Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. 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 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, a smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, 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. ☐
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 whether registrant is
a shell company (as defined in Rule 12b-2 of the Act) Yes ☐
No ☒
As of June 30, 2021 (the last business day of
the registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of the registrant’s
common stock held by non-affiliates (based upon the closing sale price of $4.71 per share) was approximately $363.3 million. Shares of
the registrant’s common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding
common stock have been excluded from the calculation in that such persons may be deemed to be affiliates of the registrant. This determination
of affiliate status is not necessarily a conclusive determination for other purposes.
There was a total of 88,705,016 shares of the registrant’s common
stock outstanding as of April 13, 2022.
None.
CBAK Energy Technology, Inc. (the “Company”
or “we”) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Original Annual Report”)
with the Securities and Exchange Commission (the “SEC”) on April 15, 2022. The Company is filing this Amendment No. 1 (the
“Amendment”) to the Original Annual Report, to add or revise disclosures in Introductory Note and Item 1A. Risk Factors, in
order to, among other things, (i) provide additional disclosures regarding the Company’s status as “a Commission-Identified
Issuer” under the Holding Foreign Companies Accountable Act, (ii) disclose the risks that the Company’s corporate structure
and being based in or having the majority of the Company’s operations in China pose to investors, (iii) add a section titled “Permissions
Required from the PRC Authorities for Our Business Operations and Securities Offering” to disclose the permissions and approvals
required to be obtained from Chinese authorities to operate the Company’s business and securities offering, (iv) add a section titled
“Cash and Asset Flows through Our Organization” to describe how cash is transferred through our organization, and (v) add
a section titled “Enforceability of Civil Liabilities” to address the difficulty of bringing actions against the Company’s
officers and directors who are located in China and enforcing judgments against them.
In addition, pursuant to Rule 12b-15 under the Securities Exchange
Act of 1934, as amended, the Amendment also contains new certifications by the principal executive officer and the principal financial
officer in Exhibits 31.1, 31.2, 32.1 and 32.2 as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
Except as specifically described above, this Amendment does not reflect
events occurring after the filing of the Original Annual Report, nor does it modify or update disclosures therein in any way other than
as required to reflect the revisions described above. Among other things, forward-looking statements made in the Original Annual Report
have not been revised to reflect events that occurred or facts that became known to us after the filing of the Original Annual Report,
and any such forward looking statements should be read in their historical context. Accordingly, this Amendment should be read in conjunction
with the Original Annual Report.
Except as otherwise indicated by the context
and for the purposes of this report only, references in this report to:
Statements contained in this report include “forward-looking
statements” within the meaning of such term in Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking
statements involve known and unknown risks, uncertainties and other factors which could cause actual financial or operating results,
performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. Forward-looking statements
made in this report generally are based on our best estimates of future results, performances or achievements, predicated upon current
conditions and the most recent results of the companies involved and their respective industries. Forward-looking statements may be identified
by the use of forward-looking terminology such as “may,” “will,” “could,” “should,” “project,”
“expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,”
“potential,” “opportunity” or similar terms, variations of those terms or the negative of those terms or other
variations of those terms or comparable words or expressions.
Readers are urged to carefully review and consider
the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties
of the risks and factors that may affect our business, financial condition and results of operations and prospects. New risks emerge
from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements we may make. The forward-looking statements made in this report speak only as of the date hereof and we disclaim
any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or
future events.
CBAK Energy Technology, Inc. is a holding company
incorporated in Nevada, the United States, with no material operations of its own. We conduct our business through our operating subsidiaries
in China. This structure involves unique risks to investors, and you may never directly hold equity interests in the operating entities.
There are significant legal and operational risks
and uncertainties associated with having substantially all operations in China, such as the enforcement of laws and changes in the legal,
political and economic policies of the Chinese government. Any such changes may take place quickly and with very little notice, which
may materially and adversely affect our business, financial condition, results of operations and the market price of our securities.
Moreover, the Chinese government may exert significant oversight and control over the conduct of our business and may intervene in or
influence our overseas offerings and foreign investment at any time, which could result in a material change in our operations and/or
the value of our securities or 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.
The PRC legal system is a civil law system based
on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover
all aspects of economic activities in China or may be subject to a significant degree of interpretation by PRC regulatory agencies and
courts. In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions
and the non-precedential nature of these decisions, and because the laws, rules and regulations often give the relevant regulator significant
discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and
can be inconsistent and unpredictable. Therefore, it is possible that our existing operations may be found not to be in full compliance
with relevant laws and regulations in the future. In addition, 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, and which may have a retroactive effect. As a result, we may not
be aware of our violation of these policies and rules until after the occurrence of the violation.
The PRC government recently initiated a series
of regulatory actions and made a number of public statements on the regulation of business operations in China, including cracking
down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using a variable
interest entity (“VIE”) structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts
in anti-monopoly enforcement. We do not believe that our subsidiaries in China are directly subject to these regulatory actions or statements,
as we have not carried out any monopolistic behavior, we have never adopted a VIE structure, and our business does not involve any restricted
industry or implicate cybersecurity. However, since these statements and regulatory actions by the PRC government are newly published
and detailed official guidance and related implementation rules have not been issued or taken effect, uncertainties exist as to how soon
the regulatory bodies in China will finalize implementation measures, and the impacts the modified or new laws and regulations will have
on our daily business operation, the ability to accept foreign investments and list our securities on an U.S. or other foreign exchange.
The Holding Foreign Companies Accountable Act
(the “HFCA Act”), was enacted in December 2020 and may affect our ability to maintain our listing on Nasdaq. Pursuant to the
HFCA Act, if the SEC determines that we are an issuer, or a Commission-Identified Issuer, that has filed audit reports issued by a registered
public accounting firm that has not been subject to inspection for the U.S. Public Company Accounting Oversight Board (the “PCAOB”),
for three consecutive years, the SEC shall prohibit our common stock from being traded on a national securities exchange or in the over-the-counter
trading market in the United States. Pursuant to the HFCA Act, 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 mainland China and Hong
Kong because of a position taken by the authorities in such jurisdictions. The PCAOB’s report identified specific registered public
accounting firms which are subject to these determinations, including our current registered public accounting firm, Centurion ZD CPA
& Co., which is headquartered in Hong Kong. On May 13, 2022, we were identified by the SEC pursuant to the HCFA Act as
a Commission-Identified Issuer. On August 26, 2022, the China Securities Regulatory Commission (“CSRC”), the Ministry of Finance
of the PRC, and PCAOB signed a Statement of Protocol (the “Protocol”), governing inspections and investigations of audit firms
based in China and Hong Kong. Pursuant to the Protocol, the PCAOB has independent discretion to select any issuer audits for inspection
or investigation and has the unfettered ability to transfer information to the SEC. However, uncertainties still exist whether this new
framework will be fully complied with. If the PCAOB continues to be prohibited from conducting complete inspections and investigations
of PCAOB-registered public accounting firms in mainland China and Hong Kong, the PCAOB is likely to determine by the end of 2022 that
positions taken by authorities in the PRC obstructed its ability to inspect and investigate registered public accounting firms in mainland
China and Hong Kong completely, then the companies audited by those registered public accounting firms would be subject to a trading prohibition
on U.S. markets pursuant to the HFCA Act. As a result, trading in our securities may be prohibited under the HFCA Act if the PCAOB determines
our audit work is performed by auditors that the PCAOB is unable to inspect or investigate completely for three consecutive years thereafter,
and U.S. national securities exchanges, such as the Nasdaq, may determine to delist our securities. Furthermore, on June 22, 2021, the
U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which, if enacted, would amend
the HFCA Act 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 the PCAOB inspections for two consecutive years instead of three. We plan to identify and engage an independent public accounting
firm that satisfies the PCAOB inspection requirements for the audit of our consolidated financial statements, subject to compliance with
SEC and other requirements prior to the three-year (or two-year under the Accelerating Holding Foreign Companies Accountable Act) deadline
of the HFCA Act.
In addition to regular business licenses,
we are required to obtain the pollutants discharge permit to operate our business in the PRC. We believe that our PRC operating subsidiaries
have obtained all requisite permissions for our operations in all material aspects from relevant Chinese authorities and none of the
requisite permissions for our operations in all material aspects have been denied by the Chinese authorities. However, we cannot assure
you that our PRC subsidiaries are always able to successfully update or renew the licenses or permits required for the relevant business
in a timely manner or that these licenses or permits are sufficient to conduct all of our present or future business. If our PRC subsidiaries
(i) do not receive or maintain required permissions or approvals, (ii) inadvertently conclude that such permissions or approvals are
not required, or (iii) applicable laws, regulations, or interpretations change and our PRC subsidiaries are required to obtain such permissions
or approvals in the future, we could be subject to fines, legal sanctions or an order to suspend our PRC operating subsidiaries’
business, which may materially and adversely affect the business, financial condition and results of operations of us.
In connection with our
previous issuance of securities, under current PRC laws, regulations and regulatory rules, as of the date of this annual report, we believe
that we and our PRC subsidiaries, (i) are not required to obtain permissions from the CSRC, (ii) are not required to go through cybersecurity
review by the Cyberspace Administration of China (the “CAC”), and (iii) have not received or were denied such requisite permissions
by any PRC authority.
However, we cannot guarantee that the regulators
will agree with us. As of the date hereof, we have not been involved in any investigations on cybersecurity review made by the CAC, and
we have not received any inquiry, notice, warning, or sanctions in such respect. However, as these are new regulations, there remains
uncertainties as to how they will be interpreted or implemented in the context of an overseas offering.
Under relevant PRC laws and regulations,
we are permitted to provide funding from the proceeds of our overseas fund raising activities to our PRC subsidiaries only through loans
or capital contributions. In fiscal years ended December 31, 2020 and 2021, we transferred $41.0 million and $69.1 million to our PRC
subsidiaries as capital contribution, respectively. As of December 31, 2021, we had made cumulative capital contribution of $136.2 million
to our existing PRC subsidiaries, which was accounted as long-term investments by us.
In January 2020, our subsidiary, Hitrans
declared dividend for the years ended December 31, 2018 and 2019. Dividend of $2,958,048 was declared and paid to its shareholder Zhejiang
Meidu Graphene Technology Co., Ltd. For other shareholders of Hitrans, a total dividend of $2,480,944 was declared in January 2020 but
remains unpaid. In March 2018, Hitrans declared a dividend of $1,333,135 for the year ended December 31, 2017, among which $533,254 was
paid in July 2018 and the remaining $799,881 was paid during the year ended December 31, 2019. Except for the above dividends, we and
our PRC subsidiaries have not previously declared or paid any cash dividend or dividend in kind, and have no plan to declare or pay any
dividends in the near future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate
and expand our business.
Under PRC laws and regulations,
we are subject to various restrictions on intercompany fund transfers and foreign exchange control. To the extent our cash in the business
is in the PRC or a PRC entity, the funds may not be available for the distribution of dividends to our investors, or for other use outside
of the PRC, due to the interventions in or the imposition of restrictions and limitations on our ability by the PRC government to transfer
cash. The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of
currency out of mainland China. Our PRC subsidiaries receive substantially all revenue in RMB. Our PRC subsidiaries may pay dividends
only out of their accumulated after-tax profits upon satisfaction of relevant statutory conditions and procedures, if any, determined
in accordance with Chinese accounting standards and regulations. If the PRC foreign exchange control system prevents us from obtaining
sufficient foreign currencies to satisfy the foreign currency demands, we may not be able to pay dividends in foreign currencies to our
shareholders. Additionally, we may make loans to our PRC subsidiaries subject to the approval from or registration with governmental authorities
and limitation on amount, or we may make additional capital contributions to our PRC subsidiaries. PRC regulation of loans to and direct
investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from
using our fund to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect
the liquidity of our PRC subsidiaries and our ability to fund and expand our business in the PRC, and cause the value of our securities
to significantly decline or become worthless. We cannot assure you that the PRC government will not intervene in or impose restrictions
on our ability to make intercompany cash transfers.
Investing in our securities involves a high degree
of risk. The following is a summary of significant risk factors and uncertainties that may affect our business, which are discussed in
more detail below under “Item 1A. Risk Factors” included in this Annual Report on Form 10-K:
All of our current operations are conducted
in China. Moreover, most of our current directors and officers are nationals or residents of China. There is uncertainty as to whether
the courts of China would:
The recognition and enforcement of foreign
judgments are provided for under PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with
the requirements of PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on
reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States that provide
for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in
the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic
principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a
PRC court would enforce a judgment rendered by a court in the United States. Under the PRC Civil Procedures Law, foreign shareholders
may originate actions based on PRC law against us in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have
jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case,
and there must be a concrete claim, a factual basis and a cause for the suit. However, it would be difficult for foreign shareholders
to establish sufficient nexus to the PRC by virtue only of holding our shares of common stock.
ITEM 1A. RISK FACTORS.
RISKS RELATED TO DOING BUSINESS IN CHINA
The audit report included in this Annual
Report on Form 10-K was prepared by an auditor who is not inspected by the PCAOB and, as such, you are deprived of the benefits of such
inspection. Our common stock may be delisted under the HFCA Act if the PCAOB is unable to inspect our auditors for three consecutive
years after we are identified by the SEC as a Commission-Identified Issuer, or two consecutive years if the AHFCAA is enacted. The delisting
of our securities, or the threat of our securities being delisted, may materially and adversely affect the value of your investment.
Auditors of companies that are registered with
the SEC and traded publicly in the United States, including the independent registered public accounting firm of the Company, must be
registered with the PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their
compliance with the laws of the United States and professional standards. However, the PCAOB is unable to inspect or investigate completely
registered public accounting firms headquartered in mainland China and Hong Kong, a Special Administrative Region of China and dependency
of the PRC. Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’
audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality.
The inability of the PCAOB to conduct full inspections of auditors operating in China makes it more difficult to evaluate our auditors’
audit procedures or quality control procedures.
As part of a continued regulatory focus in the
United States on access to audit and other information currently protected by national law, in particular China’s, the HFCA
Act was signed into law on December 18, 2020. This act amends the Sarbanes-Oxley Act of 2002 to direct the SEC to prohibit
securities of any registrant from being listed on any of the U.S. securities exchanges or traded “over-the-counter” if the
auditor of the registrant’s financial statements is not subject to PCAOB inspection for three consecutive years after the law becomes
effective.
Furthermore, on June 22, 2021, the U.S. Senate
passed the AHFCAA, which if enacted into law would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from
trading on U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive “non-inspection” years
instead of three.
On December 16, 2021, pursuant to the HFCA Act,
the PCAOB issued a Determination Report which found that the PCAOB is unable to inspect or investigate completely registered public accounting
firms headquartered in mainland China and Hong Kong, because of a position taken by one or more authorities in such jurisdictions. The
PCAOB’s report identified specific registered public accounting firms which are subject to these determinations. Our registered
public accounting firm, Centurion ZD CPA & Co., is headquartered in Hong Kong and was identified in this report as a firm subject
to the PCAOB’s determination. On May 13, 2022, we were identified by the SEC pursuant to the HCFA Act as a Commission-Identified
Issuer.
As a result, trading in our securities may be
prohibited under the HFCA Act if the PCAOB determines our audit work is performed by auditors that the PCAOB is unable to inspect or investigate
completely for three consecutive years (or two years under the AHFCA Act) thereafter, and U.S. national securities exchanges, such as
the Nasdaq, may determine to delist our securities.
While we understand that there has been dialogue
among the CSRC, the SEC and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance
that our auditor or us will be able to comply with the requirements imposed by U.S. regulators or Nasdaq. On August 26, 2022, the CSRC,
the Ministry of Finance of the PRC, and PCAOB signed the Protocol, governing inspections and investigations of audit firms based in China
and Hong Kong. Pursuant to the Protocol, the PCAOB has independent discretion to select any issuer audits for inspection or investigation
and has the unfettered ability to transfer information to the SEC. However, uncertainties still exist whether this new framework will
be fully complied with. According to the PCAOB, its December 2021 determinations under the HFCA Act remain in effect. The PCAOB is required
to reassess these determinations by the end of 2022. Under the PCAOB’s rules, a reassessment of a determination under the HFCA
Act may result in the PCAOB reaffirming, modifying or vacating the determination. However, if the PCAOB continues to be prohibited from
conducting complete inspections and investigations of PCAOB-registered public accounting firms in mainland China and Hong Kong, the PCAOB
is likely to determine by the end of 2022 that positions taken by authorities in the PRC obstructed its ability to inspect and investigate
registered public accounting firms in mainland China and Hong Kong completely, then the companies audited by those registered public
accounting firms would be subject to a trading prohibition on U.S. markets pursuant to the HFCA Act. We plan to identify and engage an
independent public accounting firm that satisfies the PCAOB inspection requirements for the audit of our consolidated financial statements,
subject to compliance with SEC and other requirements prior to the three-year (or two-year under the AHFCA Act) deadline of the HFCA
Act. If we are unable to meet the PCAOB inspection requirement in time, we could be delisted and our securities will not be permitted
for trading “over-the-counter” either. Such a delisting would substantially impair your ability to sell or purchase our securities
when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our securities.
Also, such a delisting would significantly affect our ability to raise capital on acceptable terms, or at all, which would have a material
adverse effect on our business, financial condition and prospects.
The Chinese government may intervene or
influence our operations in China at any time, or may exert more control over offerings conducted outside China by and/or foreign investment
in China-based issuers, which could result in a material change in our operations and in the value of our securities. Any actions by
the Chinese government to exert more oversight and control over offerings that are conducted outside China by and/or foreign investment
in China-based issuers could significantly limit or completely hinder our ability to offer securities to investors and cause the value
of such securities to significantly decline or be worthless.
Substantially all of our operations are conducted
in the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by the economic, political
and legal developments in the PRC. The PRC economy differs from the economies of most developed countries in many respects, including
the extent of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources.
The PRC government has implemented various measures to encourage economic growth and to guide the allocation of resources. Some of these
measures may benefit the overall PRC economy but may also have a negative effect on us. Our financial condition and results of operations
could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable
to us.
The Chinese government recently has published
new policies that significantly affected certain industries such as the education and internet industries, and we cannot rule out the
possibility that it will not in the future release regulations or policies regarding our industry that could require us or our PRC subsidiaries
to seek permission from Chinese authorities to continue to operate our business in China, which may adversely affect our business, financial
condition and results of operations. Furthermore, 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 China that are to be conducted
in foreign markets, as well as foreign investment in China-based issuers like us. Any such action, once taken by the Chinese government,
could significantly limit or completely hinder our ability to offer our securities, and could cause the value of such securities to significantly
decline or become worthless.
For example, in July 2021, the Chinese government
provided new guidance on China-based companies raising capital outside of China, including through arrangements via VIEs. In light of
such developments, the SEC has imposed enhanced disclosure requirements on China-based companies seeking to register securities with
the SEC. Although we have never adopted a VIE structure and our business in China does not involve any type of restricted industry under
Chinese regulations, any future Chinese, U.S. or other rules and regulations that place restrictions on capital raising or other activities
by companies with extensive operations in China could adversely affect our business. If the business environment in China deteriorates
from the perspective of domestic or international investment, or if relations between China and the United States or other governments
deteriorate, the Chinese government may intervene with our operations, and our business in China, as well as the value of our securities,
may also be adversely affected.
Changes in U.S. and Chinese regulations
or in relations between the United States and China may adversely impact our business, our operating results, our ability to raise capital
and the value of our securities. Any such changes may take place quickly and with very little notice.
The U.S. government, including the SEC, has made
statements and taken certain actions that led to changes to United States and international relations, and will impact companies with
connections to the United States or China. The SEC has issued statements primarily focused on companies with significant China-based
operations, such as us. For example, on July 30, 2021, Gary Gensler, Chairman of the SEC, issued a Statement on Investor Protection Related
to Recent Developments in China, pursuant to which Chairman Gensler stated that he has asked the SEC staff to engage in targeted additional
reviews of filings for companies with significant China-based operations. The statement also addressed risks inherent in companies with
VIE structures. We have never adopted a VIE structure and are not in any industry that is subject to foreign ownership limitations by
China. However, it is possible that the Company’s filings with the SEC may be subject to enhanced review by the SEC.
In response to the SEC’s July 30, 2021
statement, the CSRC announced on August 1, 2021, that “it is our belief that Chinese and U.S. regulators shall continue to enhance
communication with the principle of mutual respect and cooperation, and properly address the issues related to the supervision of China-based
companies listed in the U.S. so as to form stable policy expectations and create benign rules framework for the market.” The CSRC
pledged to continue to collaborate “closely with different stakeholders including investors, companies, and relevant authorities
to further promote transparency and certainty of policies and implementing measures,” and emphasized that it “has always
been open to companies’ choices to list their securities on international or domestic markets in compliance with relevant laws
and regulations.” If any new legislation, executive orders, laws and/or regulations are implemented, if the U.S. or Chinese governments
take retaliatory actions due to the recent U.S.-China tension or if the Chinese government exerts more oversight and control over securities
offerings that are conducted in the United States, such changes could have an adverse effect on our business, financial condition and
results of operations, our ability to raise capital and the value of our securities.
There are uncertainties regarding the interpretation
and enforcement of PRC laws, rules and regulations.
Substantially all of our operations are conducted
in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject to laws, rules and regulations applicable
to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior
court decisions may be cited for reference but have limited precedential value. In 1979, the PRC government began to promulgate a comprehensive
system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past four decades
has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed
a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic
activities in China or may be subject to significant degrees of interpretation by PRC regulatory agencies. In particular, because these
laws, rules and regulations are relatively new, and because of the limited number of published decisions and the nonbinding nature of
such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce
them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable.
In addition, 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, and may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until
after the occurrence of the violation. Any administrative and court proceedings in China may be protracted, resulting in substantial
costs and diversion of resources and management attention.
The PRC government has recently announced its
plans to enhance its regulatory oversight of Chinese companies listing overseas. The Opinions on Strictly Cracking Down on Illegal Securities
Activities issued on July 6, 2021 called for:
| ● | tightening
oversight of data security, cross-border data flow and administration of classified information,
as well as amendments to relevant regulation to specify responsibilities of overseas listed
Chinese companies with respect to data security and information security; |
| ● | enhanced
oversight of overseas listed companies as well as overseas equity fundraising and listing
by Chinese companies; and |
| ● | extraterritorial
application of China’s securities laws. |
On December 24, 2021, the CSRC released
the Administrative Provisions of the State Council Regarding Overseas Securities Offering and Listing by Domestic Companies (Draft for
Comments) (the “Administrative Provisions”), and the Measures Regarding Recordation of Overseas Securities Offering and Listing
by Domestic Companies (Draft for Comments) (the “Measures”). The Administrative Provisions and Measures aim to establish
a unified supervision system and promote cross-border regulatory cooperation. The Measures lay out filing procedures for domestic companies
to record their initial public offerings and follow-on offerings abroad with the CSRC. Issuers are required to file follow-on offerings
with the CSRC within 3 business days after the closing of such offerings.
According to the Q&A held by CSRC officials
for journalists thereafter, the CSRC will adhere to the principle of non-retroactive application of law and first focus on issuers conducting
initial public offerings and follow-on offerings by requiring them to complete the recordation procedures. Other issuers will be given
a sufficient transition period. The CSRC officials also noted that the regulation system contemplated by the draft Administrative Provisions
and Measures differentiates between IPOs and follow-on offerings to take into account overseas capital markets’ fast and efficient
features and to reduce impacts on overseas financing activities by domestic companies. If the Administrative Provisions and the Measures
are enacted as proposed, we expect to perform necessary recordation filings with the CSRC for our listing on the Nasdaq within the prescribed
transition period and for future offerings that take place after the Administrative Provisions and the Measures enter into force.
As there are still uncertainties regarding the
enactment, interpretation and implementation of regulations and rules under the umbrella of the Opinions on Strictly Cracking Down on
Illegal Securities Activities, there is no assurance that our business, operating results, cash flows and prospect will not be negatively
affected by new regulatory requirements in the future in China.
PRC laws and regulations establish complex
procedures in connection with certain acquisitions of China-based companies by foreign investors, which could make it more difficult
for us to pursue growth through acquisitions or mergers in China.
On August 8, 2006, six PRC regulatory agencies,
including the Ministry of Commerce (“MOFCOM”), the State-Owned Assets Supervision and Administration Commission, the State
Administration of Taxation, the State Administration for Industry and Commerce, the CSRC, and the State Administration of Foreign Exchange,
jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which
came into effect on September 8, 2006 and were amended on June 22, 2009. The M&A Rules include, among other things, provisions that
purport to require that an offshore special purpose vehicle formed for the purpose of an overseas listing of securities of a PRC company
obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock
exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings through
special purpose vehicles. However, substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore
special purpose vehicles.
The regulations also established additional procedures
and requirements that are expected to make merger and acquisition activities in China by foreign investors more time consuming and complex,
including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign
investor takes control of a PRC domestic enterprise, or that the approval from the MOFCOM be obtained in circumstances where overseas
companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies.
Moreover, according to the Anti-Monopoly Law
of the People’s Republic of China promulgated on August 30, 2007 and the Provisions on Thresholds for Reporting of Concentrations
of Undertakings (the “Prior Reporting Rules”) issued by the State Council in August 2008 and amended in September 2018, the
concentration of business undertakings by way of mergers, acquisitions or contractual arrangements that allow one market player to take
control of or to exert decisive impact on another market player must also be notified in advance to the anti-monopoly enforcement agency
of the State Council when the applicable threshold is crossed and such concentration shall not be implemented without the clearance of
prior reporting. In addition, the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic
Enterprise by Foreign Investors (the “Security Review Rules”) issued by the MOFCOM that became effective in September 2011
specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers
and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security”
concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review by
structuring the transaction through, among other things, trusts, entrustment or contractual control arrangements.
In the event that our acquisition of other companies
in China falls within the scope of these regulations, compliance with these regulations to complete such transactions could be time-consuming,
and any required approval processes, including approval from the MOFCOM, may delay or inhibit our ability to complete such transactions,
which could affect our ability to expand our business or maintain our market share.
CBAK Energy Technology, Inc., as a holding
company incorporated in Nevada, the United States, without material operations of its own, relies on dividends and other distributions
on equity paid by its PRC operating subsidiaries for its cash needs.
CBAK Energy Technology, Inc. is a holding company,
and we conduct all of our operations through our PRC subsidiaries. CBAK Energy Technology, Inc. relies on dividends and other distributions
on equity paid by its PRC subsidiaries for its cash needs, including the funds necessary to pay dividends and other cash distributions
to its stockholders, to service any debt it may incur and to pay its operating expenses. Current regulations in the PRC permit payment
of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. According to
the articles of association of our PRC subsidiaries, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax
profit based on the PRC accounting standards and regulations each year to its statutory general reserve, until the balance in the reserve
reaches 50% of the registered capital of the company. Funds in the reserve are not distributable to CBAK Energy Technology, Inc. in forms
of cash dividends, loans or advances. In addition, 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 distributions to CBAK Energy Technology, Inc., which in
turn will adversely affect its available cash.
In addition, our PRC subsidiaries’ ability
to pay dividends and other cash distributions is subject to foreign exchange restrictions in China. For example, to address persistent
capital outflows and the RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China
and the State Administration of Foreign Exchange, or SAFE, implemented a series of capital control measures in the subsequent months,
including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments
and shareholder loan repayments. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries’ dividends
and other distributions may be subject to tightened scrutiny in the future. The PRC government also imposes controls on the conversion
of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing
the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any.
As a matter of fact, we have never declared or
paid any dividends to CBAK Energy Technology, Inc.’s stockholders, nor do we have any present plan to pay any cash dividends on
the common stock 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.
Fluctuations in exchange rates could adversely
affect our business and the value of our securities.
The value of our securities will be indirectly
affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which our
sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations
in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as
earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may
enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not
be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into foreign currencies. As a result, fluctuations in exchange rates may
have a material adverse effect on your investment.
Investors may experience difficulties in
effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws, including
the federal securities laws or other foreign laws against us or our management.
All of our current operations are conducted in
China. Moreover, most of our current directors and officers are nationals or residents of China. All or a substantial portion of the
assets of these persons are located outside the United States and in the PRC. As a result, it may not be possible to effect service of
process within the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts
of China would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the
civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions
brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.
The approval of the CSRC or other Chinese
regulatory agencies may be required in connection with our future capital-raising activities outside China under Chinese law.
The “M&A Rules” purport to require
offshore special purpose vehicles that are controlled by Chinese companies or individuals and that have been formed for the purpose of
seeking a public listing on an overseas stock exchange through acquisitions of Chinese domestic companies or assets in exchange for the
shares of the offshore special purpose vehicles shall obtain CSRC approval prior to publicly listing their securities on an overseas
stock exchange.
Based on our understanding of the Chinese laws
and regulations currently in effect, CBAK Energy Technology, Inc. or any of our PRC subsidiaries will not be required to submit an application
to the CSRC for its approval of any of our offerings of securities to investors outside China under the M&A Rules. However, there
remains some uncertainties as to how the M&A Rules will be interpreted or implemented, and our view of our obligations under the
M&A Rules is subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating
to the M&A Rules. We cannot assure you that relevant Chinese government agencies, including the CSRC, would reach the same conclusion.
Furthermore, 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 promulgated the Opinions
on Strictly Cracking Down on Illegal Securities Activities, pursuant to which Chinese regulators are required to accelerate rulemaking
related to the overseas issuance and listing of securities, and update the existing laws and regulations related to data security, cross-border
data flow, and management of confidential information. Numerous regulations, guidelines and other measures have been or are expected
to be adopted under the umbrella of or in addition to the Cybersecurity Law and Data Security Law. On December 24, 2021, the CSRC
released the Administrative Provisions of the State Council Regarding Overseas Securities Offering and Listing by Domestic Companies
(Draft for Comments) and the Measures Regarding Recordation of Overseas Securities Offering and Listing by Domestic Companies (Draft
for Comments).
As there are still uncertainties regarding the interpretation and implementation
of such regulatory guidance, we cannot assure you that we will be able to comply with China’s new regulatory requirements relating
to our future capital-raising activities outside China and we may become subject to more stringent requirements with respect to matters
including cross-border investigation and enforcement of legal claims. Notwithstanding the foregoing, as of the date hereof, we are not
aware of any Chinese laws or regulations in effect requiring that we or any of our PRC subsidiaries obtain permission from any Chinese
authority to issue securities to investors outside China, and we or any of our PRC subsidiaries have not received any inquiry, notice,
warning, or sanction in relation to the trading of our common stock on the Nasdaq from the CSRC, the CAC or any other Chinese authorities.
We believe that we or any of our PRC subsidiaries
are not required to submit an application to the CSRC or the CAC for the approval of any of our offerings of securities to investors
outside China or trading of our common stock on the Nasdaq. However, there remains significant uncertainty as to the enactment, interpretation
and implementation of regulatory requirements related to overseas securities offerings and other capital markets activities under Chinese
laws. If it is determined in the future that the approval of the CSRC, CAC or any other regulatory authority is required for any of our
offerings, we may face sanctions by the CSRC, the CAC or other Chinese regulatory agencies. These regulatory agencies may impose fines
and penalties on our operations in China, limit our ability to pay dividends out of China, limit our operations in China, delay or restrict
the repatriation of the proceeds from overseas offerings into China or take other actions that could have a material adverse effect on
our business, financial condition, results of operations and prospects, the value of our securities, as well as our ability to offer
or continue to offer securities to investors or cause such securities to significantly decline in value or become worthless.
PRC regulation of loans to, and direct
investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent CBAK
Energy Technology, Inc. from making additional capital contributions or loans to its PRC subsidiaries.
CBAK Energy Technology, Inc., as an offshore
holding company, is permitted under PRC laws and regulations to provide funding to its PRC subsidiaries through loans or capital contributions.
However, loans by CBAK Energy Technology, Inc. to its PRC subsidiaries to finance their activities cannot exceed statutory limits and
must be registered with the local counterpart of the State Administration of Foreign Exchange and capital contributions to its PRC subsidiaries
are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, and
registration with other governmental authorities in China.
The State Administration of Foreign Exchange
promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement
of Capital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement of the Circular on the Relevant
Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-
Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration
of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration
of Certain Capital Account Foreign Exchange Businesses. According to Circular 19, the flow and use of the RMB capital converted from
foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for
the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of bank loans that have been transferred
to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested
enterprise to be used for equity investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated
capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear
whether the State Administration of Foreign Exchange will permit such capital to be used for equity investments in the PRC in actual
practice. The State Administration of Foreign Exchange promulgated the Notice of the State Administration of Foreign Exchange on Reforming
and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which
reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated
registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to grant loans
to non-associated enterprises. Violations of Circular 19 and Circular 16 could result in administrative penalties. Circular 19 and Circular
16 may significantly limit our ability to transfer any foreign currency CBAK Energy Technology, Inc. holds to its PRC subsidiaries, which
may adversely affect our liquidity and our ability to fund and expand our business in the PRC.
In light of the various requirements imposed
by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will
be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all,
with respect to future loans or future capital contributions by us to our PRC subsidiaries. As a result, uncertainties exist as to our
ability to provide prompt financial support to our PRC subsidiaries when needed. If we fail to complete such registrations or obtain
such approvals, our ability to use foreign currency and to capitalize or otherwise fund our PRC operations may be negatively affected,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Failure to comply with PRC regulations
relating to the investment in offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal
liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’
ability to distribute profits to us or otherwise materially adversely affect us.
On July 14, 2014, SAFE issued the Circular on
Relevant Issues Relating to Domestic Residents’ Investment and Financing and Roundtrip Investment through Special Purpose Vehicles
(“Circular 37”), which replaced the Circular 75, promulgated by SAFE on October 21, 2005. Circular 37 requires PRC residents
to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for
the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic
enterprises or offshore assets or interests, referred to in Circular 37 as a “special purpose vehicle.”
We have notified substantial beneficial owners
of our company who we know are PRC residents to comply with the registration obligation. However, we may not be aware of the identities
of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot assure
you that all of our PRC resident beneficial owners will comply with Circular 37. The failure of our beneficial owners who are PRC residents
to register or amend their SAFE registrations in a timely manner pursuant to Circular 37 or the failure of future beneficial owners of
our company who are PRC residents to comply with the registration procedures set forth in Circular 37 may subject such beneficial owners
or our PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration may also limit our ability to contribute
additional capital to our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds from
disposal of our PRC subsidiaries, or we may be penalized by SAFE. These risks may have a material adverse effect on our business, financial
condition and results of operations.
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 shareholders.
On March 16, 2007, the National People’s
Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on November 28, 2007, the State Council of China passed
its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de
facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner
similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management
as “substantial and overall management and control over the production and operations, personnel, accounting, and properties”
of the enterprise.
On April 22, 2009, the State Administration of
Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated
Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application
of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly
in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets
and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors
with voting rights or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate
of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. In
addition, the SAT issued the Announcement of the State Administration of Taxation on Issues concerning the Determination of Resident
Enterprises Based on the Standards of Actual Management Institutions in January 2014 to provide more guidance on the implementation of
Circular 82. This bulletin further provides that, among other things, an entity that is classified as a “resident enterprise”
in accordance with the circular shall file the application for classifying its status of residential enterprise with the local tax authorities
where its main domestic investors are registered. From the year in which the entity is determined to be a “resident enterprise,”
any dividend, profit and other equity investment gains from other resident enterprises within China in previous years (on or after January
1, 2008) shall be taxed in accordance with the enterprise income tax law and its implementing rules.
We may be deemed to be a resident enterprise
by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income
tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate
of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that
income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of
25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt
income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control
authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to
entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance
issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding
tax is imposed on dividends we pay to our non-PRC shareholders 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, and our PRC tax may not be used as a credit to reduce our U.S. tax.
We and our stockholders face uncertainties
with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a Chinese establishment
of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.
In October 2017, the State Administration of
Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident Enterprise Income Tax at Source, or Bulletin 37,
which replaced the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises
issued by the State Administration of Taxation on December 10, 2009, and partially replaced and supplemented rules under the Bulletin
on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, issued by the State
Administration of Taxation on February 3, 2015. Pursuant to Bulletin 7, an “indirect transfer” of PRC assets, including a
transfer of equity interests in an unlisted non-PRC holding company of a PRC resident enterprise, by non-PRC resident enterprises may
be re-characterized and treated as a direct transfer of the underlying PRC assets, if such arrangement does not have a reasonable commercial
purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed
to an establishment in China, immoveable properties located in China, and equity investments in PRC resident enterprises and any gains
from the transfer of such asset by a direct holder, who is a non-PRC resident enterprise, would be subject to PRC enterprise income taxes.
When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken
into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable
assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income
mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have
real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model
and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of
such indirect transfer and applicable tax treaties or similar arrangements. In the case of an indirect offshore transfer of assets of
a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of
business being transferred, and may consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer
relates to immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC
establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of 10% would apply, subject to available
preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer
payments has the withholding obligation. Pursuant to Bulletin 37, the withholding agent shall declare and pay the withheld tax to the
competent tax authority in the place where such withholding agent is located within 7 days from the date of occurrence of the withholding
obligation, while the transferor is required to declare and pay such tax to the competent tax authority within the statutory time limit
according to Bulletin 7. Late payment of applicable tax will subject the transferor to default interest. Both Bulletin 37 and Bulletin
7 do not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a
transaction through a public stock exchange.
There is uncertainty as to the application of
Bulletin 37 or previous rules under Bulletin 7. We face uncertainties as to the reporting and other implications of certain past and
future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries
or investments. Our company may be subject to filing obligations or taxes if our company is transferor in such transactions, and may
be subject to withholding obligations if our company is transferee in such transactions, under Bulletin 37 and Bulletin 7. For transfer
of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiary may be requested to assist in the filing
under Bulletin 37 and Bulletin 7. As a result, we may be required to expend valuable resources to comply with Bulletin 37 and Bulletin
7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our
company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of
operations.
We may be exposed to liabilities under
the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material
adverse effect on our business.
We are subject to the Foreign Corrupt Practice
Act (“FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and their officials
and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have
operations, have agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government
officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales
agents, or distributors of our subsidiaries, even though they may not always be subject to our control. It is our policy to implement
safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to
be less than effective, and the employees, consultants, sales agents, or distributors of our subsidiaries may engage in conduct for which
we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions,
and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In
addition, the U.S. government may seek to hold our subsidiaries liable for successor liability FCPA violations committed by companies
in which we invest or that we acquire.
RISKS RELATED TO OUR BUSINESS
If the COVID-19 pandemic is not effectively
controlled in a short period of time, our business operation and financial condition in the long-term may be materially and adversely
affected as a result of any slowdown in economic growth, operation disruptions or other factors that we cannot predict.
The spread of the novel coronavirus (“COVID-19”),
which was declared a pandemic by the World Health Organization in March 2020, has caused different countries and cities to mandate curfews,
including “shelter-in-place” and closures of most non-essential businesses as well as other measures to mitigate the spread
of the virus. All of our operating subsidiaries are located in China. Our Dalian facility’s operations were suspended in November
2021 due to the COVID-19 containment measures adopted by the local government. Hitrans’s production facility in Shangyu, Zhejiang
was also temporarily closed from December 9 to 24, 2021 to comply with the local lockdown policy in response to a surge of COVID-19 cases.
Although the COVID-19 pandemic has caused disruptions to our operations, it has had limited adverse impacts on our operating results
for the fiscal year ended December 31, 2021. We generated revenues of $52.7 million and $37.6 million for the fiscal years ended December
31, 2021 and 2020, respectively. We had a net profit of $61.6 million and net loss of $7.8 million in the fiscal years ended December
31, 2021 and 2020, respectively. However, the extent of the long-term adverse impact of COVID-19 on our business and operations is highly
uncertain and depends on several factors, such as the duration, severity, and geographic spread of the pandemic, development of the testing
and treatment and stimulus measures of the government, all of which are out of our control.
Given the uncertainty of the outbreak, the spread
of COVID-19 may be prolonged and worsened, and we may be forced to scale back or even suspend our operations. As COVID-19 spreads outside
China, the global economy is suffering a noticeable slowdown. As this outbreak persists, commercial activities throughout the world have
been curtailed with decreased consumer spending, business operation disruptions, interrupted supply chain, difficulties in travel and
reduced workforces. The duration and intensity of disruptions resulting from the COVID-19 outbreak is uncertain. It is unclear as to
when the outbreak will be contained, and we also cannot predict if the impact will be short-lived or long-lasting. The extent to which
outbreak impacts our long-term financial results will depend on its future developments. If the COVID-19 pandemic is not effectively
controlled in a short period of time, our long-term business operation and financial condition may be materially and adversely affected
as a result of any slowdown in economic growth, operation disruptions or other factors that we cannot predict.
Our independent auditors have expressed
substantial doubt about our ability to continue as a going concern.
Our independent auditors have added an explanatory
paragraph to their audit opinion issued in connection with our financial statements included in this annual report which states that
the financial statements were prepared assuming that we would continue as a going concern. As discussed in Note 1 to the consolidated
financial statements included herein, we had negative cash flows from operating activities, accumulated deficit from recurring net losses
incurred for the prior years and significant short-term debt obligations maturing in less than one year as of December 31, 2021. These
conditions raise substantial doubt about our ability to continue as a going concern. We plan to renew our bank borrowings upon maturity
and raise additional funds through bank borrowings and equity financing to meet our daily cash demands. However, there can be no assurance
that we will be successful in obtaining the financing. The audited consolidated financial statements included in this report do not include
any adjustments that might result from the outcome of this uncertainty.
The acquisition of a controlling interest
in Hitrans may fail to result in anticipated benefits but has involved significant investment and commitment of financial and other resources.
We consummated the acquisition of 81.56% of registered
equity interests (representing 75.57% of paid-up capital) in Hitrans in November 2021. However, acquisitions generally create risks such
as (i) the need to integrate and manage the businesses and products acquired with our own business and products; (ii) additional demands
on our resources, systems, procedures and controls; (iii) disruption of our ongoing business; (iv) potential unknown or unquantifiable
liabilities associated with the target company; and (v) diversion of management’s attention from other business concerns. Moreover,
this acquisition involved substantial investment of funds from our previous equity financings, resulted in one-time charges and expenses
and subjected us to contractual obligations to pay outstanding subscribed registered capital of Hitrans of RMB99.8 million by May 31,
2025. This acquisition may not be successful in generating revenue, income or other returns, and any resources we committed will not
be available to us for other purposes. Moreover, if we are unable to access the capital markets on acceptable terms or at all, or generate
sufficient operating income, we may not be able to perform our obligations to pay outstanding subscribed registered capital of Hitrans
as agreed. Our inability to take advantage of growth opportunities or address risks associated with this acquisition and investment may
negatively affect our operating results.
Additionally, any impairment of goodwill or other
intangible assets acquired in an acquisition or charges to earnings associated with any acquisition or investment activity, may
materially reduce our earnings. This acquisition may not result in its anticipated benefits, and we may not be able to properly integrate
acquired products, technologies or businesses with our existing products and operations or successfully combine personnel and cultures.
Failure to do so could deprive us of the intended benefits of this acquisition.
There are inherent risks associated with
new product development and our efforts to develop and market new products could fail.
In June 2020, our wholly-owned subsidiary, BAK
Asia entered into a framework investment agreement with Gaochun EDZ, pursuant to which intend to develop certain lithium battery projects
which are expected to have a total production capacity of 8 GWh per year. We have put into operation a production line of model 32140
large-sized cylindrical “tabless” batteries with a production capacity of 0.7 GWh per year in 2021. Model 32140 batteries
can be used in light electric vehicles, electric vehicles, electric tools and energy storage.
However, we cannot provide assurance that market
acceptance of this new product will occur due to the highly competitive nature of the business. The Company competes in the battery industry
where there are frequent introductions of new products and line extensions and such product introductions often require significant investment
and support. The ability of the Company to understand end user needs and preferences is key to maintaining and improving the competitiveness
of its product offerings. The development and introduction of new products, as well as the renovation of current products and product
lines, require substantial and effective research, development and marketing expenditures, which the Company may be unable to recoup
if the new or renovated products do not gain widespread market acceptance. There are inherent risks associated with new product development
and marketing efforts, including product development or launch delays, product performance issues during development, changing regulatory
frameworks that affect the new products in development and the availability of key raw materials included in such products. These inherent
risks could result in the failure of new products and product line extensions to achieve anticipated levels of market acceptance, additional
costs resulting from failed product introductions and the Company not being first to market. As the Company continues to focus on innovation
and renovation of its products, the Company’s business, financial condition or results of operations could be adversely affected
in the event that the Company is not able to effectively develop and introduce new or renovated products and line or brand extensions.
Our failure, if any, to keep up with rapid
technological changes and evolving industry standards may cause our products to become obsolete and less marketable, resulting in loss
of market share to our competitors.
The lithium-based battery market, as well as
the battery materials industry, are characterized by changing technologies and evolving industry standards, which are difficult to predict.
This, coupled with frequent introduction of new products and models, has shortened product life cycles and may render our products obsolete
or unmarketable. Our ability to adapt to evolving industry standards and anticipate future standards will be a significant factor in
maintaining and improving our competitive position and our prospects for growth. To achieve this goal, we have invested and plan to continue
investing significant financial resources in our R&D infrastructure. Currently, we have facilities in Dalian, Nanjing and Shaoxing,
China, which have about 121 R&D staffers and over 4,000 square meters of space dedicated to R&D activities.
R&D activities, however, are inherently uncertain,
and we might encounter practical difficulties in commercializing our research results. Accordingly, our significant investment in our
R&D infrastructure may not bear fruit. On the other hand, our competitors may improve their technologies or even achieve technological
breakthroughs that would render our products obsolete or less marketable. Therefore, our failure to effectively keep up with rapid technological
changes and evolving industry standards by introducing new and enhanced products may cause us to lose our market share and to suffer
a decrease in our revenue.
Our efforts to enter into the light electric
vehicle business could fail.
On September 24, 2020, our wholly-owned Hong
Kong subsidiary, BAK Investments entered into a framework investment agreement with Gaochun EDZ, under which we intended to develop light
electric vehicle projects. On November 9, 2020, we established our new subsidiary, Nanjing Daxin to launch and develop our light electric
vehicle business.
There are risks and uncertainties associated
with this effort, particularly given that the light electric vehicle market is evolving. In developing and commercializing this new line
of business, we may have to invest significant time and resources. External factors, such as regulatory compliance obligations, competitive
alternatives, lack of market acceptance and shifting market preferences, may also affect the successful implementation of this new line
of business. Failure to successfully plan for and manage these risks in the development and implementation of this new line of business
could have a material adverse effect on our business, financial condition and results of operations.
Maintaining our R&D activities and
manufacturing operations require significant capital expenditures, and our inability or failure to maintain our operations could have
a material adverse impact on our market share and ability to generate revenue.
We incurred capital expenditures of approximately
$17.5 million and $19.2 million for the years ended December 31, 2020 and 2021, respectively. We may incur significant additional
capital expenditures as a result of unanticipated expenses, regulatory changes and other events that impact our business. If we are unable
or fail to timely obtain capital on acceptable terms and adequately maintain our manufacturing capacity, we could lose customers and
there could be a material adverse impact on our market share and our ability to generate revenue.
We face intense competition from other
battery manufacturers and cathode material and precursor producers, many of which have significantly greater resources.
The market for batteries used in electric vehicles
and light electric vehicles is intensely competitive and is characterized by frequent technological changes and evolving industry standards.
We expect competition to become more intense. Increased competition may result in declines in average selling prices, causing a decrease
in gross profit margins. We have faced and will continue to face competition from manufacturers of traditional rechargeable batteries,
such as lead-acid batteries other manufacturers of lithium-ion batteries, as well as from companies engaged in the development of batteries
incorporating new technologies. Other manufacturers of high-power lithium batteries currently include Panasonic Corporation, Samsung
Electronics Co., Ltd., LG Chem, Tianjin Lishen Battery Joint Stock Co., Ltd., Contemporary Amperex Technology Co., Limited, BYD Co. Ltd,
Hefei Guoxuan Hi-Tech Power Energy Co., Ltd and Shandong Goldencell Electronics Technology Co., Ltd.
Many of these existing competitors have greater
financial, personnel, technical, manufacturing, marketing, sales and other resources than we do. As a result, these competitors may be
in a stronger position to respond quickly to market opportunities, new or emerging technologies and evolving industry standards. Many
of our competitors are developing a variety of battery technologies, such as lithium polymer, prismatic cells and fuel cell batteries,
which are expected to compete with our existing product lines. Other companies undertaking R&D activities of solid-polymer lithium-ion
batteries have developed prototypes and are constructing commercial scale production facilities. It is possible that our competitors
will be able to introduce new products with more desirable features than ours and their new products will gain market acceptance. If
our competitors successfully do so, we may not be able to maintain our competitive position and our future success would be materially
and adversely affected.
The market for cathode materials and precursors
has been evolving rapidly. Rapid and ongoing changes in technology and product standards could render our cathode materials and precursor
products less competitive, or even obsolete, particularly if we fail to continue to improve the performance of our cathode materials
and precursor products. Competing technologies that outperform our cathode materials and precursor products in one or more performance
attributes could be developed and successfully introduced. We are aware of certain companies, including Sumitomo Metal Mining Co., Ltd.,
Umicore N.V., Beijing Easpring Material Technology Co., Ltd. and Ningbo Ronbay Lithium Battery Material Co., Ltd. using cell chemistry
technology similar to our technology and these or other companies have introduced or could introduce products that compete directly with
our products and could in the future outperform our products in one or more performance attributes, could be offered to our customers
as a cheaper alternative to our products or may result in increased pricing pressure on our products.
We are dependent on a limited number of
customers for a significant portion of our revenues and this dependence is likely to continue.
We have been dependent on a limited number of
customers for a significant portion of our revenue. Our top five customers accounted for approximately 54.0% and 80.0% of our revenues
for the years ended December 31, 2021 and 2020, respectively. Dependence on a few customers could make it difficult to negotiate attractive
prices for our products and could expose us to the risk of substantial losses if a single dominant customer stops purchasing our products.
We expect that a limited number of customers will continue to contribute a significant portion of our sales in the near future. Our ability
to maintain close relationships with these top customers is essential to the growth and profitability of our business. If we fail to
sell our products to one or more of these top customers in any particular period, or if a large customer purchases fewer of our products,
defers orders or fails to place additional orders with us, or if we fail to develop additional major customers, our revenue could decline,
and our results of operations could be adversely affected.
In addition to our own production, we also
rely on a few battery suppliers to fulfill our customers’ orders. If we fail to effectively manage our relationships with, or lose
the services of these suppliers and we cannot substitute suitable alternative suppliers, our operations would be materially adversely
affected.
We generate part of our revenues by outsourcing
some of our customers’ orders to Zhengzhou BAK New Energy Vehicle Co., Ltd (“BAK New Energy”), Shenzhen BAK Battery
Co., Ltd (“Shenzhen BAK”) and a few other suppliers for certain battery models that we do not produce. If our business relationship
with BAK New Energy, Shenzhen BAK and other suppliers changes negatively or their financial condition deteriorates, or their operating
environment changes, our business may be harmed in many ways. BAK New Energy, Shenzhen BAK and other suppliers may also unilaterally
terminate battery supply to us or increase the prices. As a result, we are not assured of an uninterrupted supply of certain types of
high-power lithium batteries of acceptable quality or at acceptable prices from BAK New Energy, Shenzhen BAK or other suppliers. On the
other hand, we may not be able to substitute them with suitable alternative contract manufacturers in a timely manner on commercially
acceptable term or at all. We may be forced to default on the agreements with our customers. This may negatively impact our revenues
and adversely affect our reputation and relationships with our customers, causing a material adverse effect on our financial condition,
results of operations and prospects.
Failure by us to maintain and strengthen relationships with
certain contract battery material producer may materially adversely affect our ability to fulfill customer orders and our results of
operations.
We outsource the production of a portion of our
battery material products to a third-party supplier in Xianyang city, Shaanxi province. Our ability to meet the demands of our customers
for battery material products would be affected, if our relationship with this supplier changes negatively, or operations at this supplier
are disrupted. In the event of a significant disruption to the battery material production line of this supplier, our proprietary manufacturing
facility in Shangyu, Zhejiang province, may not have sufficient production capacity to meet demand until the supplier’s production
line returns to operation. On the other hand, we may not be able to replace this supplier with suitable alternative contract manufacturers
in a timely manner on commercially acceptable term or at all. We may be forced to default on orders with our customers. This could negatively
impact our revenues and adversely affect our reputation and relationships with our customers, causing a material adverse effect on our
financial condition, results of operations and prospects.
Our business depends on the growth in demand
for light electric vehicles, electric vehicles, electric tools, energy storage, such as UPS application, and other high-power electric
devices.
As the demand for our battery cell and battery
materials is directly related to the market demand for high-power electric devices, a fast-growing high-power electric devices market
will be critical to the success of our business. In anticipation of an expected increase in the demand for high-power electric devices
such as electric vehicles, light electric vehicles, electric tools, and energy storage including UPS application in the next few years,
we are building new manufacturing facilities in Nanjing and have invested in the R&D capability of our newly acquired battery materials
business. However, the markets we have targeted, primarily those in the PRC, may not achieve the level of growth we expect. If this market
fails to achieve our expected level of growth, we may have excess production capacity and may not be able to generate enough revenue
to maintain our profitability.
Our success, in part, depends on the success
of manufacturers of the end applications that use our products, and our failure to gain acceptance of our products from such manufacturers
could materially and adversely affect our results of operations and profitability.
As we target the battery markets for light electric
vehicles, electric vehicles, electric tools, energy storage including but not limited to UPS application, and other high-power electric
devices, our future success in part depends on whether end-application manufacturers are willing to use batteries that incorporate our
products. To secure acceptance of our products, we must constantly develop and introduce more reliable and cost-effective battery cells
and battery materials with enhanced functionality to meet evolving industry standards. Our failure to gain acceptance of our products
from these manufacturers could materially and adversely affect our future success. From 2017 to 2019, our electric vehicle customers
included Dongfeng Autos, Dayun Motor and Yema Auto. Since then, however, our sales to electric vehicle customers have decreased significantly
and we only generated approximately $0.2 million revenues from electric vehicle customers in 2021. On the other hand, we cannot guarantee
that the market demand for the cathode materials and precursors will maintain the current growth rate.
Even if a manufacturer decides to use batteries
that incorporate our products, the manufacturer may not be able to market and sell its products successfully. The manufacturer’s
inability to market and sell its products successfully, whether from lack of market acceptance or otherwise, could materially and adversely
affect our business and prospects because this manufacturer may not order new products from us. If we cannot achieve the expected level
of sales, we will not be able to make sufficient profits to offset the expenditures we have incurred to expand our production capacity
or develop new technologies, nor will we be able to grow our business. Accordingly, our business, financial condition, results of operations
and future success would be materially and adversely affected.
We extend relatively long payment terms
to some large customers.
As is customary in the battery industry in the
PRC, we extend relatively long payment terms to some large customers. In 2021, it generally took 60 days for us to collect payments from
our major customers. Due to the large size of many of our orders, these extended terms may adversely affect our cash flow and our ability
to fund our operations out of our operating cash flows.
While our revenue grew by $15.1 million, or 40%
for the year ended December 31, 2021 compared to the prior year, our trade accounts and bills receivable increased by $20.3 million,
or 69% as of December 31, 2021 compared to that as of December 31, 2020. Although we attempt to establish appropriate reserves for our
receivables, those reserves may not prove to be adequate in view of large amounts of accounts receivable and actual levels of bad debts.
The failure of our customers to pay us timely would negatively affect our working capital, which could in turn adversely affect our cash
flows.
Our customers often place large orders for products,
requiring fast delivery, which impacts our working capital. If our customers do not incorporate our products into their products and
sell them in a timely fashion, for example, due to excess inventories, sales slowdowns or other issues, they may not pay us in a timely
fashion, even on our extended terms. Our customers’ failure to pay may force us to defer or delay further product orders, which
may adversely affect our cash flows, sales or income in subsequent periods.
We may not be able to accurately plan our
production based on our sales contracts, which may result in excess product inventory or product shortages.
Our sales contracts for battery cells typically
provide for a non-binding, three-month forecast on the quantity of products that our customers may purchase from us. Our sales contracts
for battery materials typically provide for a non-binding, two-month forecast on the quantity of products that our customers may purchase
from us. We typically have only a 15-day to 30-day lead time to manufacture battery cell products and 25-day lead time to produce battery
material products to meet our customers’ requirements once our customers place orders with us. To meet the short delivery deadline,
we generally make significant decisions on our production level and timing, procurement, facility requirements, personnel needs and other
resources requirements based on our estimate in light of this forecast, our past dealings with such customers, market conditions and
other relevant factors. Our customers’ final purchase orders may not be consistent with our estimates. If the final purchase orders
substantially differ from our estimates, we may have excess product inventory or product shortages. Excess product inventory could result
in unprofitable sales or write-offs as our products are susceptible to obsolescence and price declines. Producing additional products
to make up for any product shortages within a short time frame may be difficult, making us unable to fill out the purchase orders. In
either case, our results of operation would fluctuate from period to period.
We may not be able to substantially increase
our manufacturing output in order to maintain our cost competitiveness.
We believe that our ability to provide cost-effective
products is one of the most significant factors that contributed to our past success and will be essential for our future growth. We
believe this is one of our competitive advantages over our Japanese and Korean competitors. We need to increase our manufacturing output
to a level that will enable us to substantially reduce the cost of our products on a per unit basis through economies of scale. However,
our ability to substantially increase our manufacturing output is subject to significant constraints and uncertainties, including:
|
● |
the need to raise significant additional funds to purchase and prepay
raw materials or to build additional manufacturing facilities, which we may be unable to obtain on reasonable terms or at all; |
|
|
|
|
● |
delays and cost overruns as a result of a number of factors, many of
which may be beyond our control, such as increases in raw material prices and problems with equipment vendors; |
|
|
|
|
● |
delays or denial of required approvals by relevant government authorities; |
|
|
|
|
● |
diversion of significant management attention and other resources;
and |
|
|
|
|
● |
failure to execute our expansion plan effectively. |
If we are unable to increase our manufacturing
output because of any of the risks described above, we may be unable to maintain our competitive position or achieve the growth we expect.
Moreover, even if we expand our manufacturing output, we may not be able to generate sufficient customer demand for our products to support
our increased production output.
We may incur significant costs because
of the warranties we supply with our battery cell products.
With respect to the sale of our battery products,
we typically offer warranties against any defects due to product malfunction or workmanship for a period of six months-to-eight years
from the date of purchase, including a period of six to twenty-four months for battery cells, and a period of twelve to twenty-seven
months for battery modules for electric bicycles, and a period of three years to eight years (or 120,000 or 200,000 km if reached sooner)
for battery modules for electric vehicles. We provide a reserve for these potential warranty expenses, which is based on an analysis
of historical warranty issues. There is no assurance that future warranty claims will be consistent with past history, and in the
event that we experience a significant increase in warranty claims, there is no assurance that our reserves will be sufficient. This
could have a material adverse effect on our business, financial condition and results of operations.
We do not have product liability insurance
for claims against our product quality. Defects in our products could result in a loss of customers and decrease in revenue, unexpected
expenses and a loss of market share.
We have not purchased product liability insurance
to provide against any claims against us based on our product quality. As a result, defects in our products could result in a loss of
customers and decrease in revenue, unexpected expenses and a loss of market share, and any of our products are found to have reliability,
quality or compatibility problems, we will be required to accept returns, provide replacements, provide refunds, or pay damages. We may
be required to incur substantial amounts to indemnify our customers in respect of their product quality claims against us, which would
materially and adversely affect the results of our operations and severely damage our reputation.
We do not have insurance coverage against all the damages or
losses of our facilities.
We currently have insurance coverage for certain
pledged machinery and equipment and pledged buildings located at our facilities in Dalian. We expect we will purchase related insurance
for the remaining buildings when we obtain their property ownership certificates. If we were to suffer any losses or damages to any of
the facilities before the purchase of insurance policies that provide adequate coverage, our business, financial condition and results
of operations may be materially and adversely affected.
In addition, Hitrans maintains property insurance
coverage against certain property and inventory damages and losses. However, such insurance may not adequately compensate it for any
such losses and will not address a loss of customers as a result of property damages and consequent disruptions to operations or may
have large deductibles insufficient to support its continuing operations. If damages or losses exceed the insurance coverage, it may
not be able to return to operation for an extended period of time, potentially even threatening its viability. In addition, insurance
coverage is expensive, may be difficult to obtain and may not be available in the future on acceptable terms or at all. A significant
increase in the cost of insurance coverage could adversely affect our business, financial condition and results of operations.
We depend on third parties to supply key
raw materials and components to us. Failure to obtain a sufficient supply of these raw materials and components in a timely fashion and
at reasonable costs could significantly delay our production and shipments, which would cause us to breach our sales contracts with our
customers.
We purchase from Chinese domestic suppliers for
certain key raw materials and components such as electrolytes, electrode materials and separators for our battery cell products
and purchase from Chinese domestic suppliers for cobaltous sulfates, manganese sulfates, lithium hydroxides, lithium carbonates and liquid
nickel sulfates. We have purchased raw materials and components on the basis of purchase orders. In the absence of firm and long-term
contracts, we may not be able to obtain a sufficient supply of these raw materials and components from our existing suppliers or alternates
in a timely fashion or at a reasonable cost. If we fail to secure a sufficient supply of key raw materials and components in a timely
fashion, it would result in a significant delay in our production and shipments, which may cause us to breach our sales contracts with
our customers. Furthermore, failure to obtain sufficient supply of these raw materials and components at a reasonable cost could also
harm our revenue and gross profit margins.
Fluctuations in prices and availability
of raw materials, particularly Ni, Co, Mn, Li2CO3, LiPF6 and LiFePO4, could increase our costs or cause delays in shipments, which would
adversely impact our business and results of operations.
Our operating results could be adversely affected
by increases in the cost of raw materials, particularly Ni, Co, Mn, Li2CO3, LiPF6 and LiFePO4, the primary cost component of our battery
products, battery material products or other product parts or components. The price of Ni, Co, Mn, Li2CO3, LiPF6 and LiFePO4 is not stable.
For example, we recently experienced significant increases in the costs of nickel and cobalt, as a result of the current Ukrainian-Russian
conflict, as well as in the cost of lithium carbonate due to large market demand and supply imbalance. Although we are not dependent
on single suppliers for supply of raw materials, we mostly purchase raw materials through individual purchase orders or short-term contracts
and not pursuant to long-term contracts. As such, our third-party suppliers may not be able to satisfy our requirements during a period
of sustained or growing demand.
In addition, our battery cell products historically
have not been able to fully offset the effects of higher costs of raw materials through price increases to customers or by way of productivity
improvements. As a result, a significant increase in the price of one or more raw materials, parts or components or the inability to
successfully implement price increases/surcharges to mitigate such cost increases could have a material adverse effect on our results
of operations.
We do not have long-term purchase commitments
from our customers, which may result in significant uncertainties and volatility with respect to our revenue from period to period.
We do not have long-term purchase commitments
from our customers and the term of our sales contracts with our customers is typically one year or less. Furthermore, these contracts
leave certain major terms such as price and quantity of products open to be determined in each purchase order. These contracts also allow
parties to re-adjust the contract price for substantial changes in market conditions. As a result, if our customers hold stronger bargaining
power than us or the market conditions are in their favor, we may not be able to enjoy the price downside protection or upside gain.
Furthermore, our customers may decide not to continue placing purchase orders with us in the future at the same level as in prior periods.
As a result, our results of operations may vary from period to period and may fluctuate significantly in the future.
Compliance with environmental regulations
can be expensive, and our failure to comply with these regulations may result in adverse publicity and a material adverse effect on our
business.
As a manufacturer, we are subject to various
PRC environmental laws and regulations on air emission, wastewater discharge, solid waste and noise. Although we believe that our operations
are in substantial compliance with current environmental laws and regulations, we may not be able to comply with these regulations at
all times as the PRC environmental legal regime is evolving and becoming more stringent. Therefore, if the PRC government imposes more
stringent regulations in the future, we will have to incur additional substantial costs and expenses in order to comply with new regulations,
which may negatively affect our results of operations. If we fail to comply with any of the present or future environmental regulations
in material aspects, we may suffer from negative publicity and may be required to pay substantial fines, suspend or even cease operations.
Failure to comply with PRC environmental laws and regulations may materially and adversely affect our business, financial condition and
results of operations.
We face risks associated with the marketing,
distribution and sale of our products internationally, and if we are unable to effectively manage these risks, they could impair our
ability to expand our business abroad.
For the years ended December 31, 2021 and 2020,
we derived 17% and 5.6%, respectively, of our sales from outside the PRC mainland. We deem overseas market as an important revenue source
for us, and have been actively exploring overseas customers. The marketing, international distribution and sale of our products expose
us to a number of risks, including:
|
● |
fluctuations in currency exchange rates; |
|
|
|
|
● |
difficulty in engaging and retaining distributors that are knowledgeable
about, and can function effectively in, overseas markets; |
|
|
|
|
● |
increased costs associated with maintaining marketing efforts in various
countries; |
|
|
|
|
● |
difficulty and cost relating to compliance with the different commercial
and legal requirements of the overseas markets in which we offer our products; |
|
|
|
|
● |
inability to obtain, maintain or enforce intellectual property rights;
and |
|
|
|
|
● |
trade barriers such as export requirements, tariffs, taxes and other
restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries. |
Our business depends substantially on the
continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lost their services.
Our future success heavily depends on the continued
service of our senior executives and other key employees. In particular, we rely on the expertise and experience of our Chairman, Chief
Executive Officer, President Mr. Yunfei Li and our Interim Chief Financial Officer, Ms. Xiangyu Pei. If one or more of our other senior
executives are unable or unwilling to continue to work for us in their present positions, we may encounter similar problems, but on a
compounded basis. Moreover, if any of our current or former senior executives joins a competitor or forms a competing company, we may
lose customers, suppliers, know-how and key personnel. Each of our executive officers has entered into an employment agreement with us,
which contains non-competition and confidentiality clauses. However, if any dispute arises between our current or former executive officers
and the Company, it is hard to predict the extent to which any of these agreements could be enforced in China, where these executive
officers reside, in light of the uncertainties with China’s legal system.
We have experienced significant management
changes which could increase our control risks and have a material adverse effect on our ability to do business and our results of operations.
Since 2009, we have had a number of changes in
our senior management, including multiple changes in our Chief Financial Officer. The magnitude of these past and potential changes and
the short time interval in which they have occurred or may occur, particularly during a time of economic or financial crisis, add to
the risks of control failures, including a failure in the effective operation of our internal control over financial reporting or our
disclosure controls and procedures. Control failures could result in material adverse effects on our financial condition and results
of operations. It may take time for the new management team to become sufficiently familiar with our business and each other to effectively
develop and implement our business strategies. The turnover of key management positions could further harm our financial performance
and results of operations. Management attention may be diverted from regular business concerns by reorganizations.
We have identified material weaknesses
in our internal control over financial reporting. If we fail to remediate the material weaknesses or maintain an effective system of
internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor
confidence and the market price of our shares may be adversely affected.
To implement Section 404 of the Sarbanes-Oxley
Act of 2002, or SOX 404, the SEC adopted rules requiring public companies to include a report of management on the company’s internal
control over financial reporting in their annual reports on Form 10-K. Under current law, we are subject to the requirement that we maintain
internal controls and that management perform periodic evaluation of the effectiveness of the internal controls, assuming our filing
status remains as a smaller reporting company. A report of our management is included under Item 9A of this annual report. Our management
has identified the following material weakness in our internal control over financial reporting: we did not have appropriate policies
and procedures in place to evaluate the proper accounting and disclosures of key documents and agreements, and there was insufficient
accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of accounting principles
generally accepted in the United States of America, or U.S. GAAP, commensurate with our financial reporting requirements. A “material
weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented
or detected on a timely basis. We have taken measures and plan to continue to take measures to remedy this material weakness. Since September
2016, we have regularly offered our financial personnel trainings on internal control and risk management. Since November 2016, we have
regularly provided trainings to our financial personnel on U.S. GAAP accounting guidelines. However, the implementation of these measures
may not fully address the material weakness in our internal control over financial reporting. Our failure to address any control deficiency
could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting
requirements and related regulatory filings on a timely basis. Moreover, effective internal control over financial reporting is important
to prevent fraud. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of
our shares, may be materially and adversely affected.
RISKS RELATED TO COMMON STOCK
Numerous factors, many of which are beyond
our control, may cause the market price of common stock to fluctuate significantly.
There are numerous factors, many of which are
beyond our control, may cause the market price of common stock of CBAK Energy Technology, Inc. to fluctuate significantly. These factors
include:
|
● |
our earnings releases, actual or anticipated changes in our earnings,
fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors; |
|
|
|
|
● |
changes in financial estimates by us or by any securities analysts
who might cover the common stock; |
|
|
|
|
● |
speculation about our business in the press or the investment community; |
|
|
|
|
● |
significant developments relating to our relationships with our customers
or suppliers; |
|
|
|
|
● |
stock market price and volume fluctuations of other publicly traded
companies and, in particular, those that are in our industries; |
|
|
|
|
● |
customer demand for our products; |
|
|
|
|
● |
investor perceptions of our industry in general and our company in
particular; |
|
|
|
|
● |
the operating and stock performance of comparable companies; |
|
|
|
|
● |
general economic conditions and trends; |
|
|
|
|
● |
major catastrophic events; |
|
|
|
|
● |
announcements by us or our competitors of new products, significant
acquisitions, strategic partnerships or divestitures; |
|
|
|
|
● |
changes in accounting standards, policies, guidance, interpretation
or principles; |
|
|
|
|
● |
loss of external funding sources; |
|
|
|
|
● |
sales of our shares, including sales by our directors, officers or
significant shareholders; and |
|
|
|
|
● |
additions or departures of key personnel. |
In the past, shareholders of a public company
often brought securities class action suits against the company following periods of instability in the market price of that company’s
securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and
other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses
to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise
capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which
could have a material adverse effect on our financial condition and results of operations.
Techniques employed by short sellers
may drive down the market price of the common stock of CBAK Energy Technology, Inc.
Short selling is the practice of selling securities
that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later
date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale
of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase
than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers
publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create
negative market momentum and generate profits for themselves after selling a security short. These short attacks
have, in the past, led to selling of shares in the market.
Public companies that have substantially all
of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered on
allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities
and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a
result, a number of targets of such efforts are now conducting internal and external investigations into the allegations and, in the
interim, are subject to shareholder lawsuits and/or SEC enforcement actions.
We have become the subject of certain unfavorable
allegations. Although we believe such allegations are untrue, inaccurate or inflated, we have expended resources to investigate such
allegations and defend ourselves and we may need to expend more resources in connection with these allegations in the future, which could
be costly and time-consuming and could distract our management from growing our business. The allegations against us may severely impact
our stock price and disrupt our business operations. Any investment in the common stock of CBAK Energy Technology, Inc. could be greatly
reduced or even rendered worthless due to such allegations.
If we fail to comply with the continued
listing requirements of NASDAQ, we would face possible delisting, which would result in a limited public market for shares of CBAK Energy
Technology, Inc. and make obtaining future debt or equity financing more difficult for us.
CBAK Energy Technology, Inc.’s common stock
is traded and listed on the NASDAQ Capital Market under the symbol “CBAT”, which was changed from “CBAK” on November
30, 2018. The common stock may be delisted if we fail to maintain certain NASDAQ listing requirements.
On February 20, 2020, we received notice from
the Listing Qualifications Department of The NASDAQ Stock Market (“Nasdaq”) indicating that, for the last 30 consecutive
business days, the bid price for the common stock had closed below the minimum $1.00 per share and as a result, CBAK Energy Technology,
Inc. was no longer in compliance with the NASDAQ Listing Rule 5550(a)(2). We regained compliance with the minimum bid price rule on October
2, 2020.
We cannot assure you that CBAK Energy Technology,
Inc. will continue to comply with the requirements for continued listing on the NASDAQ Capital Market in the future. If the common stock
loses its status on the NASDAQ Capital Market, the common stock would likely trade in the over-the-counter market. If our shares were
to trade on the over-the-counter market, selling the common stock could be more difficult because smaller quantities of shares would
likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in
the event the common stock is delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers
from effecting transactions in the common stock, further limiting the liquidity of the common stock. These factors could result in lower
prices and larger spreads in the bid and ask prices for the common stock. Such delisting from the NASDAQ Capital Market and continued
or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or
debt financing and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other
transactions.
You may experience dilution to the extent
that shares of the common stock are issued upon the exercise of outstanding warrants or other securities that CBAK Energy Technology,
Inc. may issue in the future.
You may experience dilution to the extent that
shares of the common stock are issued upon the exercise of outstanding warrants of CBAK Energy Technology, Inc., and if CBAK Energy Technology,
Inc. issues additional equity securities, or there are any issuances and subsequent exercises of stock options issued in the future.
On February 10, 2021, pursuant to that certain
Securities Purchase Agreement, dated February 8, 2021, CBAK Energy Technology, Inc. issued to certain investors (i) in a private placement,
Series A-1 warrants to purchase a total of 4,469,988 shares of common stock, at a per share exercise price of $7.67 and exercisable for
42 months from the date of issuance; (ii) in a registered direct offering, certain Series B warrants to purchase a total of 4,469,988
shares of common stock, at a per share exercise price of $7.83 and exercisable for 90 days from the date of issuance; and (iii) in the
registered direct offering, certain Series A-2 warrants to purchase up to 2,234,992 shares of common stock, at a per share exercise price
of $7.67 and exercisable for 45 months from the date of issuance. On May 10, 2021, we entered into that Amendment No. 1 to the Series
B Warrant with each of the holders of the Series B warrants, pursuant to which the expiration date of the Series B warrants was extended
from May 11, 2021 to August 31, 2021. On September 1, 2021, all of the Series B warrants and Series A-2 warrants had expired.
Prior to that, in December 2020, CBAK Energy
Technology, Inc. issued to the same investors warrants to purchase an aggregate of 3,795,920 shares of common stock at an exercise price
of $6.46 per share. These warrants are exercisable until 36 months after the date of issuance. The exercise prices of all of the above
warrants are subject to full-ratchet anti-dilution adjustment in the case of future issuances or deemed issuances of shares of common
stock below the warrants’ exercise price then in effect, as well as customary adjustment in case of stock splits, stock dividends,
stock combinations and similar recapitalization transactions. In addition, CBAK Energy Technology, Inc. issued to Mr. Jian Ke placement
agent warrants to purchase up to 379,592 shares of common stock at an exercise price of $6.475 per share in December 2020 and the placement
agent warrant to purchase up to 446,999 shares of common stock at an exercise price of $9.204 per share in February 2021. These warrants
also bear customary anti-dilution protections in the event of stock dividends or splits, business combination, sale of assets, similar
recapitalization transactions, or other similar transactions.
Our directors and executive officers, collectively,
own approximately 12.78% of outstanding common stock of CBAK Energy Technology, Inc. and may possess significant influence in or control
over our management and affairs.
Mr. Yunfei Li, our president and chief executive
officer and chairman of our board, and our other executive officers and directors beneficially own an aggregate of 12.78% of outstanding
common stock of CBAK Energy Technology, Inc. as of April 9, 2022. As a result, our directors and executive officers, acting together,
may have significant influence in or control over our management and affairs, including the election of directors and approval of significant
corporate transactions, such as mergers, consolidation, and sale of all or substantially all of our assets. Consequently, this concentration
of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination
involving us, even if such a change of control would benefit our stockholders.
GENERAL RISK FACTORS
If we cannot continue to develop new products
in a timely manner, and at favorable margins, we may not be able to compete effectively.
The battery industry has been notable for the
pace of innovations in product life, product design and applied technology. We have made, and will continue to make, investments in research
and development with the goal of further innovation. The successful development and introduction of new products and line extensions
face the uncertainty of customer acceptance and reaction from competitors, as well as the possibility of cannibalization of sales of
our existing products. In addition, our ability to create new products and line extensions and to sustain existing products is affected
by whether we can:
|
● |
develop and fund research and technological innovations; |
|
|
|
|
● |
receive and maintain necessary intellectual property protections; |
|
|
|
|
● |
obtain governmental approvals and registrations; |
|
|
|
|
● |
comply with governmental regulations; and |
|
|
|
|
● |
anticipate customer needs and preferences successfully. |
The failure to develop and launch successful
new products could hinder the growth of our business and any delay in the development or launch of a new product could also compromise
our competitive position. If competitors introduce new or enhanced products that significantly outperform ours, or if they develop or
apply manufacturing technology which permits them to manufacture at a significantly lower cost relative to ours, we may be unable to
compete successfully in the market segments affected by these changes.
A change in our product mix may cause our
results of operations to differ substantially from the anticipated results in any particular period.
Our overall profitability may not meet expectations
if our products, customers or geographic mix are substantially different than anticipated. Our profit margins vary among products, customers
and geographic markets. Consequently, if our mix of any of these is substantially different from what is anticipated in any particular
period, our profitability could be lower than anticipated.
Manufacturing or use of our products may
cause accidents, which could result in significant production interruption, delay or claims for substantial damages.
Due to the high energy density inherent in lithium-based
batteries, our batteries can pose certain safety risks, including the risk of fire. Although we incorporate safety procedures in the
research, development, manufacture and transportation of batteries that are designed to minimize safety risks, the manufacture or use
of our products may still cause accidents. Any accident, whether occurring at the manufacturing facilities or from the use of our products,
may result in significant production interruption, delays or claims for substantial damages caused by personal injuries or property damages.
We may face impairment charges if economic
environments in which our businesses operate and key economic and business assumptions substantially change.
Assessment of the potential impairment of property,
plant and equipment and other identifiable intangible assets is an integral part of our normal ongoing review of operations. Testing
for potential impairment of long-lived assets is dependent on numerous assumptions and reflects our best estimates at a particular point
in time, which may vary from testing date to testing date. The economic environments in which our businesses operate and key economic
and business assumptions with respect to projected product selling prices and materials costs, market growth and inflation rates, can
significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results.
Changes in factors and assumptions used in assessing potential impairments can have a significant impact on both the existence and magnitude
of impairments, as well as the time at which such impairments are recognized. Future changes in the economic environment and the economic
outlook for the assets being evaluated could also result in impairment charges. Any significant asset impairments would adversely impact
our financial results.
We may be exposed to infringement or misappropriation
claims by third parties, which, if determined adversely to us, could cause our loss of significant rights and inability to continue providing
our existing product offerings.
Our success also depends largely on our ability
to use and develop our technology and know-how without infringing the intellectual property rights of third parties. The validity and
scope of claims relating to lithium-ion battery technology patents involve complex scientific, legal and factual questions and analysis
and, therefore, may be highly expensive and time-consuming. If there is a successful claim of infringement against us, we may be required
to pay substantial damages to the party claiming infringement, develop non-infringing technologies or enter into royalty or license agreements
that may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary
rights on a timely basis would harm our business. Protracted litigation could result in our customers, or potential customers, deferring
or limiting their purchase or use of our products until resolution of such litigation. Parties making the infringement claim may also
obtain an injunction that can prevent us from selling our products or using technology that contains the allegedly infringing contents.
Any intellectual property litigation could have a material adverse effect on our business, results of operation and financial condition.
The success of our business depends on
our ability to attract, train and retain highly skilled employees and key personnel.
Because of the highly specialized, technical
nature of our business, we must attract, train and retain a sizable workforce comprising highly skilled employees and other key personnel.
Since our industry is characterized by high demand and intense competition for talent, we may have to pay higher salaries and wages and
provide greater benefits in order to attract and retain highly skilled employees or other key personnel that we will need to achieve
our strategic objectives. Our ability to train and integrate new employees into our operations may not meet the requirements of our growing
business. Our failure to attract, train or retain highly skilled employees and other key personnel in numbers that are sufficient to
satisfy our needs would materially and adversely affect our business.
If we become directly subject to the scrutiny,
criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate
and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment
in our stock, especially if such matter cannot be addressed and resolved favorably.
U.S. public companies that have substantially
all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been
the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such
as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes,
a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto
and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of
many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies
have also been subject to shareholder lawsuits and SEC enforcement actions, and have been conducting internal and external investigations
into the allegations. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue,
we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly
and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our company
and business operations will be severely and your investment in our stock could be rendered worthless.
The disclosures in our reports and other
filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly,
our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially
all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of our disclosures.
We are regulated by the SEC and our reports and
other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities
Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United States, however, substantially
all of our operations are located in China. Since substantially all of our operations and business take place in China, it may be more
difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosures.
These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United
States. Furthermore, our SEC reports and other disclosures and public pronouncements are not subject to the review or scrutiny of any
PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of China Securities
Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review
our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence
on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been
reviewed or otherwise been scrutinized by any local regulator.
All schedules have been omitted because the required
information is included in the consolidated financial statements or the notes thereto, or because it is not required.
See exhibits listed under Part (b) below.