2001 and last amended on February 6, 2016. The Decision of the State Council on Revising or Abolishing Certain Administrative Regulations, which was promulgated by the State Council on March 29, 2022 and will take effect from May 1, made certain significant changes to the 2016 FITE Regulations. Under the 2016 FITE Regulations, foreign investors are not allowed to hold more than 50% of the equity interests in a company providing value-added telecommunications services. In addition, a foreign investor who invests in a value-added telecommunications business in the PRC must possess prior experience in and a proven track record of operating value-added telecommunications businesses overseas (the “Qualification Requirements”), while the 2022 Decision repeals the Qualification Requirements. The restrictions of Qualification Requirements no longer apply to foreign investors, and foreign investors may be allowed to hold no more than 50% of the equity interests of a company providing value-added telecommunications services. However, as of the date of this report, no applicable PRC laws, regulations or rules have provided clear guidance or interpretation about the 2022 Decision. It remains extremely uncertain as to the interpretation and enforcement of the 2022 Decision in practice and relevant regulations by government authorities.

 

However, under the Circular on Loosening the Restriction on Foreign Shareholdings in Online Data Processing and Transaction Processing Business (for E-commerce), or Circular 196, issued by MIIT on June 19, 2015, foreign investors may hold up to 100% of all equity interest in an online data processing and transaction processing business operating e-commerce in China, while other requirements provided by the FITE Regulations shall still apply. Apart from e-commerce, the 2021 Negative List also provides that foreign investors may hold 100% equity interest in domestic multi-party communications, data collection and transmission services and call centers. Pursuant to the Special Administrative Measures for Foreign Investment Access (Negative List 2021), foreign investors are not allowed to hold more than 50% of the equity interests of any company providing value-added telecommunications services, including ICP services, with the exception of e-commerce, domestic multi-party communications, storage- forwarding, and call centers businesses. The MIIT’s Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, or the MIIT Circular, issued on July 13, 2006, requires foreign investors to set up foreign-invested enterprises and obtain a license for value-added telecommunications services. It prohibits domestic companies holding value-added telecommunications services licenses from leasing, transferring or selling their licenses in any form, or providing any resource, sites or facilities, to any foreign investors intending to conduct this type of businesses in China.

 

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In addition to restricting dealings with foreign investors, the MIIT Circular contains a number of detailed requirements applicable to operators of value-added telecommunications services, including that operators or their shareholders must legally own the domain names and trademarks used in their daily operations and each operator must possess the necessary facilities for its approved business operations and maintain its facilities in the regions covered by its license. The MIIT or its provincial counterparts have the power to require corrective actions after they discover any non-compliance by operators, and where operators fail to take those steps, the MIIT or its provincial counterparts can revoke the value-added telecommunications services licenses.

 

In view of the foregoing foreign ownership restrictions, we have established several VIEs to engage in the business of value-added telecommunications services. Due to the lack of interpretative guidance from the relevant PRC governmental authorities, there are uncertainties regarding whether PRC governmental authorities would consider our corporate structure and contractual arrangements compliant with applicable PRC foreign investment laws and regulations.

 

Regulations on Internet Information Services

 

The Administrative Measures on Internet Information Services, or the Internet Information Measures, which was issued by the State Council on September 25, 2000 and amended on January 8, 2011, set out guidelines on the provision of internet information services. Pursuant to the Internet Information Measures, “internet information services” are defined as services that provide information to online users through the internet. The Internet Information Measures require internet information services operators to obtain a value-added telecommunications business operating license for internet information services, or the ICP License, from the relevant government authorities before engaging in any commercial internet information services operations in China.

 

In addition, internet information service providers are required to monitor their websites to ensure that they do not contain content prohibited by law or regulation. The PRC government may require corrective actions to address non-compliance by ICP License holders or revoke their ICP License for serious violations. Furthermore, the MIIT Circular on Regulating the Use of Domain Names in Internet Information Services, issued on November 27, 2017 and that took effect on January 1, 2018, requires internet information service providers to register and own the domain names they use in providing internet information services.

 

Regulations on Mobile Internet Application Information Services

 

On June 28, 2016, the Cyberspace Administration of China issued the Administrative Provisions on Mobile Internet Application Information Services on June 28, 2016, which took effect on August 1, 2016, requiring internet information service providers, or ICPs, who provide information services through mobile internet applications, or APPs, to authenticate the identity of the registered users, establish procedures for protection of user information, establish procedures for information content censorship and management, ensure that users are given adequate information concerning an APP and are able to choose whether an App is installed and whether or not to use an installed App and its functions and keep records of users’ logs for 60 days. If an ICP violates these regulations, mobile app stores through which the ICP distributes its APPs may issue warnings, suspend the release of its APPs, or terminate the sale of its APPs, and/or report the violations to governmental authorities.

 

ICPs are also required under the Interim Measures on the Administration of Pre-Installation and Distribution of Applications for Mobile Smart Terminals, which was issued on December 16, 2016 and took effect on July 1, 2017, to ensure that APPs, as well as its ancillary resource files, configuration files and user data, can be conveniently uninstalled by a user, unless it is a basic function software (i.e., software that supports the normal functioning of hardware and operating system of a mobile smart device).

 

On July 22, 2020, the MIIT issued the Notice on the Special Program to Further Rectify the Infringement on Users’ Personal Rights and Interests by APPs, or the Notice. The Notice requires inspection of certain practices of application service providers, including: (i) collecting personal information without user’s consent, collecting or using personal information beyond the necessary scope of service provided, and forcing users to receive advertisements; (ii) frequently or automatically launching third-parties apps without user permission, and (iii) deceiving and misleading users to download apps or providing personal information. The Notice also specifies the period of special inspection of the Apps for supervision, the Ministry of Industry and Information Technology will order the offending party to rectify the business within five working days, otherwise a public announcement will be made, and the App will be removed from the Apps store, and the offending party will be subject to other administrative penalties.

 

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Regulations Relating to Information Security and Privacy Protection

 

Regulations on Information Security

 

In recent years, PRC government authorities have enacted laws and regulations with respect to internet information security and protection of personal information from abuse or unauthorized disclosure. Pursuant to the Decision on the Maintenance of Internet Security issued by the NPC Standing Committee on December 28, 2000, which was amended on August 27, 2009, persons may be subject to criminal liabilities in China for any attempt to: (i) gain improper entry to a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information or (v) infringe upon intellectual property rights and other activities prohibited by relevant laws and regulations.

 

The Administration Measures on the Security Protection of Computer Information Network with International Connections, issued by the Ministry of Public Security, or MPS, on December 16, 1997 and amended by the State Council of the PRC on January 8, 2011, prohibits using the internet in ways that result in a leak of state secrets or a spread of socially destabilizing content. The MPS has supervision and inspection powers and relevant local security bureaus may also have jurisdiction. If a value-added-telecommunications service license holder violates these measures, the government of the PRC may revoke its value-added-telecommunications service license and shut down its websites.

 

On November 7, 2016, the NPC Standing Committee promulgated the Cyber Security Law of the PRC, or Cyber Security Law, which took effect on June 1, 2017, pursuant to which, network operators must comply with laws and regulations and fulfil their obligations to safeguard security of the network when conducting business and providing services. Those who provide services through networks must take technical measures and other necessary measures pursuant to laws, regulations and compulsory national requirements to safeguard the safe and stable operation of the networks, respond to network security incidents effectively, prevent illegal and criminal activities, and maintain the integrity, confidentiality and usability of network data. It also states that: network operator may not collect personal information that is irrelevant to the services it provides or collect or use the personal information in violation of the provisions of laws or agreements between both parties. The Regulations on Cyber Security Supervision and Inspection of Public Security Organs, which was issued by the MPS on September 15, 2018 and came into effect on November 1, 2018, is an important basis for the Public Security Bureau to strengthen the enforcement of the Cyber Security Law.

 

Pursuant to the Ninth Amendment to the Criminal Law issued by the NPC Standing Committee on August 29, 2015, which took effect on November 1, 2015, any Internet service provider that fails to fulfil the obligations related to internet information security administration as required by applicable laws and refuses rectification orders is subject to criminal penalty for (i) any dissemination of illegal information in large scale, (ii) any severe effect due to leakage of the client’s information, (iii) any serious loss of criminal evidence, or (iv) other severe situation. These amendments also state that any individual or entity that (i) sells or provides personal information to others that violates applicable law, or (ii) steals or illegally obtains any personal information, is subject to criminal penalty for severe violations. On May 8, 2017, the Supreme People’s Court and the Supreme People’s Procuratorate released the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Citizens’ Personal Information, which took effect on June 1, 2017. It clarifies several concepts regarding the crime of “infringement of citizens’ personal information,” including “citizen’s personal information,” “provision,” and “unlawful acquisition.”

 

Pursuant to the Announcement of Conducting Special Supervision against the Illegal Collection and Use of Personal Information by Apps, which was issued on January 23, 2019, app operators should collect and use personal information in compliance with the Cyber Security Law and should be responsible for the security of personal information obtained from users and take effective measures to strengthen the personal information protection. Furthermore, app operators should not force their users to make authorization by means of bundling, suspending installation or in other default forms and should not collect personal information in violation of laws, regulations or breach of user agreements. Such regulatory requirements were emphasized by the Notice on the Special Rectification of APPs Infringing upon User’s Personal Rights and Interests, which was issued by MIIT on October 31, 2019.

 

On October 21, 2019, the Supreme People’s Court and the Supreme People’s Procuratorate jointly issued the Interpretations on Certain Issues Regarding the Applicable of Law in the Handling of Criminal Case Involving Illegal Use of Information Networks and Assisting Committing Internet Crimes, which came into effect on November 1, 2019, and further clarifies the meaning of Internet service provider and the severe situations of the relevant crimes.

 

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The recommended national standard, Information Security Technology Personal Information Security Specification, puts forward specific refinement requirements on the collection, preservation, use and commission processing, sharing, transfer, public disclosure, etc. Although it is not mandatory, in the absence of clear implementation rules and standards for the law on cyber security and other personal information protection, it will be used as the basis for judging and making determinations. On November 28, 2019, The Notice of Identification Method of Application Illegal Collection and Use of Personal Information was issued, which provides a reference for the identification of App illegal collection and use of personal information, and provides guidance for App operators’ self-inspection and self-correction and netizens’ social supervision.

 

On December 15, 2019, the Provisions on Ecological Governance of Network Information Content was issued by the Cyberspace Administration of China, which has come into effect on March 1, 2020. These provisions require network information content service platform to perform its duties as the information content administrator, strengthen ecological governance of the network information contents of its own platform, and foster a positive, healthy, progressive and amicable cyber culture.

 

The Measures on Cyber Security Review was jointly issued on April 13, 2020 and took effect on June 1, 2020. It provides detailed rules regarding cyber security review, any operator in violation of the regulations shall be penalized in accordance with Article 65 of the Cyber Security Law.

 

On July 3, 2020, the Data Security Law (Draft) was published to solicit public comments. The Data Security Law (Draft) mainly sets forth specific provisions regarding establishing basic systems for data security management, including data classification management system, risk assessment system, monitoring and early warning system, and emergency disposal system. In addition, it clarifies the data security protection obligations of organizations and individuals carrying out data activities and implementing data security protection responsibility.

 

On June 10, 2021, the Standing Committee of the National People’s Congress of China promulgated the Data Security Law which took effect in September 1, 2021. The Data Security Law provides for data security and privacy obligations of entities and individuals carrying out data activities, prohibits entities and individuals in China from providing any foreign judicial or law enforcement authority with any data stored in China without approval from the competent PRC authority, and sets forth the legal liabilities of entities and individuals found to be in violation of their data protection obligations, including rectification order, warning, fines of up to RMB10 million, suspension of relevant business, and revocation of business permits or licenses.

 

On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Severe and Lawful Crackdown on Illegal Securities Activities, which took effective on the same day. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies. These opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection.

 

On July 10, 2021, the Cyberspace Administration of China issued the Measures for Cybersecurity Review which took effect on February 15 2022. It proposes to authorize the relevant government authorities to conduct cybersecurity review on a range of activities that affect or may affect national security, including listings in foreign countries by companies that possess personal data of more than one million users. The PRC National Security Law covers various types of national security, including technology security and information security.

 

On December 24, 2021, the CSRC issued Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (the “Administration Provisions”), and the Provisions of the State Council on the Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (the “Measures”). The Administration Provisions and Measures for overseas listings lay out specific requirements for filing documents and include unified regulation management, strengthening regulatory coordination, and cross-border regulatory cooperation. Domestic companies seeking to list abroad must carry out relevant security screening procedures if their businesses involve such supervision. Companies endangering national security are among those off-limits for overseas listings. According to Relevant Officials of the CSRC Answered Reporter Questions (“CSRC Answers”), after the Administration Provisions and Measures are implemented upon completion of public consultation and due legislative procedures, the CSRC will formulate and issue guidance for filing procedures to further specify the details of filing administration and ensure that market entities could refer to clear guidelines for filing, which means it will still take time to put the Administration Provisions and Measures into effect. However, according to CSRC Answers, only new initial public offerings and refinancing by existent overseas listed Chinese companies will be required to go through the filing process; other existent overseas listed companies will be allowed sufficient transition period to complete their filing procedure. The Company may be required to obtain approval of and filling with the CSRC or other PRC government authorities for its future refinancing. However, it is uncertain when the Administration Provision and the Measures will take effect or if they will take effect as currently drafted. Currently, the period for public comment on these draft regulations has ended and their provisions and anticipated adoption or effective date are subject to changes and thus their interpretation and implementation remain substantially uncertain.

 

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Regulations on Privacy Protection

 

On December 13, 2005, the MPS issued the Regulations on Technological Measures for Internet Security Protection, or the Internet Protection Measures, which took effect on March 1, 2006, requiring internet service providers to utilize standard technical measures for internet security protection.

 

Under the Several Provisions on Regulating the Market Order of Internet Information Services issued by the MIIT on December 29, 2011 and that took effect on March 15, 2012, ICPs are also prohibited from collecting any personal user information or providing any information to third parties without the consent of the user. The Cyber Security Law provides an exception to the consent requirement where the information is anonymous, not personally identifiable and unrecoverable. ICPs must expressly inform the users of the method, content and purpose of the collection and processing of user personal information and may only collect information necessary for its services. ICPs are also required to properly maintain user personal information, and in case of any leak or likely leak of user personal information, ICPs must take remedial measures immediately and report any material leak to the telecommunications regulatory authority.

 

In addition, the Decision on Strengthening Network Information Protection issued by the NPC Standing Committee on December 28, 2012 emphasizes the need to protect electronic information that contains individual identification information and other private data. The decision requires ICPs to establish and publish policies regarding the collection and use of personal electronic information and to take necessary measures to ensure the security of the information and to prevent leakage, damage or loss. Furthermore, MIIT’s Order on Protection of Personal Information of Telecommunications and Internet Users, which was issued on July 16, 2013 and took effect on September 1, 2013, contains detailed requirements on the use and collection of personal information as well as the security measures to be taken by ICPs.

 

On August 22, 2019, the Cyberspace Administration of China promulgated the Provisions on the Cyber Protection of Children’s Personal Information, which took effect on October 1, 2019, requiring that before collecting, using, transferring or disclosing the personal information of a child, any Internet service operator should inform that child’s guardians in a noticeable and clear manner and obtain their consents. Meanwhile, Internet service operators should take measures like encryption when storing children’s personal information.

 

On May 28, 2020, the Civil Code of the PRC was issued by the National People’s Congress and became effective from January 1, 2021. The Civil Code defines the processing of personal information as the collection, storage, use, processing, transmittal, provision, and disclosure of personal information. Furthermore, according to the Civil Code, any entity that engages in the processing of personal information shall follow the principles of lawfulness, fairness, and necessity and not overuse personal information, and they shall obtain the consent from the natural person or his or her guardian, except as otherwise provided by laws and regulations.

 

On August 31, 2020, the Administrative Provisions for Text Message and Voice Call Service (Draft) were published for public comments. It provides that no entity or individual can send commercial text messages or make commercial calls to users without their consent. The relevant governmental authorities may order rectification, impose warnings or fines, make public announcements, or enforce other administrative measures on violation. Under severe circumstances, the relevant governmental authorities may revoke telecommunication licenses and phone number sources of the violating entity or individual.

 

On September 22, 2020, the Ministry of Public Security issued the Guiding Opinions on Implementing the Network Security Level Protection System and Critical Information Infrastructure Security Protection System. It stipulates that internet operators shall cooperate with public security authorities to crack down on illegal and criminal online activities. In the event of online crimes, or material cyber security threats and incidents, the internet operators shall promptly report and provide necessary assistance to the public security authorities.

 

On October 21, 2020, the Standing Committee of the National People’s Congress published a consultation draft of the Personal Information Protection Law, which sets a high bar for Chinese data protection, taking consent as basis for data processing, introducing restrictions on international data transfers and imposing revenue-based fines as the penalty for non-compliance.

 

On August 20, 2021, the Standing Committee of the National People’s Congress adopted the Personal Information Security Law, which took effect on November 1, 2021. The Personal Information Protection Law includes the basic rules for personal information processing, the rules for cross-border provision of personal information, the rights of individuals in personal information processing activities, the obligations of personal information processors, and the legal responsibilities for illegal collection, processing, and use of personal information.

 

Regulations on Anti-Monopoly Matters Related to Internet Platform Companies

 

The PRC Anti-Monopoly Law, which took effect on August 1, 2008, prohibits monopolistic conducts such as entering into monopoly agreements, abusing market dominance, and undertaking concentrations that may have the effect of eliminating or restricting competition. On February 7, 2021, the Anti-Monopoly Commission of the State Council officially promulgated the Anti-Monopoly Guidelines on Platform Economics. The guidelines prohibit certain monopolistic conducts of internet platforms to protect market competition, safeguard interests of users and operators who participate in internet platform economics, including without limitation, prohibiting platforms with dominant position from abusing their market dominance (such as discriminating customers in terms of pricing and other transactional conditions using big data and analytics, coercing counterparties into exclusivity arrangements, using technology methods to block competitors’ interface, tying or attaching unreasonable trading conditions, compulsory collection of unnecessary user data). In addition, the guidelines also reinforce the requirement of antitrust merger review for internet platform related transactions to safeguard market competition.

 

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Regulations Relating to Loan Facilitation

 

On December 1, 2017, the Group Head Office of Internet Financial Risk Special Rectification and the Group Head Office of the P2P Network Loan Risks jointly issued the Notice on the Regulation and Rectification of the “Cash Loan” Business, or Circular 141, which regulates “cash loan” businesses conducted by internet micro-finance companies, banking financial institutions and online lending information intermediaries. Circular 141 defines “cash loans” as loans that are unrelated to the circumstances of their use, with no designated use for the loan proceeds, no qualification requirement for the borrower and no collateral for the loan. The definition of a cash loan under Circular 141 is vague and subject to further regulatory interpretation. Circular 141 sets forth various prohibitions and obligations on banking financial institutions participating in “cash loan” businesses, including that: (i) extension of loans jointly with any third-party institution that has not obtained approvals for the lending business, or funding to such institutions for the purpose of extending loans in any form, is prohibited; (ii) with respect to a lending business conducted in collaboration with a third-party institution, outsourcing of the core business (including the credit assessment and risk control) is prohibited, and any credit enhancement service, whether or not in disguised form (including the commitment to bear the risk of default), provided by any third-party institutions without guarantee qualification are also prohibited, and (iii) banking financial institutions must require and ensure that such third-party institutions do not collect any interest or fees from the borrowers. Any violation of Circular 141 may result in criminal liability and various penalties, including suspension or cessation of business operations, sanctions, rectification, rejection of filing, and revocation of license.

 

In addition, the Notice on Specific Rectification Implementation Plans for Risk of Online Microfinance Businesses of Microfinance Companies, or Circular 56, provides that the online lending business conducted by microfinance companies in collaboration with a third-party institution, may not include any credit enhancement service in disguised form (including the provision of a “drawer agreement” guarantee) or underlying commitments by the third-party institution. Third-party institutions collaborating with microfinance companies are also prohibited from collecting any interest or fees from borrowers. Violation of Circular 56 may result in various penalties.

 

On August 1, 2019, the General Office of the State Council issued and promulgated the Guidance on Promoting the Healthy Development of the Platform Economy, which provides that the market-access management and supervision of financial services provided through online platforms in the finance sector are regulated by the laws, regulations and other relevant rules. In addition, entities conducting financial information intermediaries services and transaction-matching services are subject to the market-access management pursuant to relevant laws.

 

On July 12, 2020, the Interim Measures came into effect. While the Interim Measures apply to commercial banks, consumer finance companies and auto finance companies directly, the Interim Measures also require these banking financial institutions to strengthen the management of cooperation related to loan business, which would affect the cooperated institutions in internet loan business and their existing business models. Pursuant to these Interim Measures, commercial banks shall evaluate their cooperation agencies and implement name list management. Commercial banks shall not accept direct and disguised credit enhancement services from unqualified cooperation agencies, nor entrust third-party collection agencies with illegal records. The Interim Measures also provide that, except for cooperating institutions that jointly provide loans, commercial banks shall not entrust cooperating institutions to perform key operations, such as loan issuance, loan principal and interest recovery, and suspension of funding. Pursuant to the Interim Measures, commercial banks shall independently carry out risk assessment and credit approval for loans they fund, and take primary responsibility for post-loan management. Commercial banks shall not entrust third-party institutions with records of violent collection or other illegal records to collect loans. Furthermore, according to the Interim Measures, commercial banks shall forbid third-party partners from charging any fees or interests on borrowers, and shall clarify such rule in written agreements with their partners. The CBIRC and its local branches shall evaluate reports and relevant materials submitted by commercial banks, and the key assessment factors include independent control of credit approval procedures, contract signing and other core risk management procedures of commercial banks.

 

On February 19, 2021, the CBIRC issued the Notice of Further Regulating Online Loan Business of Commercial Banks, and it provides that commercial banks shall not outsource material procedures of loan origination, loan servicing, and delinquency management to third-party institutions, and in addition, commercial banks shall not engage in online loan business outside its registered place.

 

Regulation related to Exchange Administered Financial Asset Securities Distribution

 

The distribution of exchange administered financial asset securities is currently regulated by the Decision Regarding Straightening out and Rectifying Various Types of Trading Venues to Effectively Prevent Financial Risks (“Document 38”) and the Implementation Opinions on Straightening out and Rectifying Various Types of Trading Venues (“Document 37”), promulgated by the General Office of the State Council on November 11, 2011 and July 12, 2012, respectively. Both Document 38 and Document 37 stipulate that exchanges that are subject to the approval of the State Council or its administration department of finance for establishment, shall be regulated by the administration department of finance of the State Council; all other exchanges shall be regulated by the local People’s Government at the provincial level, which in practice, are the offices of finance at municipal and provincial levels. Document 38 and Document 37 emphasize on the prohibitive activities relating to the issuance and distribution of exchange administered funds, for example, that the number of investors of exchange administered funds shall not exceed 200 accumulatively.

 

Regulation on Foreign Exchange Control

 

Foreign exchange in China is primarily regulated by:

 

The Foreign Currency Administration Regulations (1996), as amended on January 14, 1997 and August 5, 2008; and

 

The Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

 

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Under the Foreign Currency Administration Regulations, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments and trade and service-related foreign exchange transactions. Conversion of Renminbi into foreign currency for capital account items, such as, loans, investment in securities and repatriation of investments, however, remains subject to the registration of the SAFE or its local counterparts as required by law. Under the Administration Rules, foreign-invested enterprises may buy, sell and remit foreign currencies at banks authorized to conduct foreign exchange transactions for settlement of current account transactions after providing valid commercial documents and, in the case of capital account item transactions, only after registration with the SAFE and, as the case may be, other relevant PRC government authorities as required by law. Capital investments directed outside of China by foreign-invested enterprises are also subject to restrictions, which include registration filing with MOFCOM. If the investment is made to the sensitive countries, districts, or industries, it needs to be approved by MOFCOM.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi will be permitted to fluctuate within a band against a basket of certain foreign currencies. We receive a significant portion of our revenue in Renminbi, which is not a freely convertible currency. Under our current structure, our income will be primarily derived from dividend payments from our subsidiaries in China. Even though we may remit the income from China to anywhere we want, the fluctuation of exchange rate may be a disadvantage to us if the Renminbi depreciated.

 

Regulation on Foreign Exchange Registration of Offshore Investment by PRC Residents

 

The Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, promulgated by SAFE on July 14, 2014 and designed to replace the former circular commonly known as “Notice 75”, requires registration of PRC residents with local branches of SAFE with respect to their direct establishment or indirect control of an offshore entity (referred to in Notice 37 as “special purpose vehicle.”), where such offshore entity are established for the purpose of overseas investment or financing, provided that PRC residents contribute their legally owned assets or equity into such entity.

 

Notice 37 further requires amendment to the registration where any significant changes with respect to the special purpose vehicle capitalization or structure of the PRC resident itself (such as capital increase, capital reduction, share transfer or exchange, merger or spin off).

 

Regulation on Dividend Distributions

 

The principal regulations governing the distribution of dividends paid by wholly foreign-owned enterprises include:

 

Corporate Law (1993), as last amended with immediate effect on October 26, 2018

 

  The Foreign Investment Law promulgated on March 15, 2019 that became effect on January 1, 2020;

 

  The Implementation Regulations for the Foreign Investment Law that was promulgated on December 12, 2019 and became effect on January 1, 2020; and

 

  The Enterprise Income Tax Law (2007) which was amended on December 29, 2018 and its Implementation Regulations (2007) which was amended on April 23, 2019.

 

Under these regulations, wholly foreign-owned and joint venture enterprises in China may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. In addition, an enterprise in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until its cumulative total reserve funds reaches 50% of its registered capital. Our Company’s reserve fund has not yet reached this level. The board of directors of a wholly foreign-owned enterprise has the discretion to allocate a portion of its after-tax profits to its employee welfare and bonus funds. These reserve funds, however, may not be distributed as cash dividends.

 

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On March 16, 2007, the National People’s Congress enacted the Enterprise Income Tax Law, and on December 6, 2007, the State Council issued the Implementation Regulations on the Enterprise Income Tax Law, both of which became effective on January 1, 2008. Under this law and its implementation regulations, dividends payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a lower withholding tax rate. See “Taxation.”

 

M&A Rules and Regulation on Overseas Listings

 

On August 8, 2006, six PRC regulatory agencies, MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, CSRC and SAFE, jointly adopted the Regulation on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006, which was amended in June 2009. The M&A Rules purport, among other things, to require that offshore SPVs that are controlled by PRC companies or individuals and that have been formed for overseas listing purposes through acquisitions of PRC domestic interests held by such PRC companies or individuals, obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings.

 

While the application of the M&A Rules remains unclear, our PRC legal counsel advised us that, based on their understanding of the current PRC laws and regulations as well as the notice announced on September 21, 2006:

 

the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings such as our initial public offering are subject to the CSRC approval procedures under the M&A Rules; and

 

despite the lack of any definitive rule or interpretation from CSRC, the main purpose of the M&A rule is for national security and national industrial policy and so far none of the Chinese companies that have completed their public listing in the U.S. have obtained such approval; and

 

Our business operations in China do not belong to a prohibited industry by foreign investment; and

 

Our M&A to our Chinese subsidiary companies have all obtained properly the approval from local governmental authorizations; and

 

Our BVI company is not established by a Chinese citizen. Accordingly, although the purpose of BVI incorporation is for overseas listing, the M&A rule should not apply to us.

 

Our PRC counsel also advises us, however, that there is still uncertainty as to how the M&A Rules will be interpreted and implemented. If the CSRC or other PRC regulatory agencies, subsequently determine that CSRC approval was required for our initial public offering, we may need to apply for remedial approval from the CSRC and we may be subject to penalties and administrative sanctions administered by these regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, or take other actions that could materially adversely affect our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Class A common shares. Consequently, even though our PRC counsel believes the probability for the aforementioned actions is small, if you engage in market trading or other activities in anticipation of, and prior to, settlement and delivery, you do so at the risk settlement and delivery may not occur.

 

In addition, if the CSRC later requires that we obtain its approval for our initial public offering, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding the CSRC approval requirements could have a material adverse effect on the trading price of our Class A common shares.

 

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Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries

 

An offshore company may invest equity in a PRC company, which will become the PRC subsidiary of the offshore holding company after investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing rules; the Tentative Provisions on the Foreign Exchange Registration Administration of Foreign-Invested Enterprise; and the Notice on Certain Matters Relating to the Change of Registered Capital of Foreign-Invested Enterprises.

 

Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by the original approval authority of its establishment. In addition, the increase of registered capital and total investment amount shall both be registered with SAIC.

 

Shareholder loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purposes, which debts are subject to a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations, the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.

 

Under these regulations, the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total amount of foreign debts that can be incurred by such PRC subsidiaries, including any shareholder loans, shall not exceed the difference between the total investment amount and the registered capital amount of the PRC subsidiaries, both of which are subject to governmental approval.

 

Regulations on Enterprise Income Tax

 

On March 16, 2007, the NPC Standing Committee issued the Enterprise Income Tax Law of the PRC, which took effect on January 1, 2008, or the Old EIT Law. On December 6, 2007, the State Council enacted the Implementation Rules for the Enterprise Income Tax Law of the PRC, or the EIT Rules, which also took effect on January 1, 2008 and was amended on April 23, 2019. The Old EIT Law was amended on February 24, 2017 and December 29, 2018. The Old EIT Law, as amended, and the EIT Rules are collectively referred to as the EIT Law. According to the EIT Law, taxpayers consist of resident enterprises and non-resident enterprises. Resident enterprises are defined as enterprises that are established in China in accordance with the PRC laws, or that are established in accordance with the laws of foreign countries but whose actual or de factocontrol entity is within the PRC. Non-resident enterprises are defined as enterprises that are set up in accordance with the laws of foreign countries and whose actual administration is conducted outside the PRC, but (i) have entities or premises in China, or (ii) have no entities or premises but have income generated from China. According to the EIT Law, foreign-invested enterprises in the PRC are subject to a uniform enterprise income tax rate of 25%. A non-resident enterprise that has an establishment or premises within the PRC must pay enterprise income tax at a rate of 25% on its income that is derived from such establishment or premises inside the PRC and that is sourced outside the PRC but is actually connected with the said establishment or premises. However, if non-resident enterprises have not formed permanent establishments or premises in the PRC, or if they have formed permanent establishment institutions or premises in the PRC but there is no actual relationship between the relevant income derived in the PRC and the established institutions or premises set up by them, the enterprise income tax is, in that case, set at the rate of 10% for their income sourced from inside the PRC.

 

Enterprises that are recognized as high and new technology enterprises in accordance with the Notice of the Ministry of Science, the Ministry of Finance and the State Administration of Taxation on Amending and Issuing the Administrative Measures for the Determination of High and New Tech Enterprises are entitled to enjoy a preferential enterprise income tax rate of 15%. Pursuant to the Administrative Measures for the Recognition of High and New Technology Enterprises, the validity period of the high and new technology enterprise qualification shall be three years from the date of issuance of the certificate of high and new technology enterprise. An enterprise can re-apply for such recognition as a high and new technology enterprise before or after the previous certificate expires.

 

On February 3, 2015, the State Administration of Taxation, or SAT, issued the Announcement on Several Issues Concerning Enterprise Income Tax on Indirect Transfer of Assets by Non-Resident Enterprises, or Circular 7. Circular 7 provides comprehensive guidelines relating to, and heightening the Chinese tax authorities’ scrutiny of, indirect transfers by a non-resident enterprise of assets (including assets of organizations and premises in the PRC, immovable property in the PRC, and equity investments in PRC resident enterprises), or the PRC Taxable Assets. For instance, when a non-resident enterprise transfers equity interest in an overseas holding company that directly or indirectly holds certain PRC Taxable Assets and if the transfer is believed by the Chinese tax authorities to have no reasonable commercial purpose other than to evade enterprise income tax, Circular 7 allows the Chinese tax authorities to reclassify the indirect transfer of PRC Taxable Assets into a direct transfer and therefore impose PRC enterprise income tax at a rate of a 10% on the non-resident enterprise. On the other hand, indirect transfers falling into the scope of the safe harbors under the Circular 7 may not be subject to PRC tax under the Circular 7. The safe harbors include qualified group restructurings, public market trades and exemptions under tax treaties or arrangements.

 

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On October 17, 2017, the SAT issued the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or the SAT Circular 37, which took effect on December 1, 2017 and was amended on June 15, 2018. According to SAT Circular 37, the balance after deducting the equity net value from the equity transfer income shall be the taxable income amount for equity transfer income.

 

Under the SAT Circular 7 and the Law on the Administration of Tax Collection issued by the NPC Standing Committee on September 4, 1992 and last amended on April 24, 2015, in the case of an indirect transfer, entities or individuals that are obligated to pay the transfer price to the transferor shall act as withholding agents. If they fail to make withholding or withhold the full amount of tax payable, the transferor of equity must declare and pay tax to the tax authorities in charge within seven days from the occurrence of the tax payment obligation. Where the withholding agent does not make withholding, and the transferor of equity does not pay the payable amount, the tax authority may impose late payment interest on the transferor. In addition, the tax authority may also hold the withholding agents liable and impose a penalty of ranging from 50% to 300% of the unpaid tax on them. The penalty imposed on the withholding agents may be reduced or waived if the withholding agents have submitted the relevant materials in connection with the indirect transfer to the PRC tax authorities in accordance with Circular 7.

 

Regulations on Dividend Tax

 

Pursuant to the SAT Circular on Relevant Issues relating to the Implementation of Dividend Clauses in Tax Agreements, which took effect on February 20, 2009, all of the following requirements must be satisfied to enjoy the preferential tax rates provided under the tax agreements: (1) the tax resident that receives dividends should be a company as provided in the tax agreement; (2) the equity interest and voting shares of the PRC resident company directly owned by the tax resident satisfy the percentages specified in the tax agreement; and (3) the equity interest of the PRC resident company directly owned by such tax resident at any time during the 12 months prior to receiving the dividends satisfy the percentage specified in the tax agreement.

 

The EIT Law provides that an income tax rate of 10% will normally be applicable to dividends payable to investors that are “non-resident enterprises,” and gains derived by such investors, which (a) do not have an establishment or place of business in the PRC or (b) have an establishment or place of business in the PRC, but the relevant income is not effectively connected with the establishment or place of business to the extent such dividends and gains are derived from sources within the PRC. The income tax on the dividends may be reduced pursuant to a tax treaty between China and other applicable jurisdictions. Pursuant to the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, or the Double Tax Avoidance Arrangement, issued by the SAT on August 21, 2006 that took effect on December 8, 2006, 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, its protocols 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% upon receiving approval from the in-charge tax authority. However, based on the SAT Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, issued and effective on February 20, 2009, 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. Based on the SAT Announcement of Taxation on Issues Relating to “Beneficial Owner” in Tax Treaties, issued on February 3, 2018 and effective from April 1, 2018, to determine the “beneficial owner” status of a resident of the treaty counterparty seeking to enjoy tax treaty benefits, a comprehensive analysis must be carried out in accordance with the factors set out in the announcement.

 

On August 27, 2015, the SAT issued the Announcement on Promulgating the Administrative Measures for Tax Convention Treatment for Non-resident Taxpayers, which took effect on November 1, 2015 and was amended on June 15, 2018. The aforementioned announcement was repealed by the Announcement of State Taxation Administration on Promulgation of the Administrative Measures on Non-resident Taxpayers Enjoying Treaty Benefits, which was propagated on October 14, 2019 and took effect on January 1, 2020. Under such announcement, non-resident taxpayers meeting conditions for enjoying the convention treatment may be entitled to the convention treatment themselves when filing a tax return or making a withholding declaration through a withholding agent, subject to the subsequent administration by the tax authorities. Such taxpayers who make their own declaration must self-assess whether they are entitled to tax treaty benefits, make truthful declarations and submit the relevant reports, statements and materials required by the relevant tax authorities.

 

Regulations on Value-added Tax

 

All entities and individuals engaged in the sale of goods, provision of processing, repairs and replacement services, and the importation of goods within the territory of the PRC must pay value-added tax, or the VAT, in accordance with the Provisional Regulations on Value-added Tax of the PRC, or the Provisional Regulations on VAT, and its implementation rules, or collectively, the VAT Law. The Provisional Regulations on VAT, which was issued by the State Council on December 13, 1993 and took effect on January 1, 1994, was amended by the Notice of Adjustment of VAT Rates issued on April 4, 2018 and by the Notice of Strengthening Reform of VAT Policies issued on March 20, 2019. Pursuant to the VAT Law, VAT payable is calculated as “output VAT” minus “input VAT”. The rate of VAT varies among 13%, 9% and 6% depending on the product type.

 

In accordance with the Circular of the Ministry of Finance and SAT on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax, issued on March 23, 2016 and effective from May 1, 2016, upon approval of the State Council of the PRC, the pilot program of the collection of VAT in lieu of business tax shall be promoted nationwide in a comprehensive manner as at May 1, 2016.

 

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Regulations on Trademarks

 

Trademarks are protected by the PRC Trademark Law adopted in 1982, as last amended in 2019 amended, as well as the Implementation Regulations of the PRC Trademark Law adopted by the State Council in 2002 and amended in 2014. The Trademark Office under the SAIC handles trademark registrations. Trademarks can be registered for a term of ten years and can be extended for another ten years if requested upon expiration of the first or any renewed ten-year term. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. Where a trademark for which a registration application has been made is identical or similar to another trademark which has already been registered or been subject to a preliminary examination and approval for use on the same type of or similar commodities or services, the application for such trademark registration may be rejected. Any person applying for the registration of a trademark may not prejudice the existing right first obtained by others, nor may any person register in advance a trademark that has already been used by another party and has already gained a “sufficient degree of reputation” through such other party’s use. Trademark license agreements must be filed with the Trademark Office or its regional offices. We are currently using at no expense two trademarks registered in China and owned by Mr. Anyuan Sun. Meanwhile, we have successfully applied on our own name two trademarks in 2015, for both of which we have obtained the certificate issued by the authority (SAIC).

 

Regulations on Copyright and Software Products

 

Under the Copyright Law of the PRC issued by the NPC Standing Committee on September 7, 1990, which has been replaced by its latest amendment on June 1 2020 and became effective on June 1, 2021, works of Chinese citizens, legal persons or other organizations, whether published or not, enjoy copyright in their works, which include, among others, works of literature, art, natural science, social science, engineering technology and computer software. Similarly, under the Computer Software Protection Regulations issued by the State Council on June 4, 1991, last amended on January 30, 2013 and effective on March 1, 2013, Chinese citizens, legal persons and other organizations shall enjoy copyright on the software they develop, regardless of whether the software has been released publicly. Software copyright commences from the date on which the development of the software is completed. A software copyright owner may register with the software registration institution recognized by the copyright administration department of the State Council of the PRC. A registration certificate issued by the software registration institution is a preliminary proof of the registered items. The protection period for software copyright of a legal person or other organizations shall be fifty years, concluding on December 31 of the fiftieth year after the software’s initial release. In order to further implement the Computer Software Protection Regulations, the National Copyright Administration issued the Measures for the Registrations of Computer Software Copyright effective on February 20, 2002, which provides procedures for software copyright registration, license contract registration and transfer contract registration. The Copyright Protection Center of the PRC is mandated as the software registration institution under the regulations.

 

Employment Laws

 

In accordance with the PRC National Labor Law, which became effective in January 1995 and last amended on December 29, 2018, and the PRC Labor Contract Law, which became effective in January 2008, as amended subsequently in 2012, employers must execute written labor contracts with full-time employees in order to establish an employment relationship. All employers must compensate their employees equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with appropriate workplace safety training. In addition, employers in China are obliged to pay contributions to the social insurance plan and the housing fund plan for employees.

 

We have entered into employment agreements with all of our full-time employees. We have contributed to the basic and minimum social insurance plan. Due to a high employee turnover rate in our industry, it is difficult for us to comply fully with the law. While we believe we have made adequate provision of such outstanding amounts of contributions to such plans in our financial statements, any failure to make sufficient payments to such plans would be in violation of applicable PRC laws and regulations and, if we are found to be in violation of such laws and regulations, we could be required to make up the contributions for such plans as well as to pay late fees and fines.

 

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C.Organizational structure

 

Corporate Structure

 

The following chart illustrates our Company’s organizational structure, including our subsidiaries and consolidated affiliated entities as of the date of this annual report:

 

 

D.Property, plant and equipment

 

Description of Property

 

There is no private land ownership in China. Individuals and entities are permitted to acquire land use rights for specific purposes. Following is a list of our properties, all of which we currently lease:

 

Property   Rental Term   Space     Ground
Floor Area
 
99 Damba Road, Putuo District, Shanghai   May 20, 2019 – October 19, 2023             354 m2 
Gubei SOHO, 188 HongBaoShi Road, Changning District, Shanghai   October 01, 2019 – July 31, 2022             1000 m2 
Unit 605, 6 / F, block B, 33 Financial Street, Xicheng District, Beijing   January 01, 2020 – December 31, 2020             278 m2 

 

Item 4A. Unresolved Staff Comments

 

None.

 

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Item 5. Operating and Financial Review and Prospects

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this annual report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report, particularly in “Risk Factors.”

 

Overview

 

Nisun International Enterprise Development Group Co., Ltd (“Nisun International” or the “Company”), formerly known as Hebron Technology Co., Ltd., was established under the laws of the British Virgin Islands (“BVI”) as a company limited by shares on May 29, 2012. On September 22, 2020, the Company changed its name from “Hebron Technology Co., Ltd.” to “Nisun International Enterprise Development Group Co., Ltd.” The Company is a holding company and conducts its business mainly through its subsidiaries, variable interest entities (“VIEs”) and subsidiaries of the VIEs in the People’s Republic of China (the “PRC”).

 

We are a technology-driven, integrated supply chain solutions and financial solutions services provider focused on transforming China’s corporate finance industry. We provide supply chain solutions services to corporate enterprises and finance institutions in technology supply chain management and digital technology transformation. Leveraging our fintech expertise and industry experience, we provide supply chain solutions to both PRC and non-PRC enterprises. Further, we offer a wide range of technology-driven customized financing solutions to small and medium-sized enterprises (SMEs) in China to improve SMEs’ access to capital. Our comprehensive solutions enable SMEs to acquire financing in a convenient, efficient and customized manner to facilitate healthy enterprise development. We also provide direct banking solutions to small- and medium-sized commercial banks and other financial institutions in their distribution and management of direct banking and other financial products. Built on our proprietary financial technology, our fintech platforms offer specialized asset allocation and financial planning services to institutional and individual investors.

 

Prior to November 30, 2020, our business also included equipment and engineering services focused on the development and manufacture of valves, pipe fittings fluid equipment primarily used in the pharmaceutical, biological, food and beverage industries in the PRC. The equipment and engineering services were conducted by Hong Kong Xibolun Technology Limited (“HK Xibolun”) and its subsidiaries in the PRC, Wenzhou Xibolun Fluid Equipment Co., Limited and Zhejiang Xibolun Automation Project Technology Co., Ltd. (collectively, the “Xibolun Group”).

 

On November 30, 2020, to streamline our businesses, we transferred all of our equity interests in HK Xibolun to Wise Metro Development Co., Ltd. (“Wise Metro”), an entity controlled by our former Chief Executive Officer and former Chairman of the Board of Directors, Mr. Anyuan Sun, pursuant to a call option agreement we entered into with Wise Metro on April 16, 2019. Through the disposition of our equity in HK Xibolun, we divested our interests in the Xibolun Group and discontinued our legacy manufacturing and engineering business.

 

Our current business is comprised of three main services areas, including SME financing solutions, supply chain solutions and other financing solutions, and supply chain trading business. We provide technology-driven customized comprehensive financing solutions to SMEs to improve SMEs’ access to capital and financings. Leveraging our closed-loop fintech ecosystem, we help SMEs channel working capital and liquidity resources by connecting SMEs to the investors and solving risk control issues in the financing process. 

 

We launched our technology-driven integrated supply chain solutions business in January 2020. Fintech provides multi-level supply chain solutions to core enterprises and SMEs by focusing on industry and finance integration and industry segmentation. Our supply chain solutions services currently primarily target the agriculture, infrastructure, maritime logistics, energy and plastics products markets. With a focus on finance and industry linkage, we serve the upstream and downstream enterprises and transactions of the supply chain industry while facilitating supply-side sub-sector reforms. We aim to build supply chain platforms that link commercial banks, securities firms, trusts, investment funds, insurance companies and state-owned enterprises through the continued introduction of big data, artificial intelligence, Internet of Things, blockchain and other cutting-edge technologies into the supply chain industry.

 

As our supply chain solution business grew substantially in size, we launched supply chain trading business and expand our product offerings, leverage supply chain technology platform and high-quality customers connections. Complementary to supply chain solution, we also sell products such as chemicals and vegetables directly to customers through our intelligent matching system.

 

Fintech also provides direct banking solutions to small and medium-sized commercial banks and other financial institutions in their distribution and management of direct banking and other financial products. Our Fintech platform offers specialized asset allocation and financial planning services to institutional and individual investors. It optimizes risk controls and asset management procedures to meet the investors’ financial planning needs and minimize their investment risks.

 

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Impact of COVID-19 Pandemic 

 

In December 2019, a novel strain of coronavirus (COVID-19) surfaced. COVID-19 has spread rapidly to many parts of the PRC and other parts of the world in the first quarter of 2020, which has caused significant volatility in the PRC and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the PRC and international economies. After the Spring of 2020, the COVID outbreak in China has gradually been controlled and we returned to normal operations. The COVID-19 pandemic did not have a material negative impact on the Company’s financial services and supply chain solution business for the year ended December 31, 2021. In March 2022, due to the spread of new variants and subvariants of COVID-19 in Shanghai and several other cities in China, which appeared to have spread faster than the original COVID-19 variant, local governments of the impacted cities have imposed strict movement restrictions. In mid-March 2022, Shanghai authorities issued strict lockdown and shutdown orders in response to the pandemic. As a result, the employees of our PRC operating entities located in Shanghai started to work from home. As our Shanghai employees were prepared for remote working in advance, our Shanghai entities have been able to continue to provide services to our customers remotely with minimum interruptions. Management of the Company does not believe the lockdown restrictions in Shanghai will have a material adverse impact on the Company’s overall business, operating results and financial condition.

 

However, the pandemic could adversely affect our business and financial results in 2022 if the virus’s resurgence causes significant disruptions to our operations or the business of our supply chain customers, logistics and service providers, and has a negative impact to the pricing of our products. We cannot predict the severity and duration of the impact from such resurgence. If any new outbreak is not effectively and timely controlled, or if government responses to outbreaks are long lasting, it could result in the slowdown in regional economic growth and weakened liquidity and financial condition of our customers, among other things. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the economic growth of the regions where we conduct business, and could materially and adversely impact our business, financial condition, and results of operations.

 

Financial Results for fiscal year 2021 and 2020

 

The following table presents an overview of our results of operations for fiscal years 2021 and 2020:

 

   Year ended December 31,   Changes 
   2021   2020   ($)   (%) 
Revenue  $160,199,711   $42,190,191    118,009,520    280%
Cost of revenue   106,151,567    19,973,656    86,177,911    432%
Gross profit   54,048,144    22,216,535    31,831,609    143%
Selling, general and administrative expenses   15,859,234    12,188,316    3,670,918    30%
Income from operations   38,188,910    10,028,219    28,160,691    281%
Other income (expense), net   2,587,113    829,451    1,757,662    212%
Income before income taxes   40,776,023    10,857,670    29,918,353    276%
Income taxes expense   10,269,501    941,064    9,328,437    991%
Net income from continuing operations   30,506,522    9,916,606    20,589,916    208%
(Loss) income from discontinued operations, net of tax   -    (22,971,016)   22,971,016    100%
Net income (loss)   30,506,522    (13,054,410)   43,560,932    334%
Less: net income attributed to non-controlling interest   126,161    37,380    88,781    238%
Net income (loss) attributed to the shareholders   30,380,361    (13,091,790)   43,472,151    332%
Foreign currency translation income   2,039,011    5,507,420    (3,468,409)   (63)%
Comprehensive (loss) income  $32,419,372   $(7,584,370)   40,003,742    527%

 

79

 

 

The following table presents an overview of our results of operations for fiscal years 2020 and 2019:

 

   Year ended December 31,   Changes 
   2020   2019   ($)   (%) 
Revenue  $42,190,191   $2,525,524    39,664,667    1571%
Cost of revenue   19,973,656    19,492    19,954,164    102371%
Gross profit   22,216,535    2,506,032    19,710,503    787%
Selling, general and administrative expenses   12,188,316    1,331,467    10,856,849    815%
Income from operations   10,028,219    1,174,565    8,853,654    754%
Other income (expense), net   829,451    1,371   

828,080

    60400%
Income before income taxes   10,857,670    1,175,936    9,681,734    824%
Income taxes expense (benefit)   941,064    (55,731)   996,795    1,789%
Net income from continuing operations   9,916,606    1,231,667    8,684,939    705%
(Loss) income from discontinued operations, net of tax   (22,971,016)   1,508,323    (24,479,339)   (1623)%
Net (loss) income   (13,054,410)   2,739,990    (15,794,400)   (575)%
Less: net income attributed to non-controlling interest   37,380    -    37,380    100%
Net (loss) income attributed to the shareholders   (13,091,790)   2,739,990    (15,831,780)   (578)%
Foreign currency translation income (loss)   5,507,420    (561,091)   6,068,511    (1082)%
Comprehensive (loss) income  $(7,584,370)  $2,178,899    (9,763,269)   (448)%

 

Revenues

 

The following table presents a breakdown of our revenue from continuing operations for fiscal years 2021 and 2020.

 

   Year ended December 31,   Changes   Changes 
   2021   %   2020   %   ($)   (%) 
Revenue from financial service:                        
SME financing solutions  $87,133,963    54%  $40,779,794    97%   46,354,169    114%
Supply chain financing solutions   4,930,289    3%   1,369,859    3%   3,560,430    260%
Other financing solutions   3,222    0%   40,538    0%   (37,316)   (92)%
Total revenue from financial service  $92,067,474    57%  $42,190,191    100%   49,877,283    118%
Revenue from supply chain trading   68,132,237    43%   -    -%   68,132,237    100%
Total revenue   160,199,711    100%   42,190,191    100%   118,009,520    280%

 

The following table presents a breakdown of our revenue from continuing operations for fiscal years 2020 and 2019.

 

   Year ended December 31,   Changes   Changes 
   2020   %   2019   %   ($)   (%) 
SME financing solutions  $40,779,794    97%  $2,522,143    100%   38,257,651    1517%
Supply chain financing solutions   1,369,859    3%   -    -%   1,369,859    100%
Other financing solutions   40,538    0%   3,381    -%   37,157    1099%
Total revenue  $42,190,191    100%  $2,525,524    100%   39,664,667    1571%

 

Total revenue for the year ended December 31, 2021, was $160.2 million, representing an increase of $118.0 million or 280%, from $42.2 million for the year ended December 31, 2020, with increases in both revenue from financial service and revenue from sales. The increase in our total revenues was primarily due to our ability to expand our business, achieve higher quality customers, and achieve a higher customer retention.

 

The Company provides a set of financing solutions to SMEs, including design, issuance, distribution, and management of financial products. For the year ended December 31, 2021, the revenue from SME financing solution services increased by $46.4 million, or 114%, from $40.8 million for the year ended December 31, 2020, to $87.1 million in the comparable period in 2021 as a result of the increased demand from SME customers to seek alternative financing solutions to bank financing.

 

The Company commenced its supply chain solution business in January 2020. With a focus on finance and industry linkages, the Company aims to serve the upstream and downstream of the supply chain industry while facilitating supply-side sub-sector reform. Revenue generated from supply chain solutions includes financing and management services to downstream venders. During the year ended December 31, 2021, revenue from the supply chain solutions was $4.9 million, increased by $3.6 million, or 260%, from $1.4 million for the year ended December 31, 2020, primarily due to the Company’s expansion of its supply chain solution business in various industries such as the energy industry and retail industry.

 

The Company launched supply chain trading business in July 2021 after generating high-quality customers and resources through its supply chain financing solution business. For fiscal year 2021, revenue from supply chain trading business was $68.1 million. We expect our revenue from sales related to supply chain solution business will continue to grow.

 

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Cost of Revenue

 

The following table presents a breakdown of our cost of revenue for fiscal years 2021 and 2020:

 

   Year ended December 31,   Changes   Changes 
   2021   %   2020   %   ($)   (%) 
Cost of revenue - service                        
SME financing solutions  $36,744,546    35%  $19,249,545    96%   17,495,001    91%
Supply chain financing solutions   1,548,698    1%   724,111    4%   824,587    114%
Other financing solutions   -         -    -    -    - 
Total cost of revenue - service   38,293,244    36%   19,973,656    100%   18,319,588    92%
Cost of revenue – supply chain trading   67,858,323    64%   -    -%   67,858,323    100%
Total cost of revenue  $106,151,567    100%  $19,973,656    100%   86,177,911    432%

 

The following table presents a breakdown of our cost of revenue for fiscal years 2020 and 2019:

 

   Year ended December 31,   Changes   Changes 
   2020   %   2019   %   ($)   (%) 
Cost of revenue - service                        
SME financing solutions  $19,249,545    96%  $19,492    100%   19,230,053    * 
Supply chain financing solutions   724,111    4%   -    -%   724,111    100%
Other financing solutions   -    -%   -    -%   -    -%
Total cost of revenue  $19,973,656    100%  $19,492    100%   19,954,164    * 

 

*Not meaningful

 

Cost of revenue from service is primarily comprised of cost of sales, direct operational costs, direct costs associated with staff who design and manage the SME financing solutions, supply chain solutions and other financing solutions business and sales related taxes, office rent and expenses.

 

For the year ended December 31, 2021, cost of revenue was $106.2 million, increased by $86.2 million, or 432%, from $20.0 million for the year ended December 31, 2021.

 

For the year ended December 31, 2021, cost of revenue related to SME financing service was $36.7 million, increased by $17.5 million, or 92%, from $19.2 million for the year ended December 31, 2021, primarily attributable to the increased revenue and more operational cost and staff cost.

 

For the year ended December 31, 2021, cost of revenue related to supply chain financing solution service was $1.5 million, increased by $0.8 million, or 114%, from $0.7 million for the year ended December 31, 2021, primarily attributable to the increased revenue and more operational cost.

 

The Company launched trading business in July 2021 after generating high-quality customers and resources through its supply chain financing solution business. For the year ended December 31, 2021, the cost of revenue related to sales was $67.9 million.

 

Gross Profit

 

For the years ended December 31, 2021 and 2020, gross profit from continuing operations was $54.0 million and $22.2 million, respectively, representing an increase of approximately $31.8 million or 143%. The increase was primarily due to the fact that the Company commenced its financial services business in July 2019 and has experienced a significant increase in demand from SME enterprises in the PRC to seek for standardized financing solutions alternative to bank financing.

  

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Operating Expenses

 

The following table presents a breakdown of operating expenses for fiscal years 2021 and 2020:

 

   Year ended December 31,   Changes   Changes 
   2021   %   2020   %   ($)   (%) 
Selling expenses  $2,323,403    15%  $3,181,810    26%   (858,407)   (27)%
General and administrative expenses   11,936,103    75%   8,188,736    67%   3,747,367    46%
Research and development expenses   1,599,728    10%   817,770    7%   781,958    96%
Total operating expenses  $15,859,234    100%  $12,188,316    100%   3,670,918    30%

 

The following table presents a breakdown of operating expenses for fiscal years 2020 and 2019:

 

   Year ended December 31,   Changes   Changes 
   2020   %   2019   %   ($)   (%) 
Selling expenses  $3,181,810    67%  $93,620    7%   3,088,190    3299%
General and administrative expenses   8,188,736    26%   1,082,631    81%   7,106,105    656%
Research and development expenses   817,770    7%   155,216    12%   662,554    427%
Total operating expenses  $12,188,316    100%  $1,331,467    100%   10,856,849