ITEM 1A. RISK FACTORS
Risks Related to Our Business
Risks Related to Our Toy and Souvenir Business
We expect the results of operations of our toy and souvenir business to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or decline.
Our results of operations are difficult to predict and may fluctuate substantially from quarter-to-quarter or year-to-year for a variety of reasons, many of which are beyond our control. If our actual results were to fall below our estimates or the expectations of public market analysts or investors, our quarterly and annual results would be negatively impacted and the price of our stock could decline. Other factors that could affect our quarterly and annual operating results include, but are not limited to:
● changes in the pricing policies of, or the introduction of new products by, us or our competitors;
● introductions of new technologies and changes in consumer preferences that result in either unanticipated or unexpectedly rapid product category shifts;
● slow or negative growth in the toy, souvenir, theme park, and related markets;
● seasonal shifts in end-market demand for our products;
● delays in the introduction of new products by us or market acceptance of these products;
● unanticipated decreases or delays in purchases of our products by our significant retailers, distributors and other channel partners;
● supply constraints from our vendors;
● unanticipated increases in costs, including air freight, associated with shipping and delivery of our products;
● the inability to maintain stable operations by our suppliers and other parties with whom we have commercial relationships;
● discovery of security vulnerabilities in our products, services or systems, leading to negative publicity, decreased demand or potential liability;
● foreign currency exchange rate fluctuations in the jurisdictions where we transact sales and expenditures in local currency;
● excess levels of inventory and low turns;
● changes in or consolidation of our sales channels and wholesale distributor relationships or failure to manage our sales channel inventory and warehousing requirements;
● delay or failure to fulfill orders for our products on a timely basis;
● delay or failure of our retailers, distributors and other channel partners to purchase at their historic volumes or at the volumes that they or we forecast;
● changes in tax rates or adverse changes in tax laws that expose us to additional income tax liabilities;
● changes in U.S. and international tax policy, including changes that adversely affect customs, tax or duty rates, as well as income tax legislation and regulations that affect the countries where we conduct business;
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● operational disruptions, such as transportation delays or failure of our order processing system, particularly if they occur at the end of a fiscal quarter;
● disruptions or delays related to our financial and enterprise resource planning systems;
● our inability to accurately forecast product demand, resulting in increased inventory exposure;
● allowance for doubtful accounts exposure with our existing retailers, distributors and other channel partners and new retailers, distributors and other channel partners, particularly as we expand into new international markets;
● geopolitical disruption, including sudden changes in immigration policies, leading to disruption in our workforce or delay or even stoppage of our operations in manufacturing, transportation, technical support and research and development;
● terms of our contracts with channel partners or suppliers that cause us to incur additional expenses or assume additional liabilities;
● an increase in price protection claims, redemptions of marketing rebates, product warranty and stock rotation returns or allowance for doubtful accounts;
● litigation involving alleged patent infringement;
● epidemic or widespread product failure, or unanticipated safety issues, in one or more of our products;
● failure to effectively manage our third-party customer support partners, which may result in customer complaints and/or harm to the Company’s brand;
● our inability to monitor and ensure compliance with our code of ethics, our anti-corruption compliance program and domestic and international anti-corruption laws and regulations, whether in relation to our employees or with our suppliers or retailers, distributors or other channel partners;
● labor unrest at facilities managed by our third-party manufacturers;
● workplace or human rights violations in certain countries in which our third-party manufacturers or suppliers operate, which may affect the Company’s brand and negatively affect our products’ acceptance by consumers;
● unanticipated shifts or declines in profit by geographical region that would adversely impact our tax rate;
● failure to implement and maintain the appropriate internal controls over financial reporting, which may result in restatements of our financial statements; and
● any changes in accounting rules.
As a result, period-to-period comparisons of our results of operations may not be meaningful, and you should not rely on them as an indication of our future performance.
Our use of third-party manufacturers to produce our products presents risks to our toy and souvenir business.
We use third-party manufacturers to manufacture all of our products and have historically concentrated production with a small number of manufacturers and factories. As a result, the loss or unavailability of one of our manufacturers or one of the factories in which our products are produced, even on a temporary basis, could have a negative impact on our business, financial condition and results of operations. This risk is exacerbated by the fact that we do not have long-term contracts with our manufacturers. While we believe our external sources of manufacturing could be shifted, if necessary, to alternative sources of supply, we would require a significant period of time to make such a shift. We may also be required to seek out additional manufacturers in response to increased demand for our products, as our current manufacturers may not have the capacity to increase production. If we were prevented from or delayed in obtaining a material portion of the products produced by our manufacturers, or if we were required to shift manufacturers (assuming we would be able to do so), our sales and profitability could be significantly reduced.
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In addition, while we require that our products supplied by third-party manufacturers be produced in compliance with all applicable laws and regulations, and we have the right to monitor compliance by our third-party manufacturers with our manufacturing requirements and to oversee the quality control process at our manufacturers’ factories, there is always a risk that one or more of our third-party manufacturers will not comply with our requirements, and that we will not immediately discover such non-compliance. Any failure of our third-party manufacturers to comply with such requirements in manufacturing products for us could result in damage to our reputation, harm our brand image and sales of our products and potentially create liability for us.
Monitoring compliance by independent manufacturers is complicated by the fact that expectations of ethical business practices continually evolve, may be substantially more demanding than applicable legal requirements and are driven in part by legal developments and by diverse groups active in publicizing and organizing public responses to perceived ethical shortcomings. Accordingly, we cannot predict how such expectations might develop in the future and cannot be certain that our manufacturing requirements, even if complied with, would satisfy all parties who are active in monitoring and publicizing perceived shortcomings in labor and other business practices worldwide.
Additionally, the third-party manufacturers that produce most of our products are located in China. As a result, we are subject to various risks resulting from our international operations.
Our toy and souvenir business may be harmed by the imposition or threat of tariffs, including reciprocal or retaliatory tariffs, in markets in which we operate which could increase our product costs and other costs of doing business, impact consumer spending, or lower our revenues and earnings.
The current global tariff environment is uncertain. For products manufactured outside the U.S., tariffs increase the cost of our products. Most of our products are produced in China, and tariffs may impact our sales and reduce our profitability as a result. Tariffs may also impact consumer spending if products become more expensive, or consumers have less discretionary income or consumer spending power. The current tariff environment, particularly the imposition or threat of tariffs on products manufactured in China for import into the U.S. as well the potential for retaliatory and reciprocal tariffs in other countries in which we do business, may negatively impact our business, sales and profitability. While our contracts currently require our customers to cover tariffs and other fees, further increases in tariffs may increase the costs of our products. We cannot assure you that we will be able to successfully implement actions to lessen the impact of tariffs imposed on our products, including any changes to our supply chain, logistics capabilities, sales policies or pricing of our products.
High levels of competition and low barriers to entry make it difficult to achieve, maintain, or build upon the success of the Company’s brands, products, and product lines.
The Company faces competitors who are also constantly monitoring and attempting to anticipate consumer tastes, seeking ideas which will appeal to consumers, and introducing new products that compete with the Company’s products. In addition, competition for access to entertainment properties has and may continue to lessen the Company’s ability to secure, maintain, and renew popular licenses to entertainment products developed by other parties and licensed to the Company, or require the Company to pay licensors higher royalties and higher minimum guaranteed payments to obtain or retain these licenses. As a licensee of entertainment properties, the Company has no guarantee that a particular property or brand will translate into a successful toy, game, or other product. In addition, the barriers to entry for new participants in the toy products industry and entertainment industry are low. In a very short period of time, new market participants with a popular product idea or entertainment property can become a significant source of competition for the Company and its products. Reduced demand for the Company’s brands, products, and product lines as a result of these factors may adversely affect the Company’s business, financial condition, and results of operations. Some of our competitors may have greater resources than the Company. In order to compete , the Company may have to lower prices and increase marketing expenses which could result in reduced margins.
The Company is not always able to successfully identify and/or satisfy consumer preferences, which could cause its business, financial condition, and results of operations to be adversely affected.
The Company’s business and operating results in the toy and souvenir segment depend largely upon the appeal of its products, driven by both innovation and marketing. Consumer preferences are continuously changing. The Company is not always able to identify trends in consumer preferences or identify and satisfy consumer preferences in a timely manner. Significant, sudden shifts in demand are caused by popular toys which steer trends, which are often unpredictable. the Company offers a diverse range of products for all ages and families that includes, among others, toys for toddlers and preschoolers, toys for school-aged children, toys for all ages, and media-driven products. The Company competes domestically and internationally with a wide range of large and small manufacturers, marketers, and sellers of toys, and consumer goods, as well as retailers, which means that the Company’s market position is always at risk. The Company’s ability to maintain its current product sales and increase its product sales or establish product sales with new, innovative toys, depends on the Company’s ability to satisfy play preferences, enhance existing products, develop and introduce new products, and market acceptance of these products. These are intensifying due to trends towards shorter life cycles for individual toy products, the phenomenon of children outgrowing traditional toys at younger ages, an increasing use of more sophisticated technology in toys, and an evolving path to purchase.
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General economic conditions may have an adverse impact on our toy and souvenir business, financial condition or results of operations.
Our results can be impacted by a number of macroeconomic factors, including but not limited to consumer confidence and spending levels, tax rates, unemployment, consumer credit availability, raw materials costs, pandemics (such as the COVID-19 pandemic) and natural disasters, fuel and energy costs (including oil prices), and credit market conditions. A general economic slowdown or recession resulting in a decrease in discretionary spending could adversely affect the frequency with which guests choose to visit our parks and the amount that our guests spend when they visit.
Additionally, difficult economic conditions throughout the world, including global supply chain issues, could impact our ability to obtain supplies, services and credit as well as the ability of third parties to meet their obligations to us, including, for example, manufacturers’ ability to supply rides, payment of claims by our insurance carriers, funding of our lines of credit, or payment by our international agreement partner. Changes in exchange rates for foreign currencies could increase our labor and supply costs or reduce the U.S. dollar value of revenue we earn in other markets, including, but not limited to, Beijing, Japan, and Europe.
In addition, availability of our products from third-party manufacturers and our ability to distribute our products into non-U.S. jurisdictions may be impacted by factors such as an increase in duties, tariffs or other restrictions on trade; raw material shortages, work stoppages, strikes and political unrest; economic crises and international disputes or conflicts; changes in leadership and the political climate in countries from which we import products; and failure of the United States to maintain normal trade relations with China and other countries. While China currently enjoys “most favored nation” trading status with the United States, the ability of the United States to revoke that status and to impose higher tariffs on products imported from China, could materially adversely affect our business, results of operations and financial condition.
Failure to successfully implement new initiatives or meet product introduction schedules can have an adverse effect on the Company’s business, financial condition, and results of operations.
The Company has in the past announced, and in the future may announce, initiatives to reduce its costs, optimize its manufacturing footprint, increase its efficiency, improve the execution of its core business, globalize and extend the Company’s brands, catch new trends, create new brands, offer new innovative products and improve existing products, enhance product safety, develop people, improve productivity, simplify processes, and maintain customer service levels, as well as initiatives designed to drive sales growth, capitalize on the Company’s scale advantage, and improve its supply chain. These initiatives involve investment of capital and complex decision-making as well as extensive and intensive execution, and the success of these initiatives is not assured. Failure to achieve any of these initiatives could harm the Company’s business, financial condition, and results of operations.
From time to time, the Company anticipates introducing new products, product lines, or brands at a certain time in the future. There is no guarantee that the Company will be able to manufacture, source, ship, and distribute new or continuing products in a timely manner and on a cost-effective basis. Unforeseen delays or difficulties in the development process or significant increases in the planned cost of development for new products of the Company may cause the introduction date for products to be later than anticipated or, in some situations, may cause a product or new product introduction to be discontinued. Failure to successfully implement any of these initiatives or launches, or the failure of any of these initiatives or launches to produce the results anticipated by management, could have an adverse effect on the Company’s business, financial condition, and results of operations.
Bad or extreme weather conditions and forecasts of bad or mixed weather conditions, which may be due to climate change, can adversely impact attendance at parks where our products are sold.
Because most of our products are sold at parks, and attendance at parks may be adversely affected by bad or extreme weather conditions and forecasts that may be a result of climate change, such bad or extreme weather conditions and forecasts may negatively affect our revenues. The effects of bad weather on attendance can be more pronounced at waterparks. We believe our operating results in certain years were adversely affected by abnormally hot, cold and/or wet weather in a number of our major U.S. markets. In addition, since a number of products are featured in parks geographically concentrated in portions of the United States, a weather pattern that affects those respective areas could adversely affect a number of our parks and disproportionately impact our results of operations. Bad weather and forecasts of bad weather on weekends, holidays or other peak periods will typically have a impact on our revenues and could impact our results of operations.
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The Company’s toy and souvenir business is highly seasonal, and its operating results depend, in large part, on sales during the relatively brief traditional holiday season. Events that disrupt the Company’s business during its peak demand times can adversely and disproportionately affect the Company’s business, financial condition, and results of operations.
The Company’s toy and souvenir business is subject to risks associated with the underproduction of popular toys and the overproduction of toys that are less popular with consumers. The Company attempts to manage their inventories tightly, which requires the Company to ship products closer to the expected date the Company sells the products to consumers. This in turn results in shorter lead times for production. These factors may decrease sales or increase the risks that the Company may not be able to meet demand for certain products at peak demand times or that the Company’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed.
In addition, as a result of the seasonal nature of the Company’s business, the Company may be adversely affected, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events, such as public health crises and pandemics, terrorist attacks, economic shocks, severe weather due to climate change or otherwise, earthquakes or other catastrophic events, that harm the retail environment or consumer buying patterns during its key selling season, or by events, such as strikes, disruptions in transportation, or port delays, that interfere with the manufacture or shipment of goods during the critical months leading up to the purchasing season.
We could be subject to future product liability suits or product recalls which could have a significant adverse effect on our financial condition and results of operations.
As a company that designs and sells consumer products, we may be subject to product liability suits or involuntary product recalls, or may choose to voluntarily conduct a product recall. While costs associated with product liability claims and product recalls have generally not been material to our business, the costs associated with future product liability claims or product recalls in any given fiscal year, individually or in the aggregate, could be significant. In addition, any product recall, regardless of the direct costs of the recall, could harm consumer perceptions of our products, subject us to additional government scrutiny, divert development and management resources, adversely affect our business operations and otherwise put us at a competitive disadvantage compared to other companies in our industry, any of which could have a significant effect on our financial condition and results of operations.
The Company’s toy and souvenir business depends in large part on the success of its vendors and outsourcers, and the Company’s brands and reputation are subject to harm from actions taken by third parties that are outside the Company’s control. In addition, any significant failure, inadequacy, or interruption from such vendors or outsourcers could harm the Company’s ability to effectively operate this business.
As a part of its efforts to cut costs, achieve better efficiencies, and increase productivity and service quality, the Company relies significantly on vendor and outsourcing relationships with third parties for services and systems including manufacturing, transportation, logistics, and information technology. Any shortcoming of a vendor or outsourcer of the Company, particularly an issue affecting the quality of these services or systems, results in risk of damage to the Company’s reputation and brand value, and potentially adverse effects to the Company’s business, financial condition, and results of operations. In addition, problems with transitioning these services and systems to, or operating failures with, these vendors and outsourcers cause delays in product sales and reduce the efficiency of the Company’s operations, and significant capital investments could be required to remediate the problem.
The Company depends on key personnel and may not be able to hire, retain, and integrate sufficient qualified personnel to maintain and expand its toy and souvenir business.
The Company’s future success depends partly on the continued contribution of key executives, designers, and technical, sales, marketing, manufacturing, entertainment, and other personnel. The loss of services of any of the Company’s key personnel could harm the Company’s business. Recruiting and retaining skilled personnel is costly and highly competitive. In addition, changes to the Company’s current and future work environments may not meet the needs or expectations of its employees or be perceived as less favorable compared to other companies’ policies, which could negatively impact the Company’s ability to hire and retain qualified personnel. If the Company fails to retain, hire, train, and integrate qualified employees and contractors, the Company may not be able to maintain or expand its business.
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The loss of any member of our senior management team, or of any other key employees, or the inability to successfully complete planned management transitions, could impair our ability to execute our business plan and could therefore have a material adverse effect on our business, financial condition and results of operations. We do not currently maintain key man life insurance policies on any member of our senior management team or on our other key employees.
Failure to keep pace with developments in technology could adversely affect our operations or competitive position.
The theme park and waterpark industry demands the use of sophisticated technology and systems for operation of our parks, ticket, membership and season pass sales and management, and labor and inventory management. Information technology systems continue to evolve and, in order to remain competitive, we must implement new technologies and systems in a timely and efficient manner. The development and maintenance of these technologies may require significant investment by us and we may not achieve the anticipated benefits from such new developments or upgrades.
Increases in labor costs and employee health and welfare benefits could have a negative impact on our cash flows, financial condition, and results of operations.
Labor is a primary component in the cost of operating our business. We devote significant resources to recruiting and training our employees in order to meet our guests’ high expectations for service. Wage and benefit increases to attract and retain employees in a tight labor market have driven-up labor costs. These increased costs pressure our margins and could have a negative impact on our financial results. Our ability to control labor costs is subject to numerous external factors, including market pressures with respect to prevailing wage rates, unemployment levels, and health and other insurance costs, as well as the impact of legislation or regulations governing labor relations, minimum wage, and healthcare benefits. Further legislative changes or competitive wage rates could continue to increase these expenses in the future.
Disruptions in the Company’s manufacturing operations or supply chain due to political instability, civil unrest, or disease could adversely affect the Company’s toy and souvenir business, financial position, sales, and results of operations.
The Company primarily utilizes third-party manufacturers and suppliers throughout Asia. The risk of political instability and civil unrest exists in certain of these countries, which could temporarily or permanently damage the manufacturing operations of the Company and/or its third-party manufacturers located there. Outbreaks of communicable diseases have also been known to occur in these countries. For example, the COVID-19 pandemic began in Wuhan, Hubei Province, China and has caused supply chain disruption for the Company, its suppliers, and its customers that contributed to lower net sales in the first half of 2020 and may cause lower net sales to the extent they remain issues in the future. Other disruptions from public health crises such as these result from, among other things, workers contracting diseases, restrictions on factory openings, restrictions on travel, restrictions on shipping, and the closure of critical infrastructure. The design, development, and manufacture of the Company’s products could suffer if the Company’s employees or the employees of its third-party manufacturers or their suppliers contract communicable diseases, or if the Company, the Company’s third-party manufacturers, or their suppliers are affected by other impacts of such diseases. In addition, the contingency plans the Company has developed to help mitigate the impact of in its manufacturing operations and supply chain may not prevent its business, financial position, sales, and results of operations from being affected by a significant to its manufacturing operations or suppliers.
Disruptions in our supply chain for materials and components and the resulting increase in equipment and logistics costs could adversely affect our financial performance.
We are subject to risk from fluctuating manufacturing costs of our products based on surging consumer demand. Prices of these manufacturing costs, including the components and materials of our products may be affected by supply restrictions or other market factors from time to time.
Political, social or economic instability in regions where these components and materials are made could cause future disruptions in trade. For example, concerns about forced labor in China’s Xinjiang Uyghur Autonomous Region (“XUAR”), where certain components and materials are manufactured, have led to legislation in countries such as the United States restricting imports from such region. Specifically, on December 23, 2021, the United States enacted the Uyghur Forced Labor Prevention Act (“UFLPA”), which presumptively prohibits imports of any goods made either wholly or in part in the XUAR. The law, which went into effect on June 21, 2022, creates a rebuttable presumption against “the importation of goods made, manufactured, or mined in the XUAR (and certain other categories of persons in China)” unless the importer meets certain due diligence standards, responds to all inquiries from U.S. Customs and Border Protection (“CBP”) related to forced labor and the CBP determines, based on “clear and convincing evidence,” that the goods in question were not produced wholly or in part by labor. We do not believe that our suppliers source materials for our supply chain from the XUAR, but we cannot guarantee that our suppliers and partners will always comply with our policies. Enforcement of the UFPLA us or our suppliers could lead to our products being held for inspection by CBP and or for entry into the United States, resulting in other supply chain , or cause us to be subject to , or sanctions. Broader policy uncertainty, including actions in various countries, such as China, have created uncertainty with respect to tariff impacts on the costs of some of these components and materials. Even if we were not subject to , or sanctions or supply chain , if products we source are linked in any way to labor in the XUAR, our reputation could be . In the future, these trade restrictions may extend beyond the United States.
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We cannot predict whether the countries in which the components and materials are sourced, or may be sourced in the future, will be subject to new or additional trade restrictions imposed by the governments of countries in which our projects are located, including the likelihood, type or effect of any such restrictions. Trade restrictions, including embargoes, safeguards and customs restrictions against certain components and materials, as well as labor strikes and work stoppages or boycotts, could increase the cost or reduce or delay the supply of components and materials available to us and our vendors, which could delay or adversely affect the scope of our projects under development or construction and adversely affect our business, financial condition or results of operations.
We depend on large, recurring purchases from certain significant retailers, distributors and other channel partners, and a loss, cancellation or delay in purchases by these channel partners could negatively affect our revenue.
The loss of recurring orders from any of our more significant retailers, distributors and other channel partners could cause our revenue and profitability to suffer. Our ability to attract new retailers, distributors and other channel partners will depend on a variety of factors, including the cost-effectiveness, reliability, scalability, breadth and depth of our products. In addition, a change in the mix of our retailers, distributors and other channel partners, or a change in the mix of direct and indirect sales, could adversely affect our revenue and gross margin.
Although our financial performance may depend on large, recurring orders from certain retailers, distributors and other channel partners, we do not generally have binding commitments from them. For example:
● our channel partner agreements generally do not require minimum purchases;
● our retailers, distributors and other channel partners can stop purchasing and stop marketing our products at any time; and
● our channel partner agreements generally are not exclusive.
Because our expenses are based on our revenue forecasts, a substantial reduction or delay in sales of our products to, or unexpected returns from, channel partners, or the loss of any significant channel partners, could materially adversely affect our business, results of operations and financial condition. Although our largest channel partners may vary from period to period, we anticipate that our results of operations for any given period will continue to depend on large orders from a small number of channel partners.
The Company relies extensively on information technology in its operations, and any material failure, inadequacy, interruption, or security breach of that technology could have an adverse effect on its business, financial condition, and results of operations.
The Company relies extensively on information technology systems across its operations, including for management of its supply chain, sale and delivery of its products and services, reporting its results and various other processes and transactions. Many of these systems are managed by third-party service providers. The Company uses third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. A small and growing volume of the Company’s consumer products and services are web-based, and some are offered in conjunction with business partners or such third-party service providers. The Company’s ability to effectively manage its business and coordinate the production, distribution, and sale of its products and services depends significantly on the reliability and capacity of these systems and third-party service providers.
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The Company faces risks related to protecting its proprietary intellectual property and information and is subject to third-party claims that the Company is infringing on their intellectual property rights, either of which could adversely affect the Company’s business, financial condition, and results of operations.
The value of the Company’s business depends on its ability to protect its intellectual property and information, including its trademarks, trade names, copyrights, patents, trade secrets, and rights under intellectual property license agreements and other agreements with third parties, in the United States and around the world, as well as its customer, employee, and consumer data. From time to time, third parties may in the future try to challenge, the Company’s ownership of its intellectual property in the United States and around the world. Responding to any infringement claim, regardless of its validity, may be costly and time-consuming and may divert management and key personnel from business operations. Findings of infringement on the intellectual property rights of any third party by the Company, its distributors, its licensors, or its manufacturers may require obtaining a license to use those rights, which may not be obtainable on reasonable terms, if at all.
In addition, the Company’s business is subject to the risk of third parties counterfeiting its products or infringing on its intellectual property rights. The steps the Company has taken may not prevent unauthorized use of its intellectual property, particularly in foreign countries where the laws may not protect its intellectual property as fully as in the United States. The Company may resort to litigation to protect its intellectual property rights, which could result in substantial costs and diversion of resources. The Company’s failure to protect its proprietary intellectual property and information, including with respect to any successful challenge to the Company’s ownership of its intellectual property or significant infringements of its intellectual property, could have an adverse effect on the Company’s business, financial condition, and results of operations.
We rely on a combination of copyright, trademark, patent and trade secret laws, nondisclosure agreements with employees, consultants and suppliers and other contractual provisions to establish, maintain and protect our intellectual property and technology. Despite efforts to protect our intellectual property, unauthorized third parties may attempt to design around, copy aspects of our product design or obtain and use technology or other intellectual property associated with our products. Furthermore, our competitors may independently develop similar technology or design around our intellectual property. Our inability to secure and protect our intellectual property rights could materially adversely affect our brand and business, results of operations and financial condition.
If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to sell or timely deliver our products, and our operating expenses could increase.
We are highly dependent upon the transportation systems we use to ship our products, including surface and air freight. Our attempts to closely match our inventory levels to our product demand intensify the need for our transportation systems to function effectively and without delay. On a quarterly basis, our shipping volume also tends to steadily increase as the quarter progresses, which means that any disruption in our transportation network in the latter half of a quarter will likely have a more material effect on our business than at the beginning of a quarter.
The transportation network is subject to disruption or congestion from a variety of causes, including labor disputes or port strikes, acts of war or terrorism, natural disasters and congestion resulting from higher shipping volumes. Labor disputes among freight carriers and at ports of entry are common, particularly in Europe, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us. A port worker strike, work slow-down or other transportation disruption in Asia and the United States, where we import our products to fulfill our orders, could significantly disrupt our business. Our international freight is regularly subjected to inspection by governmental entities. If our delivery times increase unexpectedly for these or any other reasons, our ability to deliver products on time would be materially adversely affected and result in or revenue as well as customer imposed . In addition, if increases in fuel prices occur, our transportation costs would likely increase. Moreover, the cost of shipping our products by air freight is than other methods. From time to time in the past, we have shipped products using extensive air freight to meet spikes in demand and shifts in demand between product categories, to bring new product introductions to market quickly and to timely ship products previously ordered. If we rely more heavily upon air freight to deliver our products, our overall shipping costs will increase. A transportation or a significant increase in the cost of freight could materially affect our business, results of operations and financial condition.
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As part of growing our business, we may make acquisitions. If we fail to successfully select, execute or integrate our acquisitions, then our business, results of operations and financial condition could be materially adversely affected and our stock price could decline.
From time to time, we may undertake acquisitions to add new product and service lines and technologies, acquire talent, gain new sales channels or enter into new sales territories. Acquisitions involve numerous risks and challenges, including relating to the successful integration of the acquired business, entering into new territories or markets with which we have limited or no prior experience, establishing or maintaining business relationships with new retailers, distributors or other channel partners, vendors and suppliers and potential post-closing disputes.
We cannot ensure that we will be successful in selecting, executing and integrating acquisitions. Failure to manage and successfully integrate acquisitions could materially harm our business, financial condition and results of operations. In addition, if stock market analysts or our stockholders do not support or believe in the value of the acquisitions that we choose to undertake, our stock price may decline.
If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory, or lose sales from having too few products.
If we are unable to properly monitor, control and manage our sales channel inventory and maintain an appropriate level and mix of products with our distributors and within our sales channels, we may incur increased and unexpected costs associated with this inventory. If our wholesale distributors and retailers are unable to sell their inventory in a timely manner, we might lower the price of the products, or these parties may exchange the products for newer products. Also, during the transition from an existing product to a new replacement product, we must accurately predict the demand for the existing and the new product.
We determine production levels based on our forecasts of demand for our products. Actual demand for our products depends on many factors, which makes it difficult to forecast. We have experienced differences between our actual and our forecasted demand in the past and expect differences to arise in the future. If we improperly forecast demand for our products, we could end up with too many products and be unable to sell the excess inventory in a timely manner, if at all, or, alternatively, we could end up with too few products and not be able to satisfy demand. This problem is exacerbated because we attempt to closely match inventory levels with product demand, leaving limited margin for error. If these events occur, we could incur increased expenses associated with writing off excessive or obsolete inventory, lose sales, incur penalties for delivery or have to ship products by air freight to meet immediate demand, thereby incurring incremental freight costs above the sea freight costs, a preferred method, and a corresponding in gross margin.
Changes in tax laws or exposure to additional income tax liabilities could affect our future profitability.
Factors that could materially affect our future effective tax rates include but are not limited to:
changes in tax laws or the regulatory environment;
changes in accounting and tax standards or practices;
changes in the composition of operating income by tax jurisdiction; and
our operating results before taxes.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Because we do not have a long history of operating as a separate company and we have significant expansion plans, our effective tax rate may fluctuate in the future. Future effective tax rates could be affected by operating losses in jurisdictions where no tax benefit can be recorded under GAAP, changes in the composition of earnings in countries with differing tax rates, changes in deferred tax assets and liabilities, or changes in tax laws.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Code. In particular, sweeping changes were made to the U.S. taxation of foreign operations. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a quasi-territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. Additionally, new provisions were added to mitigate the potential erosion of the U.S. tax base and to discourage use of low tax jurisdictions to own intellectual property and other valuable intangible assets. While these provisions were intended to prevent specific perceived taxpayer abuse, they may have adverse, unexpected consequences. At this time, Treasury has not yet issued Regulations on how these new rules should be applied and how the relevant calculations are to be prepared. As there exists only limited guidance at this time, significant estimates and judgment are required in assessing the consequences. The amounts for adjusting the deferred tax assets and liabilities for the new tax rate and the transition tax are provisional based on the guidance provided by the SEC in Staff Accounting Bulletin No. 118 (“SAB 118”), which provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the 2017 Tax Act. As a result of continued regulations and interpretations of the Tax Act, we are still quantifying the effects of the tax law change. The amounts reported as of December 31, 2025 are provisional based on the uncertainty discussed above. As we complete our analysis and prepare necessary data, and interpret any additional guidance, we will adjust our calculations and provisional amounts that we have recorded in our tax provision. Any such adjustments may materially impact our provision for income taxes in our financial statements.
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In addition to the impact of the Tax Act on our federal taxes, the Tax Act may impact our taxation in other jurisdictions, including with respect to state income taxes. State legislatures have not had sufficient time to respond to the Tax Act. Accordingly, there is uncertainty as to how the laws will apply in the various state jurisdictions. Additionally, other foreign governing bodies may enact changes to their tax laws in reaction to the Tax Act that could result in changes to our global tax position and materially adversely affect our business, results of operations and financial condition.
Additionally, the IRS and several foreign tax authorities have increasingly focused attention on intercompany transfer pricing with respect to sales of products and services and the use of intangibles. Tax authorities could disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. If we do not prevail in any such disagreements, our profitability may be affected.
We must comply with indirect tax laws in multiple jurisdictions, as well as complex customs duty regimes worldwide. Audits of our compliance with these rules may result in additional liabilities for taxes, duties, interest and penalties related to our international operations which would reduce our profitability.
Our operations are routinely subject to audit by tax authorities in various countries. Many countries have indirect tax systems where the sale and purchase of goods and services are subject to tax based on the transaction value. These taxes are commonly referred to as value-added tax (“VAT”) or goods and services tax (“GST”). In addition, the distribution of our products subjects us to numerous complex customs regulations, which frequently change over time. Failure to comply with these systems and regulations can result in the assessment of additional taxes, duties, interest and penalties. While we believe we are in compliance with local laws, we cannot assure that tax and customs authorities agree with our reporting positions and upon audit may assess us additional taxes, duties, interest and penalties.
Additionally, some of our products are subject to U.S. export controls, including the Export Administration Regulations and economic sanctions administered by the Office of Foreign Assets Control. We also incorporate encryption technology into certain of our solutions. These encryption solutions and underlying technology may be exported outside of the United States only with the required export authorizations or exceptions, including by license, a license exception, and appropriate classification notification requirement and encryption authorization.
Furthermore, our activities are subject to U.S. economic sanctions laws and regulations that prohibit the shipment of certain products and services without the required export authorizations, including to countries, governments and persons targeted by U.S. embargoes or sanctions. Obtaining the necessary export license or other authorization for a particular sale may be time consuming, and may result in delay or loss of sales opportunities even if the export license ultimately is granted. While we take precautions to prevent t our solutions from being exported in violation of these laws, including using authorizations or exceptions for our encryption products and implementing IP address blocking and screenings against U.S. government and international lists of restricted and prohibited persons and countries, we cannot guarantee that the precautions we take will prevent all violations of export control and sanctions laws. Violations of U.S. sanctions or export control laws can result in significant fines or penalties and could be imposed on employees and managers for of these laws.
Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including import and export licensing requirements, and have enacted laws that could limit our ability to distribute our products and services or our end-users’ ability to utilize our solutions in their countries. Changes in our products and services or changes in import and export regulations may create delays in the introduction of our products in international markets. Adverse action by any government agencies related to indirect tax laws could materially adversely affect our business, results of operations and financial condition.
The Consumer Product Safety Improvement Act and other existing or future government regulation could harm our business or may cause us to incur additional costs associated with compliance.
We are subject to various federal, state and local laws and regulations, including but not limited to, laws and regulations relating to labor and employment, U.S. customs and consumer product safety, including the Consumer Product Safety Improvement Act, or the “CPSIA.” The CPSIA created more stringent safety requirements related to lead and phthalates content in children’s products. The CPSIA regulates the future manufacture of these items and existing inventories and may cause us to incur losses if we offer for sale or sell any non-compliant items. Failure to comply with the various regulations applicable to us may result in damage to our reputation, civil and criminal liability, fines and penalties and increased cost of regulatory compliance. These current and any future laws and regulations could harm our business, results of operations and financial condition.
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We may be subject to anti-corruption, anti-bribery, anti-money laundering, economic sanctions and other similar laws and regulations, and non-compliance with such laws and regulations could subject the Company to civil, criminal and administrative penalties, remedial measures and legal expenses, all of which could adversely affect the Company’s business, prospects, results of operations, financial condition and reputation.
The Company is or will be subject to laws with respect to anti-corruption, anti-bribery, anti-money laundering, financial and economic sanctions and other similar laws and regulations in various jurisdictions in which the Company conducts, or in the future may conduct, activities, including the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws and regulations. The FCPA prohibits the Company and its officers, directors, employees and business partners acting on its behalf, including agents, from offering, promising, authorizing or providing anything of value to a “foreign official” for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. The FCPA also requires companies to make and keep books, records and accounts that accurately reflect transactions and dispositions of assets and to maintain a system of adequate internal accounting controls. A violation of these laws or regulations could adversely affect our business, prospects, results of operations, financial condition and reputation.
If one or more of our major customers were to experience difficulties in fulfilling their obligations to us, cease doing business with us, significantly reduce the amount of their purchases from us or return substantial amounts of our products, it could have a materially adverse effect on our business, results of operations and financial condition.
A substantial reduction in or termination of orders from any of our largest customers would adversely affect our business, results of operations and financial condition. In addition, pressure by large customers seeking price reductions, financial incentives and changes in other terms of sale or for us to bear the risks and the cost of carrying inventory could also adversely affect our business, results of operations and financial condition.
If one or more of our major customers were to experience difficulties in fulfilling their obligations to us resulting from bankruptcy or other deterioration in their financial condition or ability to meet their obligations, cease doing business with us, significantly reduce the amount of their purchases from us, or return substantial amounts of our products, it could have a material adverse effect on our business, results of operations and financial condition. The COVID-19 pandemic has left many customers outside of our largest customers under varying degrees of financial distress, and it seems some of our largest customers are facing increases in their operating costs. Customers may request extended payment terms which may require us to take on increased credit risk or to reduce or forgo sales entirely in an attempt to mitigate financial risk associated with customer bankruptcy risk.
Customer complaints regarding our products and services could hurt our business.
From time to time, we may receive complaints from customers regarding the quality of goods purchased from us. We may in the future receive correspondence from customers requesting reimbursement. Certain dissatisfied customers may threaten legal action against us if no reimbursement is made. We may become subject to product liability lawsuits from customers alleging injury because of a purported defect in our products or services, claiming substantial damages and demanding payments from us. We are in the chain of title when we supply or distribute products, and therefore are subject to the risk of being held legally responsible for them. These claims may not be covered by our insurance policies. Any resulting litigation could be costly for us, divert management attention, and could result in increased costs of doing business, or otherwise have a material effect on our business, results of operations, and financial condition. Any publicity generated as a result of customer with our products or services, or with our websites, could our reputation and the value of our brand name, which could have a material effect on our business, results of operations, and financial condition.
Risks Related to Our Securities and Other Risks
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company” as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but (i) not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) not being required to comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”), requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (iii) not being required to comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (iv) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (v) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
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We could remain an emerging growth company until the earlier of: (i) the last day of the fiscal year in which we have total annual gross revenues of $1.24 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our first sale of common equity securities pursuant to an effective registration statement; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer. We cannot predict if investors will find our securities less attractive if we choose to rely on these exemptions. If some investors find our securities less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our securities and our stock price may be more volatile. Further, as a result of these scaled regulatory requirements, our disclosure may be more limited than that of other public companies and you may not have the same protections afforded to stockholders of such companies.
Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a) (2)(B) of the Securities Act, for complying with new or revised accounting standards. We have opted for taking advantage of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the Jobs Act.
● We are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements is time-consuming and results in increased costs to us and could have a negative effect on our results of operations, financial condition or business.
● Certain of our stockholders hold a significant percentage of our outstanding voting securities, which could reduce the ability of minority stockholders to effect certain corporate actions.
We may face risks relating to the lack of PCAOB inspection on our auditor.
We may face risks relating to the lack of the PCAOB inspection on our auditor, which may cause our securities to be delisted from a U.S. stock exchange or prohibited from being traded over-the-counter in the future under the Holding Foreign Companies Accountable Act, or the HFCAA, if the SEC determines that we have filed any annual report containing an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely for three consecutive years beginning in 2021. On June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act and on December 29, 2022, a legislation entitled “Consolidated Appropriations Act, 2023” (the “Consolidated Appropriations Act”) was signed into law by President Biden, which contained, among other things, an identical provision to Accelerating Holding Foreign Companies Accountable Act and amended the HFCAA by requiring the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three, thus reducing the time before our securities may be prohibited from trading or delisted. The delisting or the cessation of trading of our securities, or the of their or prohibited from being trade, may materially and affect the value of your investment.
On December 16, 2021, the PCAOB issued a determination report which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China of the PRC; and (2) Hong Kong, a Special Administrative Region of the PRC, because of positions taken by PRC authorities in those jurisdictions, which determinations were vacated on December 15, 2022. Our current auditor, M&K CPAS, PLLC, is headquartered in Texas, the United States, and was not identified by the PCAOB in its report on December 16, 2021 as a firm subject to the PCAOB’s determinations, which determinations were vacated on December 15, 2022.
If the PCAOB in the future determines it is unable to inspect and investigate completely our auditor, then the lack of access to the PCAOB inspection would prevent the PCAOB from fully evaluating audits and quality control procedures of our auditor. As a result, investors could be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of our auditor would make it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality control procedures, which could cause existing and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements. Although our auditor was not identified by the PCAOB in its report as a firm subject to the PCAOB’s determinations, which determinations were vacated on December 15, 2022, should the PCAOB be unable to fully conduct inspection of our auditor’s work papers, this could adversely affect us and our securities for the reasons noted above.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this Annual Report, as an auditor of companies that are traded publicly in the U.S. and a firm registered with the PCAOB, is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess our auditor’s compliance with the applicable professional standards. Our auditor is headquartered in Texas, the United States and has been inspected by the PCAOB on a regular basis. However, the recent developments would add uncertainties to our offerings and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements.
Immediately after August Warrant Exercise in connection with the June Securities Purchase Agreement, Bravemorning held approximately 86.6% of the Company’s outstanding Common Stock, and also Preferred Stock Shares which vote together with the Common Stock and increased Bravemorning’s aggregate voting power to 92.5%. Bravemorning holds supermajority voting power and may take actions that may not be in the best interests of our other stockholders.
On August 29, 2025, in connection with the August Warrant Exercise, the Company issued 220,000,000 shares of Common Stock to Bravemorning, making it the holder of approximately 86.6% of the Company’s outstanding Common Stock. Upon the August Warrant Exercise in connection with the June Securities Purchase Agreement, Bravemorning also held 100,000 Preferred Stock Shares, which are convertible into an additional 200,000,000 shares of Common Stock and which vote on an as-converted basis with the Common Stock; and Bravemorning’s ownership of Common Stock and Preferred Stock gave it an aggregate voting power of 92.5%. As a result, Bravemorning is able to control the management and affairs of the Company and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. The interests of Bravemorning may not be the same as or may even conflict with your interests. For example, Bravemorning could attempt to delay or prevent a change in control of us, even if such change in control would benefit our other stockholders, which could deprive our stockholders of an opportunity to receive a premium for their Common Stock as part of a sale of us or our assets, and might affect the prevailing market price of our Common Stock due to investors’ perceptions that of interest may exist or arise. As a result, this concentration of ownership may not be in the interests of our other stockholders.
We may regularly encounter potential conflicts of interest, and our failure to identify and address such conflicts of interest could adversely affect our business.
We face the possibility of actual, potential, or perceived conflicts of interest in the ordinary course of our business operations.
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Conflicts of interest may exist between (i) our different businesses; (ii) us and our stakeholders; or (iii) us and our affiliates. As we expand the scope of our business it is critical for us to be able to timely address potential conflicts of interest, including situations where two or more interests within our businesses naturally exist but are in competition or conflict. We have put in place internal control and risk management procedures that are designed to identify and address conflicts of interest, including a procedure for presenting potential conflicts of interest to the audit committee of our Board. However, appropriately identifying and managing actual, potential, or perceived conflicts of interest is complex and difficult, and our reputation and our stakeholders’ confidence in us could be damaged if we fail, or appear to fail, to deal appropriately with one or more actual, potential, or perceived of interest. It is possible that actual, potential, or perceived of interest could also give rise to client , , or regulatory enforcement actions. Regulatory of, or in connection with, of interest could have a material effect on our reputation, which could materially and affect our business in a number of ways, including a of some potential counterparties to do business with us. Any of the foregoing could materially and affect our reputation, business, financial condition, and results of operations.
A conflict of interest occurs when an individual’s private interest (or the interest of a member of his or her family or close friend(s) or business associate(s)) interferes, or even appears to interfere, with the interests of our company as a whole. A conflict of interest can arise when an employee, officer or director (or a member of his or her family or a close friend(s) or business associate(s)) takes actions or has interests that may make it difficult to perform his or her work for our company objectively and effectively. Conflicts of interest also arise when an employee, officer or director (or a member of his or her family or close friend(s) or business associate(s)) receives improper personal benefits as a result of his or her position in our company.
Specific potential conflicts of interest may arise from the following relationships:
we engaged BiT Global, a licensed Trust or Company Service Provider and registered trust company in Hong Kong, to set up the Treasury Wallet. Our director, Zhihong Liu, is one of the directors of BiT Global.
some of our directors have certain ties with the TRON blockchain ecosystem. For example, Weike Sun is the father of Justin Sun, the founder of TRON. Zhihong Liu has been the senior advisor to TRON DAO since 2021. Zi Yang holds senior position for Tronscan, the official blockchain explorer for Tron protocol.
Directors and executive officers must seek determinations and prior authorizations or approvals of potential conflicts of interest exclusively from our audit committee. All other employees are required to approach our Chief Executive Officer or our Chief Financial Officer if they have any questions about reporting a suspected conflict of interest.
Risks Related to Our TRX Token Strategy and Holdings
The TRX token is a highly volatile asset, and fluctuations in the price of the TRX token are likely to affect our financial results and the market price of our listed securities.
All digital assets, including the TRX token, are highly volatile assets, and fluctuations in the price of the TRX token are likely to continue to affect our financial results and the market price of our listed securities. The trading price of the TRX token has experienced substantial volatility historically. In 2021, the trading price of the TRX token reached a high of approximately $0.18 in April, but it declined to a low of approximately $0.05 in November 2022, representing a drawdown of approximately 75%. More recently, during 2024, the TRX token appreciated significantly, rising from approximately $0.11 in January 2024 to a high of approximately $0.44 in December 2024, a gain of approximately 309%. After significant price correction, the trading price of the TRX token reached approximately $0.284271 by the end of 2025. As of March 18, 2026, the closing price of the TRX token was approximately $0.304394, which was an increase of approximately 7% from the price by the end of 2025. These figures are non-exhaustive examples that illustrate that the market price of TRX token has exhibited, and may continue to exhibit, rapid and substantial increases or decreases over relatively short periods, which could materially and adversely affect the value of our holdings directly and the trading price of our securities indirectly. The price figures and percentage change figures above are based on the historical data file downloaded from the CoinMarketCap TRON Historical Data page.
Our financial results and the market price of our listed securities would be adversely affected, and our business and financial condition would be negatively impacted, if the price of TRX tokens decreased substantially, including as a result of:
decreased user and investor confidence in the TRX token, including due to the various factors described herein;
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investment and trading activities, such as (i) trading activities of highly active retail and institutional users and investors; and (ii) actual or expected significant dispositions of TRX tokens by large holders, including the expected liquidation of digital assets associated with entities that have filed for bankruptcy protection and the transfer and sale of TRX tokens associated with significant hacks, seizures, or forfeitures;
negative publicity, media or social media coverage, or sentiment due to events in or relating to, or perception of, TRON blockchain, TRX tokens or the broader digital assets industry, for example, (i) public perception that blockchains can be used as a platform to circumvent sanctions, including sanctions imposed on Russia or certain regions related to the ongoing conflict between Russia and Ukraine, or to fund criminal or terrorist activities, such as the purported use of digital assets by Hamas to fund its terrorist attack against Israel in October 2023; (ii) expected or pending civil, criminal, regulatory enforcement or other high profile actions against major participants in the TRON ecosystem, if any; and (iii) additional filings for bankruptcy protection or bankruptcy proceedings of major digital asset industry participants, such as the bankruptcy proceeding of FTX Trading and its affiliates;
changes in consumer preferences and the perceived value or prospects of the TRX token;
competition from other digital assets that exhibit better speed, security, scalability, or energy efficiency, that feature other more favored characteristics, that are backed by governments, including the U.S. government, or reserves of fiat currencies, or that represent ownership or security interests in physical assets;
a decrease in the price of other digital assets, including stablecoins, or the crash or unavailability of stablecoins that are used as a medium of exchange for TRX token purchase and sale transactions, such as the crash of the stablecoin Terra USD in 2022, to the extent the decrease in the price of such other digital assets or the unavailability of such stablecoins may cause a decrease in the price of TRX tokens or adversely affect investor confidence in digital assets generally;
developments relating to the TRON protocol, including (i) changes to the TRON protocol that impact its security, speed, scalability, usability, or value, such as changes to the cryptographic security protocol underpinning the TRON blockchain, changes to the maximum number of TRX tokens outstanding, changes to the mutability of transactions, changes relating to the size of blockchain blocks, and similar changes, (ii) failures to make upgrades to the TRON protocol to adapt to security, technological, legal or other challenges, and (iii) changes to the TRON protocol that introduce software bugs, security risks or other elements that adversely affect TRX tokens;
disruptions, failures, unavailability, or interruptions in service of trading venues for TRX tokens, such as, for example, the announcement by the digital asset exchange FTX Trading that it would freeze withdrawals and transfers from its accounts and subsequent filing for bankruptcy protection and the SEC enforcement action brought against Binance Holdings Ltd., which initially sought to freeze all of its assets during the pendency of the enforcement action and has since resulted in Binance discontinuing all fiat deposits and withdrawals in the U.S.;
the filing for bankruptcy protection by, liquidation of, or market concerns about the financial viability of digital asset custodians, trading venues, lending platforms, investment funds, or other digital asset industry participants, such as the filing for bankruptcy protection by digital asset trading venues FTX Trading and BlockFi and digital asset lending platforms Celsius Network and Voyager Digital Holdings in 2022, the ordered liquidation of the digital asset investment fund Three Arrows Capital in 2022, the announced liquidation of Silvergate Bank in 2023, the government-mandated closure and sale of Signature Bank in 2023, the placement of Prime Trust, LLC into receivership following a cease-and-desist order issued by the Nevada Department of Business and Industry in 2023, and the exit of Binance from the U.S. market as part of its settlement with the Department of Justice and other federal regulatory agencies;
regulatory, legislative, enforcement and judicial actions that adversely affect the price, ownership, transferability, trading volumes, legality or public perception of TRX tokens, or that adversely affect the operations of or otherwise prevent digital asset custodians, trading venues, lending platforms or other digital assets industry participants from operating in a manner that allows them to continue to deliver services to the digital assets industry;
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the recent resolution of a March 2023 civil enforcement action brought by the U.S. Securities and Exchange Commission that had been pending in the Southern District of New York (the “SEC Action”). Among other claims, the SEC Action had alleged that certain contests, giveaways, and secondary market trading involving TRX tokens in 2018 and 2019 constituted unregistered securities offerings under the law. In February 2025, the SEC Action was stayed by the Court at the request of the parties. On March 9, 2026, pursuant to a global agreement to resolve the matter, the Court entered final judgment which, among other things, dismissed with prejudice the unregistered securities offerings claims concerning TRX tokens;
transaction congestion and fees associated with processing transactions on the TRON network;
macroeconomic changes, such as changes in the level of interest rates and inflation, fiscal and monetary policies of governments, trade restrictions, and fiat currency devaluations;
developments in mathematics or technology, including in digital computing, algebraic geometry and quantum computing, that could result in the cryptography used by the TRON blockchain becoming insecure or ineffective; and
changes in national and international economic and political conditions, including, without limitation, federal government policies, trade tariffs and trade disputes, the adverse impacts attributable to the current conflict between Russia and Ukraine and the economic sanctions adopted in response to the conflict, and the broadening of the Israel-Hamas conflict to other countries in the Middle East.
Most importantly, our TRX token strategy has not been tested over an extended period of time or under different market conditions. Although we are and will be continually examining the risks and rewards of our TRX token strategy, if TRX token prices were to decrease or our TRX token strategy otherwise proves unsuccessful, the Company’s financial condition, results of operations, and the market price of our listed securities would be materially adversely impacted.
The TRX token and other digital assets are novel assets, and are subject to significant legal, commercial, regulatory and technical uncertainty
The TRX token and other digital assets are relatively novel and are subject to significant uncertainty, which could adversely impact their price. The application of state and federal securities laws and other laws and regulations to digital assets is unclear in certain respects, and it is possible that regulators in the United States or foreign countries may interpret or apply existing laws and regulations in a manner that adversely affects the price of the TRX token or the ability of individuals or institutions (including the Company) to own or transfer TRX tokens.
The U.S. federal government, states, regulatory agencies, and foreign countries may also enact new laws and regulations, or pursue regulatory, legislative, enforcement or judicial actions, that could materially impact the price of the TRX token or the ability of individuals or institutions (including the Company) to own or transfer TRX tokens. For example, within the past several years:
President Trump signed an executive order instructing a working group comprised of representatives from key federal agencies to evaluate measures that can be taken to provide regulatory clarity and certainty built on technology-neutral regulations for individuals and firms involved in digital assets, including through well-defined jurisdictional regulatory boundaries;
the European Union adopted Markets in Crypto Assets Regulation (“MiCA”), a comprehensive digital asset regulatory framework for the issuance and use of digital assets;
in June 2023, the SEC filed complaints against Binance Holdings Ltd. and Coinbase, Inc., and their respective affiliated entities, relating to, among other claims, that each party was operating as an unregistered securities exchange, broker, dealer, and clearing agency;
in November 2023, the SEC filed a complaint against Payward Inc. and Payward Ventures Inc., together known as Kraken, alleging, among other claims, that Kraken’s crypto trading platform was operating as an unregistered securities exchange, broker, dealer, and clearing agency;
in June 2023, the United Kingdom adopted and implemented the Financial Services and Markets Act 2023 (“FSMA 2023”), which regulates market activities in “cryptoassets;”
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in November 2023, Binance Holdings Ltd. and its then chief executive officer reached a settlement with the U.S. Department of Justice, CFTC, the U.S. Department of Treasury’s Office of Foreign Asset Control, and the Financial Crimes Enforcement Network to resolve a multi-year investigation by the agencies and a civil suit brought by the CFTC, pursuant to which Binance Holdings Ltd. agreed to, among other things, pay $4.3 billion in penalties across the four agencies and to discontinue its operations in the United States; and
in China, the People’s Bank of China and the National Development and Reform Commission have outlawed cryptocurrency mining and declared all cryptocurrency transactions illegal within the country.
It is not possible to predict whether, or when, new laws will be enacted that change the legal framework governing digital assets or provide additional authorities to the SEC or other regulators, or whether, or when, any other federal, state or foreign legislative bodies will take any similar actions. It is also not possible to predict the nature of any such additional laws or authorities, how additional legislation or regulatory oversight might impact the ability of digital asset markets to function, the willingness of financial and other institutions to continue to provide services to the digital assets industry, or how any new laws or regulations, or changes to existing laws or regulations, might impact the value of digital assets generally and TRX tokens specifically. The consequences of any new law or regulation relating to digital assets and digital asset activities could adversely affect the market price of TRX tokens, as well as our ability to hold or transact in TRX tokens, and in turn adversely affect the market price of our listed securities.
Moreover, the risks of engaging in a TRX token strategy are relatively novel and have created, and could continue to create, complications due to the lack of experience that third parties have with companies engaging in such a strategy, such as increased costs of director and officer liability insurance or the potential inability to obtain such coverage on acceptable terms in the future.
The growth of the digital assets industry in general, and the use and acceptance of the TRX token in particular, may also impact the price of the TRX token and is subject to a high degree of uncertainty. The pace of worldwide growth in the adoption and use of TRX tokens may depend, for instance, on public familiarity with digital assets, ease of buying, accessing or gaining exposure to TRX tokens, institutional demand for TRX tokens as an investment asset, the participation of traditional financial institutions in the digital assets industry, consumer demand for TRX tokens as means of payment, and the availability and popularity of alternatives to the TRX token. Even if growth in TRX token adoption occurs in the near or medium-term, there is no assurance that TRX token usage will continue to grow over the long-term.
Because the TRX token has no physical existence beyond the record of transactions on the TRON blockchain, a variety of technical factors related to the TRON blockchain could also impact the price of the TRX token. For example, malicious attacks by hackers, hard “forks” of the TRX token blockchain into multiple blockchains, and advances in digital computing, algebraic geometry, and quantum computing could undercut the integrity of the TRON blockchain and negatively affect the price of the TRX token. The liquidity of the TRX token may also be reduced and damage to the public perception of the TRX token may occur, if financial institutions were to deny or limit banking services to businesses that hold TRX tokens, provide TRX token-related services or accept the TRX token as payment, which could also decrease the price of the TRX token. Actions by U.S. banking regulators, such as the issuance in February 2023 by Federal banking agencies of the “Interagency Liquidity Risk Statement,” which cautioned banks on contagion risks posed by providing services to digital assets customers, and similar actions, have in the past resulted in or contributed to reductions in access to banking services for cryptocurrency-related customers and service providers, or the willingness of traditional financial institution to participate in markets for digital assets. The liquidity of the TRX token may also be impacted to the extent that changes in applicable laws and regulatory requirements impact the ability of exchanges and trading venues to provide services for TRX tokens and other digital assets.
A significant decrease in the market value of our TRX token holdings could adversely affect our ability to satisfy our financial obligations.
For the year ended December 31, 2025, our toys and souvenir business did not generate positive cash flow from operations. If our toys and souvenir business does not generate cash flow in future periods sufficient to satisfy our financial obligations, including our debt and cash dividend obligations, we intend to fund our obligations using cash flow generated by equity or debt financings. Our ability to achieve the objectives of our TRX token strategy depends in significant part on our ability to obtain equity and debt financing. If we are unable to obtain equity or debt financing on favorable terms or at all, we may not be able to successfully execute on our TRX token strategy.
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Our ability to obtain equity or debt financing may in turn depend on, among other factors, the value of our TRX token holdings, investor sentiment and the general public perception of TRX tokens, our strategy and our value proposition. Accordingly, a significant decline in the market value of our TRX token holdings or a negative shift in these other factors may create liquidity and credit risks, as such a decline or such shifts may adversely impact our ability to secure sufficient equity or debt financing to satisfy our financial obligations, including our debt and cash dividend obligations. These risks could materialize at times when the TRX token is trading below its carrying value on our most recent balance sheet or our cost basis. As TRX tokens constitute the vast bulk of assets on our balance sheet, if we are unable to secure equity or debt financing in a timely manner, on favorable terms, or at all, we may be required to sell TRX tokens to satisfy these obligations. Any such sale of TRX token may have a material adverse effect on our operating results and financial condition, and could our ability to secure additional equity or debt financing in the future. Our to secure additional equity or debt financing in a timely manner, on terms or at all, or to sell our TRX tokens in amounts and at prices sufficient to our financial obligations, including our debt service and cash dividend obligations, could cause us to under such obligations. Any on our current or future indebtedness or preferred stock may have a material effect on our financial condition.
Our historical financial statements do not reflect the potential variability in earnings that we may experience in the future relating to our TRX token holdings.
Given that we have only started adopting the TRON (TRX) treasury strategy since June 2025, our historical financial statements do not reflect the potential variability in earnings that we may experience in the future from holding or selling significant amounts of TRX tokens. The price of the TRX token has historically been subject to dramatic price fluctuations and is highly volatile. Our TRX token holdings are expected to significantly affect our financial results and if we continue to increase our overall holdings of TRX tokens in the future, they will have an even greater impact on our financial results and the market price of our listed securities. Going forward, we will evaluate and adopt appropriate accounting standards and policies for the preparation of our financial statements, in particular to areas relating to our TRX token holdings.
Our TRX token strategy subjects us to enhanced regulatory oversight.
There has been increasing focus on the extent to which digital assets can be used to launder the proceeds of illegal activities, fund criminal or terrorist activities, or circumvent sanctions regimes, including those sanctions imposed in response to the ongoing conflict between Russia and Ukraine. While we have implemented and maintain policies and procedures reasonably designed to promote compliance with applicable anti-money laundering and sanctions laws and regulations and take care to only acquire our TRX tokens through entities subject to anti-money laundering regulation and related compliance rules in the United States, if we are found to have purchased any of our TRX tokens from bad actors that have used TRX tokens to launder money or persons subject to sanctions, we may be subject to regulatory proceedings and any further transactions or dealings in TRX tokens by us may be restricted or prohibited.
We may incur indebtedness or enter into other financial instruments in the future that may be collateralized by our TRX token holdings. We may also consider pursuing strategies to create income streams or otherwise generate funds using our TRX token holdings. These types of TRX token-related transactions are the subject of enhanced regulatory oversight. These and any other TRX token-related transactions we may enter into, beyond simply acquiring and holding TRX tokens, may subject us to additional regulatory compliance requirements and scrutiny, including under federal and state money services regulations, money transmitter licensing requirements and various commodity and securities laws and regulations.
Additional laws, guidance and policies may be issued by domestic and foreign regulators following the filing for Chapter 11 bankruptcy protection by FTX, one of the world’s largest cryptocurrency exchanges, in November 2022. While the financial and regulatory fallout from FTX’s collapse did not directly impact our business, financial condition or corporate assets, the FTX collapse may have increased regulatory focus on the digital assets industry. Increased enforcement activity and changes in the regulatory environment, including changing interpretations and the implementation of new or varying regulatory requirements by the government or any new legislation affecting TRX tokens, as well as enforcement actions involving or impacting our trading venues, counterparties and custodians, may impose significant costs or significantly limit our ability to hold and transact in TRX tokens.
In addition, private actors that are wary of the TRX token or the regulatory concerns associated with the TRX token have in the past taken and may in the future take further actions that may have an adverse effect on our business or the market price of our listed securities.
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Due to the unregulated nature and lack of transparency surrounding the operations of many TRX token trading venues, TRX token trading venues may experience greater fraud, security failures or regulatory or operational problems than trading venues for more established asset classes, which may result in a loss of confidence in TRX token trading venues and adversely affect the value of our TRX token.
TRX token trading venues are relatively new and, in many cases, unregulated. Furthermore, there are many TRX token trading venues which do not provide the public with significant information regarding their ownership structure, management teams, corporate practices and regulatory compliance. As a result, the marketplace may lose confidence in TRX token trading venues, including prominent exchanges that handle a significant volume of TRX token trading and/or are subject to regulatory oversight, in the event one or more TRX token trading venues cease or pause for a prolonged period the trading of TRX token or other digital assets, or experience fraud, significant volumes of withdrawal, security failures or operational problems.
The concentration of our TRX token holdings enhances the risks inherent in our TRX token strategy.
The vast majority of our assets are concentrated in our TRX token holdings. As of March 18, 2026, the Company holds approximately 549,676,892 Staked TRX (sTRX) tokens and approximately 9,769,626 TRX tokens in the Treasury Wallet. We intend to purchase additional TRX tokens and increase our overall holdings of TRX tokens in the future. The concentration of our TRX token holdings limits the risk mitigation that we could achieve if we were to purchase a more diversified portfolio of treasury assets, and the absence of diversification enhances the risks inherent in our TRX token strategy.
Our holdings of sTRX tokens are subject to risks associated with smart contracts and the TRON blockchain, which could adversely affect their value.
We received and hold sTRX tokens, which are issued and redeemable through a smart-contract protocol. The use of sTRX entails risks inherent in smart contracts, including the possibility of coding errors, security vulnerabilities, or malicious exploits that could result in the partial or total loss of sTRX or the underlying TRX. In addition, risks relating to the TRON blockchain itself, such as congestion, outages, or consensus failures, could disrupt transfers, redemptions, or yield distributions. Further, the staking yield of sTRX consists of standard staking rewards and energy rental income on the TRON blockchain, therefore, any changes to TRON protocol parameters could alter yields, redemption mechanics, or fees in ways that negatively affect the value of sTRX. Any of these risks could materially and adversely affect the value of our sTRX holdings and, by extension, our business, financial condition, and results of operations.
Due to Justin Sun’s role as the founder of TRON and his continued association with the TRON blockchain system, his actions and statements may potentially impact the price of TRX, which could in turn impact the Company and the effectiveness of its treasury strategy.
As the founder of TRON, and due to his continued association with the TRON blockchain system, Justin Sun ’ s actions and statements may potentially impact the price of TRX. While the Company is not aware of any past action or statement by Justin Sun which has had a significant impact on the price of TRX, it is theoretically possible that the market could have interpreted in the past, or interpret in the future, his statements and actions (whether incorrectly in whole or in part) as a factor that could impact the price of TRX. Any such occurrence that impacts the price of TRX would likely also affect the value of the Company ’ s Common Stock or other securities.
The emergence or growth of other digital assets, including those with significant private or public sector backing, could have a negative impact on the price of TRX tokens and adversely affect our business.
As a result of our TRX token strategy, our assets are concentrated in our TRX token holdings. Accordingly, the emergence or growth of digital assets other than the TRX token (such as Bitcoin and Ethereum) may have a material adverse effect on our financial condition.
Other alternative digital assets that compete with the TRX token in certain ways include “stablecoins,” which are designed to maintain a constant price because of, for instance, their issuers’ promise to hold high-quality liquid assets (such as U.S. dollar deposits and short-term U.S. treasury securities) equal to the total value of stablecoins in circulation. Stablecoins have grown rapidly as a medium of exchange and store of value, particularly on digital asset trading platforms. As of December 31, 2025, two of the eight largest digital assets by market capitalization were U.S. dollar-pegged stablecoins.
Additionally, the introduction of a government-issued digital currency could eliminate or reduce the need or demand for private-sector issued cryptocurrencies, or significantly limit their utility. National governments around the world could introduce central bank digital currencies, which could in turn limit the size of the market opportunity for cryptocurrencies, including TRX tokens.
Our TRX token holdings are less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents.
The TRX tokens are mainly traded on centralized and decentralized cryptocurrency exchange platforms. During times of market instability, we may not be able to sell our TRX tokens at favorable prices or at all. As a result, our TRX token holdings may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. Further, TRX tokens we hold and transact with our trade execution partners does not enjoy the same protections as are available to cash or securities deposited with or transacted by institutions subject to regulation by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation.
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Moreover, TRX tokens may be “staked” on various platforms, including centralized cryptocurrency exchanges, or directly on decentralized platforms. “Staking” is a crypto-related process that allows network participants to earn rewards by locking their tokens in wallets. The TRX tokens in the Treasury Wallet are currently “staked” on JustLend, a decentralized finance (DeFi) protocol, in exchange for Staked TRX (sTRX) tokens. sTRX token is a derivative token that represents the “staked” TRX tokens, which can automatically generate yield for the token holders. For the avoidance of doubt, the sTRX token does not generate discrete staking rewards. Instead, the economic benefit of staking is reflected through a floating conversion rate between TRX and sTRX, which increases over time based on accrued protocol rewards. While “staking” can generate yields and rewards, there are inherent risks such as (i) smart contract risk – any vulnerabilities of the smart contract may potentially lead to loss of funds, and the redemption of “staked” tokens which is governed by smart contract may be modified by the operator; (ii) interest rate fluctuations – rates can change rapidly based on market conditions, and therefore the amount of yields or is not guaranteed; and (iii) liquidity risk – it may take days or even weeks to release TRX tokens from “staking”. Other than yields and generated from “staking” of the TRX tokens, the TRX token itself does not pay interest or other returns and we can only generate cash from our TRX token holdings if we sell our TRX tokens or implement strategies to create income streams or otherwise generate cash by using our TRX token holdings. Even if we pursue any such strategies, we may be to create income streams or otherwise generate cash from our TRX token holdings, and any such strategies may subject us to additional risks.
The TRX tokens staked through JustLend have been voted to super representative nodes on the TRON blockchain. According to Tronscan (the explorer of TRON blockchain), as of March 18, 2026, the TRX tokens which were staked into Staked TRX (sTRX) have been casted votes for the following super representatives: Abra Capital Management, Poloniex, BlockAnalysis, Crypto Labs, and TRONALLIANCE. The voting power was allocated on an approximately equal basis among these nodes. These nodes are identifiable on the TRON blockchain explorer, and the Company does not exercise discretion over the selection beyond the delegation carried out through the JustLend protocol.
Additionally, we may be unable to enter into term loans or other capital raising transactions collateralized by our unencumbered TRX tokens or otherwise generate funds using our TRX token holdings, including in particular during times of market instability or when the price of TRX tokens has declined significantly. If we are unable to sell our TRX tokens, enter into additional capital raising transactions, including capital raising transactions using TRX tokens as collateral, or otherwise generate funds using our TRX token holdings, or if we are forced to sell our TRX tokens at a significant loss, in order to meet our working capital requirements, our business and financial condition could be negatively impacted.
We face risks relating to the security of the wallets holding our TRX tokens, including the loss or destruction of private keys required to access our TRX tokens and cyberattacks or other data loss relating to our TRX tokens.
TRX tokens are controllable only by the possessor of both the unique public key and private key(s) relating to the local or online digital wallet in which a TRX token is held. While the TRON blockchain ledger requires a public key relating to a digital wallet to be published when used in a transaction, private keys must be safeguarded and kept private in order to prevent a third party from accessing the TRX tokens held in such wallet. To the extent the private key(s) for a digital wallet are lost, destroyed, or otherwise compromised and no backup of the private key(s) is accessible, we will not be able to access the TRX tokens held in the related digital wallet. Furthermore, we cannot provide assurance that our digital wallets will not be compromised as a result of a cyberattack.
The limited rights of legal recourse available to us, and our lack of insurance protection expose us and our stockholders to the risk of loss of our digital assets.
Our digital assets are not insured. If our digital assets are lost, stolen or destroyed under circumstances rendering a party liable to us, the responsible party may not have the financial resources sufficient to satisfy our claim. For example, as to a particular event of loss, the only source of recovery for us might be limited, to the extent identifiable, to other responsible third parties (which may include a thief or terrorist), some or all of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim or may be beyond the reach of available legal recourse. Furthermore, the TRX token is not subject to Federal Deposit Insurance Corporation (“FDIC”) or Securities Investor Protection Corporation protection, which is the protection afforded to depositors at banking institutions. Therefore, a loss may be suffered with respect to our digital assets for which no recourse is available, which could adversely affect our operations and, consequently, an investment in our securities.
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If we or our third-party service providers experience a security breach or cyberattack and unauthorized parties obtain access to our TRX tokens, we may lose some or all of our TRX tokens and our financial condition and results of operations could be materially adversely affected.
Security breaches and cyberattacks are of particular concern with respect to our TRX tokens. Blockchain-based digital assets have been, and may in the future be, subject to security breaches, cyberattacks, or other malicious activities. A successful security breach or cyberattack could result in a partial or total loss of our TRX tokens. Such a loss could have a material adverse effect on our financial condition and results of operations.
As of March 18, 2026, the TRON blockchain and TRX tokens have not experienced any material security breaches or protocol-level cyberattacks that compromised the integrity of the network. TRON currently maintains a public bug bounty program on HackerOne and has undergone an external security audit of its Java-Tron node software by ChainSecurity. However, the TRON blockchain and TRX token, similar to other digital assets and blockchain technologies, may in the future be, subject to security breaches, cyberattacks, or other malicious activities. For example, in November 2022, hackers exploited weaknesses in the security architecture of the FTX Trading digital asset exchange and reportedly stole over $400 million in digital assets from customers. A successful security breach or cyberattack could result in:
a partial or total loss of our TRX tokens;
harm to our reputation and brand;
improper disclosure of data and violations of applicable data privacy and other laws; or
significant regulatory scrutiny, investigations, fines, penalties, and other legal, regulatory, contractual and financial exposure.
Further, any actual or perceived data security breach or cybersecurity attack directed at other companies with digital assets or companies that operate digital asset networks, regardless of whether we are directly impacted, could lead to a general loss of confidence in the broader TRON blockchain ecosystem or in the use of the TRON blockchain to conduct financial transactions, which could negatively impact us.
Attacks upon systems across a variety of industries are increasing in frequency, persistence, and sophistication, and, in many cases, are being conducted by sophisticated, well-funded and organized groups and individuals, including state actors. The techniques used to obtain unauthorized, improper or illegal access to systems and information (including personal data and digital assets), disable or degrade services, or sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized or detected until after they have been launched against a target. These attacks may occur on our systems or those of our third-party service providers or partners. We may experience breaches of our security measures due to human error, malfeasance, insider threats, system errors or or other . In particular, parties have attempted, and we expect that they will continue to attempt, to access to our systems and facilities, as well as those of our partners and third-party service providers, through various means, such as hacking, social engineering, phishing and . In the past, hackers have employed a social engineering attack one of our service providers and our digital assets, although, to date, such events have not been material to our financial condition or operating results. can come from a variety of sources, including hackers, hacktivists, state-sponsored intrusions, industrial espionage, and insiders. In addition, certain types of attacks could us even if our systems are left undisturbed. For example, certain are designed to remain dormant or undetectable, sometimes for extended periods of time, or until launched a target and we may not be to implement adequate preventative measures. Further, there has been an increase in such activities due to the increase in work-from-home arrangements since the onset of the COVID-19 pandemic. The risk of could also be increased by cyberwarfare in connection with the ongoing Russia-Ukraine and Israel-Hamas , or other future , including potential proliferation of malware into systems unrelated to such . Any future of our operations or those of others in the digital asset industry, including third-party services on which we rely, could materially and affect our business.
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Absent federal regulations, there is a possibility that the TRX token (either on its own or when offered and sold as part of or subject to an investment contract) may be classified as a “security.” Any such classification of TRX token as a “security” would subject us to additional regulation and could materially impact the operation of our business.
Our assets are concentrated in our TRX token holdings. While neither the SEC nor any other U.S. federal or state regulator has publicly stated whether they agree that the TRX token, either on its own or when offered and sold as part of or subject to an investment contract, is a “security”, if the TRX token is determined to be a “security” in the future, it could lead to our classification as an “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”), which would subject us to significant additional regulatory controls that could have a material adverse effect on our ability to execute on our TRX token strategy, and our business and operations and may also require us to substantially change the manner in which we conduct our business.
While (for the reasons discussed below) we believe that TRX token, whether on its own or when offered and sold as part of or subject to an investment contract, is not a “security” within the meaning of the U.S. federal securities laws, and registration of the Company under the Investment Company Act is therefore not required under the applicable securities laws, we acknowledge that a regulatory body or federal court may determine otherwise. Our belief, even if reasonable under the circumstances, would not preclude legal or regulatory action based on such a finding that TRX token, whether on its own or when offered and sold as part of or subject to an investment contract, is a “security” which would require us to register as an investment company under the Investment Company Act.
We have also adapted our process for analyzing the U.S. federal securities law status of the TRX token and other cryptocurrencies over time, as guidance and case law have evolved. As part of our U.S. federal securities law analytical process, we take into account a number of factors, including the various definitions of “security” under U.S. federal securities laws and federal court decisions interpreting the elements of these definitions, such as the U.S. Supreme Court’s decisions in the Howey and Reves cases, as well as court rulings, reports, orders, press releases, public statements, and speeches by the SEC Commissioners and SEC Staff providing guidance on when a digital asset or a transaction to which a digital asset may relate may be a security for purposes of U.S. federal securities laws. Our position that TRX token, whether on its own or when offered and sold as part of or subject to an investment contract, is not a “security” is premised, among other reasons, on our conclusion that the TRX token does not meet the elements of the Howey test. Among the reasons for our conclusion that the TRX token is not a security is that holders of TRX tokens do not have a reasonable expectation of profits from our efforts in respect of their holding of TRX tokens. Also, TRX token ownership does not convey the right to receive any interest, rewards, or other returns.
We acknowledge, however, that the SEC, a federal court or another relevant entity could take a different view. Application of securities laws to the specific facts and circumstances of digital assets is complex and subject to change. Our conclusion, even if reasonable under the circumstances, would not preclude legal or regulatory action based on a finding that the TRX token, or any other digital asset we might hold, is a “security.” As such, we are at risk of enforcement proceedings against us, which could result in potential injunctions, cease-and-desist orders, fines, and penalties if the TRX token was determined to be a security by a regulatory body or a court. Such developments could subject us to fines, penalties, and other damages, and adversely affect our business, results of operations, financial condition, and prospects.
Under Sections 3(a)(1)(A) and (C) of the Investment Company Act, a company generally will be deemed to be an “investment company” if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding, or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities, shares of registered money market funds under Rule 2a-7 of the Investment Company Act, and cash items) on an unconsolidated basis. Rule 3a-1 under the Investment Company Act generally provides that notwithstanding the Section 3(a)(1)(C) test described in clause (ii) above, an entity will not be deemed to be an “investment company” for purposes of the Investment Company Act if no more than 45% of the value of its assets (exclusive of U.S. government securities, shares of registered money market funds under Rule 2a-7 of the Investment Company Act, and cash items) consists of, and no more than 45% of its net income after taxes (for the past four fiscal quarters combined) is derived from, securities other than U.S. government securities, shares of registered money market funds under Rule 2a-7 of the Investment Company Act, securities issued by employees’ securities companies, securities issued by qualifying majority owned subsidiaries of such entity, and securities issued by qualifying companies that are controlled primarily by such entity. We do not believe that we are an “investment company” as such term is defined in either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act.
With respect to Section 3(a)(1)(A), following the June PIPE Offering, our ownership or holding of TRX tokens is in excess of 40% of our total assets. Since we believe that the TRX token is not an investment security, we do not hold ourselves out as being engaged primarily, or propose to engage primarily, in the business of investing, reinvesting, or trading in securities within the meaning of Section 3(a)(1)(A) of the Investment Company Act.
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With respect to Section 3(a)(1)(C), we believe we satisfy the elements of Rule 3a-1 and therefore are deemed not to be an investment company under, and we intend to conduct our operations such that we will not be deemed an investment company under, Section 3(a)(1)(C). We believe that we are not an investment company pursuant to Rule 3a-1 under the Investment Company Act because, on a consolidated basis with respect to wholly-owned subsidiaries but otherwise on an unconsolidated basis, no more than 45% of the value of the Company’s total assets (exclusive of U.S. government securities, shares of registered money market funds under Rule 2a-7 of the Investment Company Act, and cash items) consists of, and no more than 45% of the Company’s net income after taxes (for the last four fiscal quarters combined) is derived from, securities other than U.S. government securities, shares of registered money market funds under Rule 2a-7 of the Investment Company Act, securities issued by employees’ securities companies, securities issued by qualifying majority owned subsidiaries of the Company, and securities issued by qualifying companies that are controlled primarily by the Company.
TRX tokens and other digital assets, as well as new business models and transactions enabled by blockchain technologies, present novel interpretive questions under the Investment Company Act. There is a risk that assets or arrangements that we have concluded are not securities could be deemed to be securities by the SEC or another authority for purposes of the Investment Company Act, which would increase the percentage of securities held by us for Investment Company Act purposes. The SEC has requested information from a number of participants in the digital assets’ ecosystem, regarding the potential application of the Investment Company Act to their businesses. For example, in an action unrelated to the Company, in February 2022, the SEC issued a cease-and-desist order under the Investment Company Act to BlockFi Lending LLC, in which the SEC alleged that BlockFi was operating as an unregistered investment company because it issued securities and also held more than 40% of its total assets, excluding cash, in investment securities, including the loans of digital assets made by BlockFi to institutional borrowers.
If we were deemed to be an investment company, Rule 3a-2 under the Investment Company Act is a safe harbor that provides a one-year grace period for transient investment companies that have a bona fide intent to be engaged primarily, as soon as is reasonably possible (in any event by the termination of such one-year period), in a business other than that of investing, reinvesting, owning, holding, or trading in securities, with such intent evidenced by the company’s business activities and an appropriate resolution of its board of directors. The grace period is available not more than once every three years and runs from the earlier of (i) the date on which the issuer owns securities and/or cash having a value exceeding 50% of the issuer’s total assets on either a consolidated or unconsolidated basis or (ii) the date on which the issuer owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Accordingly, the grace period may not be available at the time that we seek to rely on Rule 3a-2; however, Rule 3a-2 is a safe harbor and we may rely on any exemption or exclusion from investment company status available to us under the Investment Company Act at any given time. Furthermore, reliance on Rule 3a-2, Section 3(a)(1)(C), or Rule 3a-1 could require us to take actions to dispose of securities, limit our ability to make certain investments or enter into joint ventures, or otherwise limit or change our service offerings and operations. If we were to be deemed an investment company in the future, restrictions imposed by the Investment Company Act — including on our ability to issue different classes of stock and equity compensation to directors, officers, and employees and restrictions on management, operations, and transactions with affiliated persons — likely would make it for us to continue our business as contemplated, and could have a material effect on our business, results of operations, financial condition, and prospects.
We are not subject to legal and regulatory obligations that apply to investment companies such as mutual funds and exchange-traded funds, or to obligations applicable to investment advisers.
Mutual funds, ETFs and their directors and management are subject to extensive regulation as “investment companies” and “investment advisers” under U.S. federal and state law; this regulation is intended for the benefit and protection of investors. We are not subject to, and do not otherwise voluntarily comply with, these laws and regulations. This means, among other things, that the execution of or changes to our Treasury Reserve Policy or our TRX token strategy, our use of leverage, the manner in which our TRX tokens are custodied, our ability to engage in transactions with affiliated parties and our operating and investment activities generally are not subject to the extensive legal and regulatory requirements and prohibitions that apply to investment companies and investment advisers. For example, although a significant change to our Treasury Reserve Policy would require the approval of our Board, no shareholder or regulatory approval would be necessary. Consequently, our Board has broad discretion over the investment, leverage and cash management policies it authorizes, whether in respect of our TRX token holdings or other activities we may pursue, and has the power to change our current policies, including our strategy of acquiring and holding TRX tokens.
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Our TRX token strategy exposes us to risk of non-performance by counterparties in the future.
As of the date hereof, the Company does not have any material agreements with counterparties relating to the purchase or sale of TRX tokens. However, this may change in the future. Our TRX token strategy exposes us to the risk of non-performance by counterparties, whether contractual or otherwise. Risk of non-performance includes inability or refusal of a counterparty to perform because of a deterioration in the counterparty’s financial condition and liquidity or for any other reason. For example, our execution partners, or other counterparties might fail to perform in accordance with the terms of our agreements with them, which could result in a loss of TRX tokens, a loss of the opportunity to generate funds, or other losses.
If we pursue any strategies to create income streams or otherwise generate funds using our TRX token holdings, we would become subject to additional counterparty risks. Any significant non-performance by counterparties could have a material adverse effect on our business, prospects, financial condition, and operating results.
Further, the broader digital assets industry is subject to counterparty risks, which could adversely impact the adoption rate, price, and use of TRX tokens. A series of recent high-profile bankruptcies, closures, liquidations, regulatory enforcement actions and other events relating to companies operating in the digital asset industry have highlighted the counterparty risks applicable to owning and transacting in digital assets. Although these bankruptcies, closures, liquidations and other events have not resulted in any loss or misappropriation of our TRX tokens, nor have such events adversely impacted our access to our TRX tokens, they have, in the short-term, likely negatively impacted the adoption rate and use of the TRX tokens. Additional bankruptcies, closures, liquidations, regulatory enforcement actions or other events involving participants in the digital assets industry in the future may further impact the adoption rate, price, and use of the TRX token, limit the availability to us of financing collateralized by TRX tokens, or create or additional counterparty risks. Changes in the accounting treatment of our TRX token holdings could have significant accounting impacts, including increasing the of our results.
The broader digital assets industry, including the technology associated with digital assets, the rate of adoption and development of, and use cases for, digital assets, market perception of digital assets, and the legal, regulatory, and accounting treatment of digital assets are constantly developing and changing, and there may be additional risks in the future that are not possible to predict.
The price decrease of energy, a type of system resources on the TRON blockchain, could negatively affect the Company .
Bandwidth and energy are main types of resources on the TRON blockchain which are necessary for execution of different types of transactions. Except for query operations, the execution of all the transactions on the TRON blockchain consumes bandwidth. Bandwidth measures the byte size of a transaction on the blockchain. The larger the transaction is, the more bandwidth will be consumed. Energy measures the resources consumed by the TRON Virtual Machine (TVM) to execute a smart contract. Energy is only consumed when deploying or triggering a smart contract.
According to committee proposals available on Tronscan, the proposal #104 which proposed the modification of transaction fee of 1 unit of energy from 0.00021 TRX token to 0.0001 TRX token was approved by the SR and became effective on August 29, 2025. Because users consume energy to execute smart contracts on the TRON blockchain, the price decrease of energy has several implications and potential risks.
The effectiveness of proposal #104 means that less TRX is required to be burned (from 0.00021 TRX token to 0.0001 TRX token) to obtain a unit of energy; as a result, the cost for users to obtain energy through TRX burning decreases significantly, and therefore there will be less demand for energy rental. This change may:
Lower the yields in the energy rental market, as evidenced by JustLend DAO’s downward adjustment of its base rate, which means the staking yield to be earned by the Company through sTRX generated from standard staking and energy rental is expected to be lower; this may cause the value of sTRX held by the Company to decline. Any such decline could negatively affect the Company’s return on its sTRX holdings, which in turn could negatively impact the Company.
Lessen the deflationary pressure on the TRX token supply as fewer TRX tokens will be burned by users for obtaining energy.
(iii)
Increase the on-chain transaction volume as transaction costs are lower.
Lower the TRX token threshold for executing smart contracts, which is expected to enable broader participation and expand the network’s active user base.
Lower the barriers for developers and dApps, which is expected to drive increased contract deployment and greater TRON ecosystem activity.
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Risks Related to Our Corporate Structure
In 2023, the PRC government initiated a series of regulatory actions and statements to regulate business operations in certain areas in Mainland China, including cracking down on illegal activities in the securities market, enhancing supervision over Mainland China-based companies listed overseas using the variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. We are subject to PRC laws and regulations related to the current or future business operations of our subsidiary in Hong Kong and any changes in such laws and regulations and interpretations may impair its ability to operate profitably, which could result in a material negative impact on its operations and/or the value of our Common Stock or other securities.
Although we have direct ownership of our subsidiary in Hong Kong and currently do not have or intend to have any subsidiary or any contractual arrangement to establish a VIE structure with any entity in Mainland China, we are still subject to certain legal and operational risks associated with our connections to Hong Kong. The legal and operational risks associated in Mainland China also apply to our current or future operations in Hong Kong, and we face the risks and uncertainties associated with the complex and evolving PRC laws and regulations and as to whether and how the recent PRC government statements and regulatory developments, such as those relating to data and cyberspace security and anti-monopoly concerns, would be applicable to a company such as our subsidiary and our Company, given the Hong Kong aspects of our subsidiary in Hong Kong and the potential that the Chinese government may exercise significant oversight over the conduct of business in Hong Kong. In the event we were to become subject to PRC laws and regulations, we could incur material costs to ensure compliance, and might be subject to fines, experienced evaluation of securities or delisting, restrictions on securities offerings, and/or no longer be permitted to continue business operations as presently conducted. Our organizational structure involves risks to the investors, and Chinese regulatory authorities could this structure, which would likely result in a material change in our subsidiary’s operations and/or a material change in the value of our Common Stock or other securities, including the risk that such event could cause the value of our Common Stock or other securities to . Moreover, there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations potentially related to our business and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and regulations may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations, may be , and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our understanding of these laws and regulations. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
We may become subject to a variety of PRC laws and other obligations regarding M&A Rules, the Trial Measures and data security, and any failure to comply with applicable laws and obligations could potentially have a material and adverse effect on our business, financial condition and results of operations.
The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies on August 8, 2006, and amended on June 22, 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of domestic companies in Mainland China and controlled by companies or individuals of Mainland China to obtain the approval of the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. In addition, on December 24, 2021, the CSRC released the Administrative Regulations of the State Council Concerning the Oversea Issuance of Security and Listing by Domestic Enterprise (Draft for Comments) (the “Draft Administrative Regulations”) and the Measures for the Overseas Issuance of Securities and Listing Record-Filings by Domestic Enterprises (Draft for Comments) (the “Draft Filing Measures”), collectively the “Draft Rules on Overseas Listing”, for public opinion.
As of the date of this Annual Report, we have no subsidiary, VIE structure or any direct operations in Mainland China, nor do we intend to have any subsidiary or VIE structure or to acquire any equity interests in any domestic companies in Mainland China, and we have not generated any revenues or profits in Mainland China. Additionally, we do not intend to operate in Mainland China in the foreseeable future. As such, we do not believe we would be subject to the M&A Rules, or would be required to file with the CSRC under the Trial Measures. Moreover, pursuant to the Basic Law of the Hong Kong Special Administrative Region, or the Basic Law, PRC laws and regulations shall not be applied in Hong Kong except for those listed in Annex III of the Basic Law (which is confined to laws relating to national defense, foreign affairs and other matters that are not within the scope of autonomy). Therefore, we believe, as of the date of this Form 10-K, the CSRC’s approval or review is not required for the listing and trading of our Common Stock in the U.S. exchange as provided under the M&A Rules and the Trial Measures. We believe it is not necessary to obtain, and we have not obtained, an opinion from PRC or Hong Kong counsel to consult on the above.
SRM Ltd has two independent contractors in Hong Kong, which is a part of the PRC. In 2023, the PRC government initiated a series of regulatory actions and statements to regulate business operations in certain areas in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using a VIE structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding its efforts in anti-monopoly enforcement. Since these statements and regulatory actions are new, it is highly uncertain how soon the legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any. It is also highly uncertain what the potential impact such modified or new laws and regulations will have on our Hong Kong subsidiary. These actions could result in a material change in the Hong Kong aspects of our operations and/or to the value of our Common Stock or other securities.
Statements by the PRC government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China based issuers. On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued a document to crack down on illegal activities in the securities markets and promote the high-quality development of the capital markets, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws.
On December 24, 2021, the CSRC released the Draft Administrative Provisions and the Draft Filing Measures, both of which had a comment period that expired on January 23, 2022. The Draft Administrative Provisions and Draft Filing Measures regulate the administrative system, record-filing management, and other related rules in respect of the direct or indirect overseas issuance of listed and traded securities by “domestic enterprises”. The Draft Administrative Provisions specify that the CSRC has regulatory authority over the “overseas securities offering and listing by domestic enterprises”, and requires “domestic enterprises” to complete filing procedures with the CSRC if they wish to list overseas. On February 17, 2023, the CSRC released the Trial Measures and five supporting guidelines, which came into effect on March 31, 2023. According to the Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedures and report relevant information to the CSRC; any failure to comply with such filing procedures may result in administrative penalties, such as an order to rectify, warnings, and fines. On April 2, 2022, the CSRC published the Draft Archives Rules, for public comment. These rules state that in the overseas listing activities of domestic companies, domestic companies, as well as securities companies and securities service institutions providing relevant securities services thereof, should establish a sound system of confidentiality and archival work, shall not state secrets, or the state and public interests.
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Under the Trial Measures and the Guidance Rules and Notice, Chinese domestic companies conducting overseas securities offering and listing activities, either in direct or indirect form, shall complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures within three working days following their submission of initial public offerings or listing application. The companies that have already been listed on overseas stock exchanges or have obtained the approval from overseas supervision administrations or stock exchanges for its offering and listing and will complete their overseas offering and listing prior to September 30, 2023 are not required to make immediate filings for its listing, yet need to make filings for subsequent offerings in accordance with the Trial Measures. Companies that have already submitted an application for an initial public offering to overseas supervision administrations prior to the effective date of the Trial Measures but have not yet obtained the approval from overseas supervision administrations or stock exchanges for the offering and listing, shall arrange for the filing within a reasonable time period and shall complete the filing procedure before such companies’ overseas issuance and listing.
Management understands that as of the date of this Form 10-K, the Company has no operations in Mainland China and is not required to complete filing procedures with the CSRC pursuant to the requirements of the Trial Measures. While the Company has no current operations in Mainland China, should we have any future operations in Mainland China and should we (i) fail to receive or maintain such permissions or approvals, (ii) inadvertently conclude that such permissions or approvals are not required, or (iii) applicable laws, regulations, or interpretations change and require us to obtain such permissions or approvals in the future, we may face sanctions by the CSRC, the CAC or other PRC regulatory agencies. These regulatory agencies may also impose fines and penalties on our potential operations in Mainland China, as well as limit our ability to pay dividends outside of Mainland China, limit our operations in Mainland China, delay or restrict the repatriation of the proceeds from our offerings into Mainland China or take other actions that could have a material adverse effect on our business as well as the trading price of our Common Stock or other securities. If we have PRC operations in the future, we may be required to our operations to comply with such regulations or potentially operations in the PRC entirely. The CSRC, the CAC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to our offerings before settlement and delivery of our Common Stock or other securities. In addition, if the CSRC, the CAC or other regulatory PRC agencies later promulgate new rules requiring that we obtain their approvals for our offerings, we may be to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. If we have PRC operations in the future, any action taken by the PRC government could significantly limit or completely our operations in the PRC and our ability to offer or continue to offer securities to investors, and could cause the value of such securities to .
Furthermore, on July 10, 2021, the CAC issued a revised draft of the Measures for Cybersecurity Review for public comment, which required that, among others, in addition to any “operator of critical information infrastructure”, any “data processor” controlling personal information of no less than one million users which seeks to list in a foreign stock exchange should also be subject to cybersecurity review, and further elaborated the factors to be considered when assessing the national security risks of the relevant activities. On December 28, 2021, the CAC, the National Development and Reform Commission (“NDRC”), and several other administrations jointly issued the revised Measures for Cybersecurity Review, which became effective and replaced the existing Measures for Cybersecurity Review on February 15, 2022. According to the Revised Review Measures, if an “online platform operator” that is in possession of personal data of more than one million users intends to list in a foreign country, it must apply for a cybersecurity review. Based on a set of Q&A published on the official website of the State Cipher Code Administration in connection with the issuance of the Revised Review Measures, an official of the said administration indicated that an online platform operator should apply for a cybersecurity review prior to the submission of its listing application with non-PRC securities regulators. Moreover, the CAC released the draft of the Regulations on Network Data Security Management in November 2021 for public consultation, which among other things, stipulates that a data processor listed overseas must conduct an annual data security review by itself or by engaging a data security service provider and submit the annual data security review report for a given year to the municipal cybersecurity department before January 31 of the following year. Given the recency of the issuance of the Revised Review Measures and their pending effectiveness, there is a general of guidance and substantial uncertainties exist with respect to their interpretation and implementation. It remains unclear whether a Hong Kong company which collects personal information from PRC individuals shall be subject to the Revised Review Measures. We do not currently expect the Revised Review Measures to have an impact on our business, our operations or our offerings as we do not believe that our subsidiary would be deemed to be an “operator of information infrastructure” or a “data processor” controlling personal information of no less than one million users, that would be required to file for cybersecurity review before listing in the U.S.. However, there remains uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations. If the Revised Review Measures are adopted into law in the future and if our subsidiary is deemed to be an “operator of information infrastructure” or a “data processor” controlling personal information of no less than one million users, our operation and the listing of our Common Stock or other securities in the U.S. could be subject to CAC’s cybersecurity review.
As of the date of this Annual Report, Hong Kong does not have similar regulations as of the PRC to extend oversight and control over offerings that are conducted overseas. Hong Kong does not have similar regulation as of the Trial Measures and the Guidance Rules and Notice, and Measures for Cybersecurity Review of the PRC. However, the legal and operational risks associated in Mainland China apply to operations in Hong Kong, and we face the risks and uncertainties associated with the complex and evolving PRC laws and regulations and as to whether and how the recent PRC government statements and regulatory developments, such as those relating to data and cyberspace security and anti-monopoly concerns, would be applicable to a company such as our subsidiary and our Company, given the Hong Kong aspects of our subsidiary in Hong Kong and the possibility that the Chinese government may exercise significant oversight over the conduct of business in Hong Kong. In the event we or our subsidiary were to become subject to PRC laws and regulations, we could incur material costs to ensure compliance, and we or our subsidiary might be subject to fines, experienced evaluation of securities or delisting, restrictions on securities offerings, and/or no longer be permitted to continue business operations as presently conducted. In the event that (i) the PRC government expands the categories of industries and companies whose foreign securities offerings are subject to review by the CSRC or the CAC or if applicable laws, regulations or interpretations change and we are required to obtain such permissions or approvals, (ii) we conclude that relevant permissions or approvals were not required or (iii) we did not receive or maintain relevant permissions or approvals required, any action taken by the PRC government could significantly limit or completely our operations in Hong Kong and our ability to offer or continue to offer securities to investors and could cause the value of our Common Stock or other securities to .
We believe that our current connections to Hong Kong are not substantial. Although SRM Ltd, our wholly-owned subsidiary is a Hong Kong company, it has only two independent contractors and its function is to provide administrative support for the procurement and delivery process which is controlled by the Company directly with its PRC suppliers. As to our TRX treasury business, our Treasury Wallet is located in Hong Kong; however, all operating decisions relating to the movement of TRX to and from the Treasury Wallet are made by our Board, a majority of whom are not based in Hong Kong or the PRC.
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Certain of our operations are conducted in Hong Kong. It is possible that the Chinese government may exercise significant oversight and discretion over the conduct of such business and may influence such operations, which could potentially significantly interfere with, alter, limit or hinder our current presence in Hong Kong, and certain scenarios, possibly affect the value of our Common Stock or other securities. Changes in the policies, regulations, rules, and the enforcement of laws of the Chinese government may also occur quickly and our assertions and beliefs of the risk imposed by the PRC legal and regulatory system cannot be certain. There are uncertainties regarding the enforcement of PRC laws, and rules and regulations in China can change quickly with little advance notice. The Chinese government may intervene or influence the Hong Kong aspects of our operations, which could interfere with our operations and/or affect the value of the Common Stock or other securities we are registering for sale.
In 2023, the PRC government initiated a series of regulatory actions and statements to regulate business operations in certain areas in Mainland China, including a cracking down on illegal activities in the securities market, enhancing supervision over Mainland China-based companies listed overseas using the VIE structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. Given the recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in Mainland China-based issuers, any extension of these actions, statements or policies into Hong Kong could potentially significantly interfere with, alter, limit or hinder our current presence in Hong Kong.
There are uncertainties regarding the enforcement of PRC laws, and rules and regulations in China can change with little advance notice. The Chinese government may intervene or influence our Hong Kong subsidiary or our TRX treasury business at any time, which could result in a material change in the Hong Kong aspects of our operations and/or the value of the securities we are registering for sale.
It may be difficult to enforce a judgment of U.S. courts for civil liabilities under U.S. federal securities laws against us, our directors or officers in Mainland China and Hong Kong.
As of the date of this Annual Report, our Chairman and Director Mr. Weike Sun and our Director Mr. Zhihong Liu are based in Hong Kong. We do not have any directors or officers located in Mainland China. In addition, the Company retains sole control of the Treasury Wallet and private keys in Hong Kong, and Mr. Weike Sun and Mr. Zi Yang are authorized by the Board to make the arrangements for safeguarding and operating the private keys of the Treasury Wallet. As a result, it may be difficult for investors to effect service of process within the U.S. upon such directors, or to enforce judgments obtained in U.S. courts against them in Mainland China or Hong Kong, including judgments predicated upon the civil liability provisions of the securities laws of the U.S. or any state in the U.S. and whether in connection with any claim relating to the Treasury Wallet, or otherwise.
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. The PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of written arrangement with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment if they decide that the judgment violates the basic principles of PRC laws 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. In addition, it will be difficult for U.S. shareholders to originate actions against us in China in accordance with PRC laws because it will be difficult for U.S. shareholders, by virtue only of holding our Common Stock or other securities, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.
There is also uncertainty as to whether the courts of Hong Kong would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States or (ii) entertain original actions brought in Hong Kong against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. Currently, there are no treaties or reciprocity protocols in place between the U.S. and the PRC relating to the enforceability of civil judgments.
In Hong Kong, foreign judgments can be enforced under statute under the Foreign Judgments (Reciprocal Enforcement) Ordinance or under common law. The Foreign Judgments (Reciprocal Enforcement) Ordinance is a registration scheme for the recognition and enforcement of foreign judgments based on reciprocity but the United States is not a designated country under the Foreign Judgments (Reciprocal Enforcement) Ordinance. As a result, a judgment rendered by a court in the United States, including as a result of administrative actions brought by regulatory authorities, such as the SEC, and other actions, will not be enforced by the Hong Kong courts under the statutory regime. In addition, the Supreme People’s Court of the PRC and the Government of Hong Kong have entered into the “Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region pursuant to Choice of Court Agreements between Parties Concerned,” or the Arrangement. The Mainland Judgements (Reciprocal Enforcement) Ordinance gave effect to the Arrangement and is a registration scheme for recognition and enforcement of PRC judgements based on reciprocity. Other than the Arrangement, Hong Kong has not entered into any multilateral convention or bilateral treaty regarding the recognition and enforcement of foreign judgments. Accordingly, any judgments rendered by a court in the United States will need to be enforced under common law. In order to enforce a foreign judgment under common law in Hong Kong, the judgment must meet certain criteria before it can be enforced, such as the judgment being final and .
The foregoing risks make it uncertain that stockholders or others will be able to obtain a legally binding judgment against the Company or our directors or officers, and if such a judgment is ultimately obtained, the process could be time consuming and costly. We believe it is not necessary to obtain, and we have not obtained, an opinion from PRC or Hong Kong counsel to consult on the above.
