ITEM 1A. RISK FACTORS
Risk Factor Summary
The risk factors summarized below could materially harm our business, operating results and/or financial condition, impair our future prospects and/or cause the price of our Common Stock to decline. These risks are discussed more fully in the section titled “Risk Factors.” Material risks that may affect our business, operating results and financial condition include, but are not necessarily limited to, the following:
Risks Related to Our Financial Condition and Capital Requirements
We have a history of net losses. We expect to continue to incur net losses in the future (See page 23).
Our independent auditor’s report for the fiscal year ended September 30, 2025 includes an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern, and absent additional financing we may be unable to remain a going concern (See page 23).
Future changes in financial accounting standards or practices may cause adverse unexpected financial reporting fluctuations and affect reported results of operations (See page 24).
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations (See page 24).
Risks Related to Our Business
Product safety and quality concerns could negatively affect our business (See page 25).
Our business is highly concentrated in our Maca Series products, and our reliance on a limited number of suppliers and customers exposes us to significant risks (See page 25).
Continued innovation and the successful development and timely launch of new products are critical to our financial results and the achievement of our growth strategy (See page 26).
Our future financial results are difficult to predict, and the early stage of commercialization of our current product lines may cause our operating results to fluctuate and may adversely affect the price of our securities (See page 26).
Increased competition, including as a result of industry consolidation, could hurt our businesses (See page 27).
Changes in the Maca products environment and retail landscape could impact our financial results (See page 28).
Our business, growth, and profitability depend on the performance of third-parties and our relationship with them (See page 28).
Interruption or increased costs of our supply chain and sales network, including a disruption in operations at any of our facilities or our manufacturer partners’ facilities, could affect our ability to manufacture or distribute products and could adversely affect our business and sales (See page 28).
The loss of any member of our senior management team or our inability to attract and retain highly skilled personnel could have a material adverse effect on our business (See page 28).
Because our management structure is not centralized, the management of our business operations may be more expensive and more difficult (See page 29).
We expect to continue to experience inflationary pressure on our cost structure, and price increases may not be sufficient to offset cost increases or may result in sales volume declines (See page 29).
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy (See page 29).
Any failure by us to accurately forecast customer demand for our products, or to quickly adjust to forecast changes, could adversely affect our business and financial results (See page 30).
We may not be able to adequately protect our intellectual property rights, and our competitors may be able to offer similar products and services, which would harm our competitive position (See page 30).
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations (See page 30).
Failure to comply with applicable transfer pricing and similar regulations could harm our business and financial results (See page 30).
If we are unable to protect our information systems against service interruption or failure, misappropriation of data or breaches of security, our operations could be disrupted, we could be subject to costly government enforcement actions and private litigation and our reputation may be damaged (See page 31).
Employment litigation and unfavorable publicity could negatively affect our future business (See page 31).
Currently pending, threatened or future litigation or governmental or regulatory proceedings or inquiries could result in material adverse consequences, including judgments or settlements (See page 31).
Future acquisitions of and investments in new businesses could impact our business and financial condition (See page 32).
Ongoing geopolitical tensions around the world may have a material adverse effect on our business, financial condition, and results of operations (See page 32).
We may be exposed to risks related to digital assets and artificial intelligence (See page 33).
Risks Associated With Doing Business in China
Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of our business (See page 33).
Our Hong Kong subsidiary, DZR Tech, is subject to various evolving Hong Kong laws and regulations regarding data security and antimonopoly, which could subject it to government enforcement actions and investigations, fines, penalties, and suspension or disruption of its operations (See page 33).
The PRC government may intervene in, or influence, the conduct of our business to ensure our compliance with PRC laws and regulations, which could result in a material change in our operations and/or the value of our Common Stock (See page 34).
The approval and/or other requirements of the CSRC or other mainland China governmental authorities may be required in connection with our issuance of securities overseas under mainland China rules, regulations or policies, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such other requirements (See page 34).
A slowdown or other adverse developments in the PRC economy may harm our customers and the demand for our services and our products (See page 35).
If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease (See page 35).
Future inflation in China may inhibit the profitability of our business in China (See page 36).
The fluctuation of the Renminbi may have a material adverse effect on your investment (See page 36).
Restrictions on currency exchange may limit our ability to receive and use our revenue effectively (See page 36).
Our subsidiary in China is subject to restrictions on making dividends and other payments to us (See page 36).
Uncertainties with respect to the PRC legal system could have a material adverse effect on us (See page 37).
The PRC’s legal and judicial system under special circumstances may not adequately protect our business and operations and the rights of foreign investors (See page 37).
Certain PRC regulations, including the M&A Rules and national security regulations, may require a complicated review and approval process which could make it more difficult for us to pursue growth through acquisitions in China (See page 37).
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to the PRC Subsidiaries and affiliated entities, which could harm our liquidity and our ability to fund and expand our business (See page 38).
We must remit offering proceeds to China in a future securities issuance before they may be used to benefit our business in China, the process of which may be time-consuming, and we cannot assure that we can complete all necessary governmental registration processes in a timely manner (See page 38).
A failure by the beneficial owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability under PRC law (See page 39).
We may be subject to fine due to our insufficient payment of the social insurance and housing fund of the employees (See page 39).
You may face difficulties in protecting your interests and exercising your rights as a stockholder of ours since we conduct part of our operations in China and part of our officers and directors reside in China (See page 40).
You may experience difficulties in protecting your rights through the United States courts (See page 40).
Increases in labor costs in the PRC may adversely affect our business and our profitability (See page 40).
Our auditor is headquartered in Singapore and is subject to inspection by the PCAOB on a regular basis. To the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for our company become located in China, the PCAOB may not be able inspect such audit documentation and, as such, you may be deprived of the benefits of such inspection and our Common Stock could be delisted from the stock exchange pursuant to the Holding Foreign Companies Accountable Act and Accelerating Holding Foreign Companies Accountable Act (See page 40).
In light of recent events indicating greater oversight by the CAC over data security, we may be subject to a variety of PRC laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have a material adverse effect on our business and our securities (See page 41).
Compliance with China’s new Data Security Law, Measures on Cybersecurity Review (revised draft for public consultation), Personal Information Protection Law (second draft for consultation), regulations and guidelines relating to the multi-level protection scheme and any other future laws and regulations may entail significant expenses and could materially affect our business (See page 41).
Failure to comply with the Foreign Corrupt Practices Act could adversely affect our business (See page 43).
Risks Related to Ownership of our Common Stock
The market price of our stock may be volatile, and you could lose all or part of your investment. (See page 44)
Despite our listing on the Nasdaq Capital Market, there can be no assurance that an active trading market for our Common Stock will be sustained. (See page 44)
The Nasdaq Capital Market may subsequently delist our securities if we fail to comply with ongoing listing standards. (See page 44)
We have broad discretion in the use of the net proceeds from our recent offering and may not use them effectively, which could affect our results of operations and cause our stock price to decline. (See page 47)
We incur significant costs as a result of operating as a public company, and our management must devote substantial time to compliance initiatives as a result of the listing of our Common Stock on the Nasdaq Capital Market. (See page 47)
We expect to incur significant costs and devote substantial management time to maintaining our disclosure controls and procedures and internal control over financial reporting, and regardless we may be unable to prevent or detect all errors or acts of fraud or to accurately and timely report our financial results or file our periodic reports in a timely manner (See page 48).
If we are unable to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud (See page 48).
Anti-takeover provisions in our third amended and restated bylaws and Nevada law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our securities (See page 49).
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our Common Stock, the price of our Common Stock could decline (See page 49).
We may be subject to securities litigation, which is expensive and could divert management attention (See page 49).
We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any profits from an investment in our Common Stock will depend on whether the price of our Common Stock increases (See page 50).
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us (See page 50).
In addition to the other information set forth in this Report and other filings we have made and make in the future with the SEC, you should carefully consider the following risk factors and uncertainties, which could materially affect our business, financial condition or results of operations in future periods. Additional risks are not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.
Risks Related to Our Financial Condition and Capital Requirements
We have a history of net losses. We expect to continue to incur net losses in the future.
We have incurred net losses since our inception in 2013, including net losses of $4.89 million and $8.97 million for the fiscal years ended September 30, 2025, and 2024, respectively. As of September 30, 2025, our accumulated deficit was approximately $87.23 million. We expect to incur significant sales and marketing expenses, as well as costs associated with operating as an exchange-listed public company, prior to recording sufficient revenue from our operations to offset these expenses.
These losses have had, and will continue to have, an adverse effect on our working capital, total assets and stockholders’ equity. Our ability to become and remain profitable will depend on our ability to generate significantly higher revenues from the sales of the Homology of Medicine and Food Series and Maca Series products, etc., which depends upon a number of factors, including but not limited to successful sales, manufacturing, marketing and distribution of our products and services.
Because of the risks and uncertainties associated with our commercialization efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our inability to achieve and then sustain profitability would have a material adverse effect on our business and financial condition.
Our independent auditor’s report for the fiscal year ended September 30, 2025 includes an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern, and absent additional financing we may be unable to remain a going concern.
Considering our current cash resources and our current and expected levels of operating expenses for the next twelve months, we expect to need additional capital to fund our planned operations for at least the next twelve months. This evaluation is based on relevant conditions and events that are currently known or reasonably foreseeable. A reduction in consumer demand for, or revenues from the sale of, our products could further constrain our cash resources.
We intend to seek to raise additional capital through public or private equity offerings. However, we may not be able to raise such additional capital on favorable terms or at all. If we are unsuccessful in efforts to raise additional capital, based on our current levels of operating expenses, our current capital is not expected to be sufficient to fund our operations for the next twelve months. These conditions raise substantial doubt about our ability to continue as a going concern.
We may also consider raising additional capital in the future to expand our business, to pursue strategic investments or acquisitions, to take advantage of financing opportunities or for other reasons, including to:
fund development of our products;
acquire, license or invest in technologies or intellectual property relating to our existing products;
acquire or invest in complementary businesses or assets; and
finance capital expenditures and general and administrative expenses.
Our present and future funding requirements will depend on many factors, including:
success of our current marketing efforts;
our revenue growth rate and ability to generate cash flows from sales of our products;
effects of competing technological and market developments; and
changes in regulatory oversight applicable to our products.
The various alternatives for raising additional capital include short-term or long-term debt financings, equity offerings, collaborations or licensing arrangements and each one carries potential risks. If we raise funds by issuing equity securities, our stockholders will be further diluted. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our Common Stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations or our ability to issue additional equity securities or issue additional indebtedness.
We may also be required under additional debt financing to grant security interests on our assets, including our intellectual property. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our intellectual property, or grant licenses on terms that are not favorable to us which could lower the economic value of those items to us.
The credit markets and the financial services industry have in the past experienced turmoil and upheaval characterized by the bankruptcy, failure, collapse, or sale of various financial institutions and intervention from the U.S. federal government. Furthermore, the capital markets and the financial services industry are currently and expected to continue to be unpredictable and volatile. These events typically make equity and debt financing more difficult to obtain. Accordingly, additional equity or debt financing might not be available on reasonable terms, if at all. If we cannot secure additional funding when needed, including due to changes in our business plan, a lower demand for our products or other risks described in this Report, we may have to delay, reduce the scope of or eliminate one or more sales and marketing initiatives and development programs, which would have a materially adverse effect on our business.
Future changes in financial accounting standards or practices may cause adverse unexpected financial reporting fluctuations and affect reported results of operations.
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business.
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
The Tax Cuts and Jobs Act (the “TCJA”), enacted in 2017, limited the use of net operating loss carryforwards arising in periods beginning after 2017 to eighty-percent of taxable income in the period to which the losses are carried. The TCJA also extended the expiration period for net operating losses arising in periods after 2017 from 20 years to an unlimited period.
However, the taxable income limitation on the use of net operating loss carryforwards was eliminated by the Coronavirus Aid, Relief and Economic Security Act (the “CARES” Act) for tax years beginning before January 1, 2021. We may not be able to utilize our existing net operating losses or any portion thereof in the current tax year or any available carryforward period.
In addition, Section 382 may limit the utilization of net operating loss carryforwards. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to annual limitations on its ability to use its pre-change net operating loss carryforwards, or NOLs, and certain other tax attributes to offset future taxable income or reduce taxes. Our past issuance of stock and other changes in our stock ownership may have resulted in one or more ownership changes within the meaning of Section 382 of the Code; accordingly, our pre-change NOLs may be subject to limitations under Section 382. State NOL carryforwards may be similarly limited. Furthermore, transactions in our stock that have occurred in the past and could occur in the future may trigger another ownership change pursuant to Section 382. Because of the cost and complexity involved in the analysis of a Section 382 ownership change and the fact that we do not have any taxable income to offset, we have not undertaken a study to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since we became a “loss corporation” as defined in Section 382. Future changes in our stock ownership could result in ownership changes under Section 382 of the Code further limiting our ability to utilize our NOLs. Finally, our ability to use NOLs of companies that we may acquire in the future may be subject to . For these reasons, even if we , we may not be to use a material portion of our NOLs, and this could reduce our earnings and potentially affect the valuation of our stock.
Risks Related to Our Business
Product safety and quality concerns could negatively affect our business.
Our success depends in part on our ability to maintain consumer confidence in the safety and quality of all of our products. While we are committed to the safety and quality of our products, we may not achieve our product safety and quality standards. Product safety or quality issues, or mislabeling, actual or perceived, or allegations of product contamination or quality or safety issues, even when false or unfounded, could subject us to product liability and consumer claims, negative publicity, a loss of consumer confidence and trust, may require us from time to time to conduct costly recalls from some or all of the channels in which the affected product was distributed, could damage the goodwill associated with our brands, and may cause consumers to choose other products. Such issues could result in the destruction of product ies and sales due to the of product for a period of time, which could cause our business to and affect our results of operations.
Our business is highly concentrated in our Maca Series products, and our reliance on a limited number of suppliers and customers exposes us to significant risks.
Our business is currently highly concentrated in our Maca Series and the Homology of Medicine and Food Series products, which represent a substantial portion of our revenue (61.51% for the fiscal year ended September 30, 2025). As a result, our operating results are highly dependent on the market acceptance, continued demand, and successful commercialization. Any adverse developments affecting, including changes in consumer preferences, increased competition, regulatory developments, supply disruptions, or reputational issues, could have a disproportionate impact on our business, financial condition, and results of operations. Our limited product diversification increases our exposure to risks specific to the Maca Series products market and may limit our ability to offset declines in demand with other product offerings.
Also, we rely on a limited number of significant suppliers for the production and supply of our Maca Series and the Homology of Medicine and Food Series products. For the fiscal year ended September 30, 2025, two suppliers collectively contributed 96.76% of our total purchases. Disruptions in our relationships with these suppliers, whether due to capacity constraints, quality issues, pricing changes, regulatory matters, or other operational challenges, could materially and adversely affect our ability to source products on a timely and cost-effective basis. We may not be able to promptly identify or qualify alternative suppliers on commercially reasonable terms, or at all, which could result in supply shortages, increased costs, delays in product availability, or reduced margins. For additional information regarding our suppliers, see “Item 1. Business—Our Suppliers.”
Our customer is also highly concentrated. For the fiscal year ended September 30, 2025, our two largest customers collectively accounted for approximately 96% of our total revenue, with one customer contributing approximately 60% and another contributing approximately 36% of our total revenue. See “Item 1. Business—Our Customers.” The loss of, or a material reduction in orders from, either of these customers could have a material adverse effect on our revenue, cash flows, and operating results. In addition, these significant customers may have substantial bargaining power with respect to pricing, payment terms, and other commercial terms, which could adversely affect our margins and liquidity.
If we are unable to diversify our product offerings, supplier base, or customer base over time, or if demand for our Maca Series products declines, our business, financial condition, and results of operations could be materially and adversely affected.
Continued innovation and the successful development and timely launch of new products are critical to our financial results and the achievement of our growth strategy .
Our primary focus is on developing Maca-based products for the Asian market, targeting consumers for use at home, in the office, and in other everyday settings. Our future success depends, largely, on our ability to implement these and our other growth strategies effectively. However, the achievement of our growth strategy is dependent, among other things, on our ability to extend the product offerings of our existing brands and introduce innovative new. Although we devote significant focus to the development of new products, including Maca Peptide Coffee, Maca-Noni, Maca Wine, Maca Purified Powder, we may not be successful in developing innovative new products or our new products may not be commercially successful. Additionally, our new product introductions are often time sensitive, and thus failure to deliver innovations on schedule could be detrimental to our ability to successfully launch such new products and retain partners, in addition to potentially harming our reputation and customer loyalty. If we to implement our growth strategies or if we invest resources in growth strategies that ultimately prove , our sales and may be affected, which would materially and affect our business, financial condition and results of operations. Our financial results and our ability to maintain or our competitive position will depend on our ability to effectively gauge the direction of our key marketplaces and identify, develop, manufacture, market and sell new or products and co-packing services in these changing marketplaces.
Our future financial results are difficult to predict, and the early stage of commercialization of our current product lines may cause our operating results to fluctuate and may adversely affect the price of our securities.
Our future financial results are difficult to predict. We are at an early stage of commercialization of our current product lines in Asia, including our Maca Series and the Homology of Medicine and Food Series. We began expanding our sales and distribution activities for Maca products in Asia toward the end of 2024 and we expanded our product offerings in Asia to include the Homology of Medicine and Food Series in the fourth quarter of the fiscal year ended September 30, 2025, and this product line remains at an early stage of market rollout. Because these product lines have a limited operating history under our current business model, our historical results may not be indicative of future performance, and we may not be able to accurately forecast demand, net revenues, costs, margins, or cash flows.
As we and our industry evolve, we expect to face new challenges with respect to the introduction of new products and the changing competitive landscape within the Maca products industry. These challenges can occur at various stages, including product positioning, supply chain, channel development, and sales cycles. Our ability to successfully commercialize these product lines depends on a number of factors, many of which are outside of our control, including consumer acceptance of our products, the effectiveness of our marketing and brand-building strategies, our ability to expand and maintain distribution channels and retail relationships in Asia, our ability to maintain product quality and ensure consistent supply from key suppliers, and compliance with applicable food safety, labeling, advertising, and other regulatory requirements in the jurisdictions in which we operate. In addition, we currently distribute our products primarily through wholesale channels, and our plans to expand retail operations and online sales channels may require additional resources and operational capabilities. There can be no assurance that these efforts will be successful or timely.
Any public forecasts regarding the expected performance of our business and future operating results are forward-looking statements subject to risks and uncertainties, and necessarily reflect assumptions and judgments that may prove incorrect. As a result, there can be no assurance that our performance will be consistent with any public forecasts or that any variation from such forecasts will not be material and adverse. Failure to meet expectations, particularly with respect to operating margins, earnings per share, operating cash flows, and net revenue, may result in a decline and/or increased volatility in the trading price of our Common Stock. In addition, broad price and volume fluctuations in the stock market as a whole, as well as general economic, business, and political conditions, may adversely affect the trading price of our Common Stock in ways that may be unrelated to our financial performance.
Our international operations subject us to complex legal and regulatory requirements, including requirements relating to product labeling and marketing claims, and non-compliance could adversely affect our business.
We have a manufacturing and sales office in Hong Kong. We operate globally and are attempting to develop products in multiple countries. Consequently, we face complex legal and regulatory requirements in multiple jurisdictions, including laws and regulations relating to food safety, product labeling, advertising, and marketing practices. Our products are marketed as health and wellness products, and our branding and promotional activities may reference functional attributes or traditional wellness concepts. Regulators may scrutinize our product labels, packaging, online content, influencer campaigns, and other marketing materials, including whether any statements or implications could be viewed as improper, misleading, unsubstantiated, or as making unauthorized health or disease-related claims.
International operations are subject to a variety of risks, including:
foreign currency exchange rate fluctuations;
greater difficulty in overseeing foreign operations;
logistical and communications challenges;
potential adverse changes in laws and regulatory practices, including export license requirements, trade barriers, tariffs and tax laws;
burdens and costs of compliance with a variety of foreign laws;
political and economic instability;
foreign tax laws and potential increased costs associated with overlapping tax structures;
greater difficulty in protecting intellectual property;
the risk of third-party disputes over ownership of intellectual property and infringement of third-party intellectual property by our products; and
general social, economic and political conditions in these foreign markets.
Compliance requirements applicable to product labeling and marketing can be complex, subject to change, and interpreted differently by regulatory authorities. If we fail to comply with applicable requirements, or if any of our labels or marketing materials are alleged or determined to be non-compliant, we could be subject to warning letters, fines, penalties, product seizures, mandatory label changes, recalls, restrictions on sales or advertising, suspension or revocation of permits or licenses, increased compliance costs, and civil or criminal liability. In addition, even allegations of non-compliance could harm our reputation, reduce consumer confidence, disrupt our distribution relationships, and adversely affect demand for our products. Moreover, we rely in part on third parties, such as distributors, marketing service providers, and influencers, to promote our products, and we may have limited ability to control all statements made by these parties. If we are required to modify our labeling or marketing practices, product promotions, or incur additional compliance-related costs, our business, financial condition, and results of operations could be materially and affected.
Increased competition, including as a result of industry consolidation, could hurt our businesses.
The Maca products industry is intensely competitive and we compete with respect to product, quality, convenience, technology, innovation, and price. We face significant competition in each of our channels and marketplaces. We compete with major international Maca products companies that operate in multiple geographic areas, many of which have greater financial and other resources than we do, as well as numerous companies that are primarily local in operation. Our Maca Series products also compete against local or regional brands as well as against private label brands developed by retailers. Our ability to gain or maintain share of sales in the global marketplace or in various local marketplaces or maintain or enhance our relationships with our partners and customers may be limited as a result of actions by competitors, including as a result of increased consolidation in the Maca products industry.
Changes in the Maca products environment and retail landscape could impact our financial results.
The Maca products environment is rapidly evolving as a result of, among other things, changes in consumer preferences; shifting consumer tastes and needs; changes in consumer lifestyles; and competitive product and pricing pressures. In addition, the Maca products retail landscape is dynamic and constantly evolving, not only in emerging and developing marketplaces, where modern trade is growing at a faster pace than traditional trade outlets, but also in developed marketplaces, where discounters and value stores, as well as the volume of transactions through e-commerce, are growing at a rapid pace. If we are unable to successfully adapt to the rapidly changing environment and retail landscape, our share of sales, volume growth and overall financial results could be negatively affected.
Our business, growth, and profitability depend on the performance of third-parties and our relationship with them.
In connection with the distribution of Maca products, we rely on third-party suppliers and manufacturing partners to provide high quality Maca products. We also rely on our manufacturing partners to provide us with additional manufacturing and facilitate distribution efforts throughout China. Our reliance on third-party suppliers and manufacturing partners subjects us to additional risks, including the possible termination of the arrangement by a third-party supplier or manufacturing partner at a time that is costly or inconvenient for us. Our third-party suppliers and manufacturing partners are independent entities subject to their own unique operational and financial risks that are out of our control. If any of these third-party suppliers or manufacturing partners fail to perform as required, this could cause delays in our receipt of the Maca products or otherwise adversely affect our business.
In addition, a significant portion of our distribution network, and correspondingly our success in distributing our Maca products, depends on the performance of third parties. Any non-performance or deficient performance by such parties may undermine our operations and profitability. For distribution of our Maca products, we typically rely on third-party distribution networks, including freight companies and common carriers. The success of these distribution networks depends on the performance of brokers, distributors, common carriers and retailers, as well as our third-party manufacturing partners as they relate to the distribution of certain of our products. There is a risk that a broker, distributor, common carrier or retailer may refuse to or cease to market or carry our products, or that any such entity or our third-party manufacturing partner may not adequately perform its functions within the network by, without limitation, failing to distribute our products.
Furthermore, such third-parties’ financial position or market share may deteriorate, which could adversely affect our distribution, marketing and sale activities. We must also maintain good commercial relationships with third-party brokers, distributors and retailers so that they will promote and carry our product. Any adverse consequences resulting from the performance of third-parties or our relationship with them could undermine our operations and profitability.
Interruption or increased costs of our supply chain and sales network, including a disruption in operations at any of our facilities or our manufacturer partners’ facilities, could affect our ability to manufacture or distribute products and could adversely affect our business and sales.
A disruption in operations at any of our facilities or any other disruption in our supply chain or increase in prices relating to service by our retailers, distributors, common carriers that ship goods within our distribution channels, or otherwise, whether as a result of shipping costs and delays, trade restrictions, casualty, natural disaster, weather, power loss, telecommunications failure, terrorism, labor shortages, contractual disputes, interruptions in port operations or highway arteries, pandemic, strikes, work stoppages, the financial or operational instability of key suppliers, distributors and transportation providers, or other causes, could significantly impair our ability to operate our business, adversely affect our relationship with our customers, and impact our financial condition or results of operations.
The loss of any member of our senior management team or our inability to attract and retain highly skilled personnel could have a material adverse effect on our business.
Our success depends on the skills, experience and performance of key members of our senior management team. The individual and collective efforts of our senior management team will be important as we continue to expand our commercial activities and develop additional products. The loss or incapacity of existing members of our senior management team could have a material adverse effect on our business and financial condition if we experience difficulties in hiring qualified successors. Our employment agreements with our executive officers are “at will,” and the retention of our executive officers for any period of time cannot be guaranteed. We do not maintain “key person” insurance on any of our employees.
Due to the specialized nature of the business and our small size, we are highly dependent upon our ability to attract and retain qualified sales and marketing, technical and managerial personnel. The loss of the services of existing personnel, as well as the failure to recruit key sales, marketing, technical and managerial personnel in a timely manner would be detrimental to our development and could have a material adverse effect on our business and financial condition. Our anticipated growth and expansion into areas and activities requiring additional expertise, such as sales and marketing, may require the addition of new management personnel, both domestic and international. All of our employees may terminate their employment at any time with short or no advance notice. We may have difficulties locating, recruiting or retaining qualified sales personnel. Recruiting and retention difficulties will limit our ability to support our development and sales programs and to build a commercially viable business.
The competition for talent is currently extremely high. In this competitive environment, our business could be adversely impacted by increases in labor costs, including wages and benefits, including those increases triggered by regulatory actions regarding wages, scheduling and benefits; increased health care and workers’ compensation insurance costs; increased wages and costs of other benefits necessary to attract and retain high-quality employees with the right skill sets; and increased wages, benefits, and other costs. In addition, our wages and benefits programs, combined with the periodic challenges in the labor market, may be insufficient to attract and retain talent.
Because our management structure is not centralized, the management of our business operations may be more expensive and more difficult.
As part of our strategy to attract the most qualified individuals, we do not require the members of our management team to relocate to a particular geographic area. Accordingly, the members of our management team are geographically dispersed. This decentralized structure might cause additional expenses in the conduct of our business, and may also delay communication between members of our management team, lower the quality of our management decisions, or decrease our ability to take action quickly.
We expect to continue to experience inflationary pressure on our cost structure, and price increases may not be sufficient to offset cost increases or may result in sales volume declines.
We expect to experience inflationary pressure on our cost structure for the foreseeable future. We may be able to pass some or all of our raw materials, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to mitigate these inflationary pressures, such as by increasing our selling prices or reducing product sizes sufficiently to offset increased raw material, energy or other input costs, including but not limited to packaging, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our results of operations and financial condition.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
While we are currently a small company and, therefore, limited in our product development, marketing and sales activities, we anticipate continued growth in our business operations commensurate with the expansion of our sales and support operations and distribution network and the commercialization of our coffee products. Any future growth could impose significant added responsibilities on members of our existing management and create strain on our organizational, administrative, and operational infrastructure, including sales and marketing, quality control, and customer service. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures, which in the past have been determined to be inadequate. Our status as an exchange-listed public company will require us to increase our investment in financial accounting and reporting. If our current infrastructure is unable to handle our growth, we may need to expand our infrastructure to identify and recruit new staff and to implement new reporting systems. The time and resources required to implement such expansion and systems could adversely affect our operations. Our future financial performance and our ability to expand and market our products and to compete effectively will depend, in part, on our ability to manage this potential future growth effectively, without compromising quality.
Any failure by us to accurately forecast customer demand for our products, or to quickly adjust to forecast changes, could adversely affect our business and financial results.
There is inherent risk in forecasting demand due to the uncertainties involved in assessing the current level of maturity of the single-serve component of our business as well as the current and future needs of our customers. We will set the production and procurement targets for the products before receiving the customer orders. These targets will be based on our predictions of customer needs as well as the predictions of our business partners. If our forecasts exceed demand, we could experience excess inventory in the short-term, excess manufacturing capacity in the short and long-term, and/or price decreases, all of which could impact our financial performance. Alternatively, if the demand is beyond our current production and procurement capabilities , we may not be able to satisfy customer demand, which could result in a loss of share if our competitors are able to meet customer demands. A failure to accurately predict the level of demand for our products could adversely affect our net revenues and net income.
We may not be able to adequately protect our intellectual property rights, and our competitors may be able to offer similar products and services, which would harm our competitive position.
Our success depends in part upon our intellectual property rights. We rely primarily on trademark, trade secret laws, confidentiality procedures, license agreements and contractual provisions to establish and protect our proprietary rights over our products, procedures and services. Other persons could copy or otherwise obtain and use our intellectual property without authorization or create intellectual property similar to ours independently. We may also pursue the registration of our domain names, trademarks and service marks in other jurisdictions, including the United States. However, we cannot assure you that we will be able to protect our proprietary rights. Further, our competitors may be able to independently develop similar intellectual property, duplicate our products and services or design around any intellectual property rights we hold. Further, our intellectual property rights may be subject to termination or expiration. The loss of intellectual property protections or the inability to timely regain intellectual property protections could harm our business and ability to compete.
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time subject to legal proceedings and claims relating to the intellectual property rights of others.
There may be third-party intellectual property that is infringed by our products, services or other aspects of our business. There could also be existing patents or other intellectual property rights of which we are not aware that our products may inadvertently infringe. We cannot assure you that holders of the relevant intellectual property rights purportedly relating to some aspect of our technology platform or business, if any such holders exist, would not seek to enforce such intellectual property rights against us in the United States or any other jurisdiction. We also cannot be certain that our efforts will be effective in completely preventing the infringement of trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. If we are found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be to develop alternatives of our own. In addition, we may incur significant expenses, and may be to management’s time and other resources from our business and operations to these third-party , regardless of their merits. or licensing made us may result in significant monetary liabilities and may materially our business and operations by restricting or prohibiting our use of the intellectual property in .
Failure to comply with applicable transfer pricing and similar regulations could harm our business and financial results.
In many countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned and are taxed accordingly. Although we believe that we are in substantial compliance with all applicable regulations and restrictions, we are subject to the risk that governmental authorities could audit our transfer pricing and related practices and assert that additional taxes are owed. In the event that the audits or assessments are concluded adversely to us, we may or may not be able to offset or mitigate the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure that we would in fact be able to take advantage of any foreign tax credits in the future.
If we are unable to protect our information systems against service interruption or failure, misappropriation of data or breaches of security, our operations could be disrupted, we could be subject to costly government enforcement actions and private litigation and our reputation may be damaged.
Our business involves the collection, storage, and transmission of personal, financial, or other information that is entrusted to us by our customers and employees. Our information systems also contain the Company’s proprietary and other confidential information related to our businesses. Despite the implementation of network security measures, our systems and those of third parties on which we rely may also be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components; power outages; telecommunications or system failures; server or cloud provider breaches; computer viruses; physical or electronic break-ins; cyber-attacks; catastrophic events; or breaches due to employee error or malfeasance or other attempts to our systems. Cybersecurity and can range from uncoordinated individual attempts to access to information technology networks and systems to more sophisticated and targeted measures, known as advanced , directed at the Company, its products, its customers and/or its third-party service providers. Because the techniques used to obtain access, disable or service, or systems change frequently and often are not recognized until launched a target, we may be to anticipate these techniques or to implement adequate preventative measures in time. We could also experience a of data and or in our ability to manage inventories or process transactions. Some of our commercial partners, such as those that help us deliver our website, may receive or store information provided by us or our users through our websites. If these third parties to adopt or adhere to adequate information security practices, or to comply with our online policies, or in the event of a of their networks, our users’ data may be accessed, used or .
If our systems are harmed or fail to function properly, we may need to expend significant financial resources to repair or replace systems or to otherwise protect against security breaches or to address problems caused by breaches. If we experience a significant security breach or fail to detect and appropriately respond to a significant security breach, we could be exposed to costly legal or regulatory actions against us in connection with such incidents, which could result in orders or consent decrees forcing us to modify our business practices. Any incidents involving unauthorized access to or use of user information, or that are a of our online privacy policy, could our brand reputation and our competitive position. Any of these events could have a material and effect on our business, reputation or financial results. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for caused by security .
Employment litigation and unfavorable publicity could negatively affect our future business.
Employees may, from time to time, bring lawsuits against us regarding injury, creation of a hostile work place, discrimination, wage and hour, sexual harassment and other employment issues. In recent years there has been an increase in the number of discrimination and harassment claims generally. Coupled with the expansion of social media platforms and similar devices that allow individuals access to a broad audience, these claims have had a significant negative impact on some businesses. Companies that have faced employment or harassment related lawsuits have had to terminate management or other key personnel and have suffered reputational harm that has negatively impacted their sales. If we were to face any employment related claims, our business could be affected.
Currently pending, threatened or future litigation or governmental or regulatory proceedings or inquiries could result in material adverse consequences, including judgments or settlements.
We are, or may from time to time become, involved in lawsuits and other legal, governmental or regulatory proceedings or inquiries. See “Item 3. Legal Proceedings” included in this Report for information regarding currently pending litigation that could have a material impact on the Company. Many of these matters raise complicated factual and legal issues and are subject to uncertainties and complexities, all of which make the matters costly to address. The timing of the final resolutions to any such lawsuits, inquiries, and other legal proceedings is uncertain.
Additionally, the possible outcomes or resolutions to these matters could include adverse judgments or settlements, either of which could require substantial payments, adversely affecting our consolidated financial condition, results of operations and cash flows. Any judgment against us, the entry into any settlement agreement, or the imposition of any fine could have a material adverse effect on our consolidated financial condition, results of operations and cash flows.
Future acquisitions of and investments in new businesses could impact our business and financial condition.
From time to time, we may acquire or invest in businesses or partnerships that we believe could complement our business. The pursuit of such acquisitions or investments may divert the attention of management and cause us to incur various expenses, regardless of whether the acquisition or investment is ultimately completed. In addition, acquisitions and investments may not perform as expected and we may be unable to realize the expected benefits, synergies, or developments that we may initially anticipate. Further, if we are able to successfully identify and acquire additional businesses, we may not be able to successfully integrate the acquired personnel or operations, or effectively manage the combined business following the acquisition, any of which could harm our business and financial condition.
In addition, to the extent we finance any acquisition or investment in cash, it would reduce our cash reserves, and to the extent the purchase price is paid with shares of our Common Stock, it could be dilutive to our current stockholders.
Ongoing geopolitical tensions around the world may have a material adverse effect on our business, financial condition, and results of operations.
We may face risks associated with heightened tensions in geopolitical and economic relations. Rivalries and sanctions between major powers, including the United States and China, and unrest, terrorist threats, wars and other conflicts involving Ukraine, the Middle East and elsewhere have created increased global uncertainty. Such geopolitical tensions, along with trade disputes and regional conflicts, may result in economic instability, market volatility, and regulatory changes, which could impact our supply chain, operations, and consumer demand. Recently, the United States has proposed to impose multiple rounds of tariffs on a wide range of goods imported from multiple countries, including China, and China has responded with retaliatory tariffs. Since February 2025, the U.S. administration has proposed to increase the total tariff level for imported Chinese goods to 125%, and additional tariff increases could be imposed as the trade tension between the two countries continues to heighten. On April 9, 2025, China responded by hiking its levies on U.S. imports to 84% from 34%. On April 10, 2025, the U.S. imposed a 34% “reciprocal tariff” on top of existing levies, effectively raising the minimum tariff on Chinese goods to 54%. On April 11, 2025, the U.S. announced that consumer electronics would be exempt from tariffs imposed on most countries, but a 20% tariff would remain in place for electronics imported from China. Later that same day, in a further move, China increased tariffs on U.S. imports to 125%.
Historically, tariffs have led to increased trade and political tensions, between the U.S. and China, as well as between the U.S. and other countries. Political tensions as a result of trade policies could reduce trade volume, cross-border investment, technological exchange, and other economic activities between major economies, resulting in a material adverse effect on global economic conditions and the stability of global financial and stock markets. Moreover, the heightened geopolitical uncertainty and potential for further escalation may discourage investments in securities issued by China-based companies (including us) and affect the global macroeconomic environment. For example, it has been reported that the U.S. administration may consider imposing further restrictions or prohibitions on trading of Chinese securities. Such geopolitical developments could materially and adversely affect our overall financial performance and prices of our Common Stock.
Furthermore, such tensions may lead to consumer boycotts, increased security measures, and travel restrictions, all of which could negatively affect our ability to conduct business, maintain supply chain operations, and expand into new markets. Any restrictions on international trade and capital flows may have a negative impact on our ability to access capital and expand our operations. As a result, any of these events could have a material adverse effect on our business, financial condition, and results of operations. The Maca Series products are exclusively distributed in the Asian market, with raw materials, supply chains, and sales operations based in China. In contrast, DRIPKIT products are sold solely in the U.S. market, with their raw materials, supply chains, and sales operations entirely within the United States. As both product lines operate independently and do not involve cross-border trade, the Company is not directly affected by changes in export tariffs or foreign import policies. Accordingly, as of the date of this report, ongoing geopolitical tensions have had a limited impact on our business.
We may be exposed to risks related to digital assets and artificial intelligence
For the fiscal year ended September 30, 2025, we introduced two new revenue streams, Computing Power Product Series and the Homology of Medicine and Food Series . See “Item 1. Business.” In addition, we hold digital assets, such as Bitcoin, from time to time in connection with various financing activities. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As a result, we may be subject to risks related to artificial intelligence and digital assets, including risks arising from potential reliance on large-scale computing models and third-party cloud infrastructure, evolving data privacy, cybersecurity and other regulatory requirements, and the volatility, custody, valuation, liquidity, accounting and regulatory uncertainty associated with digital assets. These areas are still in the early stages of development, and it is not yet clear how they may affect us. If they develop in ways that are unfavorable to us, our business, financial condition, and results of operations could be materially and adversely affected.
If future prices of Bitcoin are not sufficiently high, our business, results of operations, and financial condition could be materially and adversely affected, which may have a negative impact on the trading price of our securities.
Our business, financial condition, and results of operations depend in part on Bitcoin prices because we hold Bitcoin as part of our assets. If the value of Bitcoin declines, the value of our assets could decrease. In addition, price declines in other cryptocurrencies may dampen overall market sentiment, even if we do not hold such assets. If any of these events occur, our business, results of operations, and financial condition may be adversely affected, and the trading price of our securities could also decline. We may need to seek alternative sources of capital if this happens, which may not be available to us on acceptable terms, or at all.
Changes in blockchain validation protocols, network rules, or other fundamental changes to the Bitcoin ecosystem could reduce demand for Bitcoin and adversely affect the value of our Bitcoin holdings.
The blockchain industry continues to evolve, and the protocols, validation mechanisms, and software rules governing digital asset networks may change over time. Bitcoin currently relies on the “proof-of-work” consensus mechanism, which is integral to how transactions are validated and how the network is secured. Changes to Bitcoin’s validation protocol, core rules, transaction fee structure, or other technical features, whether through software updates, governance or community-driven decisions, forks, or other events, could negatively affect the usability, security, or perceived value of Bitcoin.
Although we do not engage in Bitcoin mining activities, we hold Bitcoin as part of our assets. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Accordingly, any reduction in demand for Bitcoin or deterioration in market confidence arising from protocol changes, competing technologies, network disruptions, or other fundamental developments in the Bitcoin ecosystem could cause the market price of Bitcoin to decline. A decline in the value of our Bitcoin holdings could adversely affect our financial condition and results of operations and could negatively impact the trading price of our securities.
Regulatory authorities may in the future determine that Bitcoin is a “security,” which could materially reduce its liquidity and value and adversely affect our financial condition and results of operations.
Bitcoin has historically been treated by many market participants as a non-security crypto asset; however, U.S. federal and state regulators, self-regulatory organizations, and courts continue to evaluate and refine the legal and regulatory framework applicable to digital assets, and there can be no assurance that Bitcoin will not be reclassified or otherwise regulated as a “security” under the U.S. federal securities laws (or similar laws in other jurisdictions) in the future. If Bitcoin were to become subject to a securities regulatory regime, the market for Bitcoin could be materially disrupted, including through reduced availability of trading venues and liquidity providers, limitations on market-making activity, and changes to custody and settlement practices, any of which could reduce trading volumes, widen bid-ask spreads, impair price discovery, increase volatility, and negatively impact the value and liquidity of Bitcoin. In turn, because we hold Bitcoin as part of our assets, any sustained decline in Bitcoin’s market price or liquidity could reduce the value of our assets, constrain our ability to access Bitcoin markets on acceptable terms, and adversely affect our business, financial condition, and results of operations, and the trading price of our securities could also be impacted.
Changes in U.S. regulatory interpretation relating to digital assets could reduce the value and liquidity of the Bitcoin we hold as part of our assets and could materially and adversely affect our financial condition and results of operations.
The digital asset industry in the U.S. remains subject to evolving regulatory interpretation and enforcement, and U.S. federal and state regulators and courts continue to assess how existing laws apply to various digital assets and related market activities. Future regulatory changes affecting Bitcoin markets could materially reduce the liquidity, market accessibility, and value of Bitcoin. Any such developments could impair our ability to hold, transfer, or dispose of Bitcoin on commercially reasonable terms, increase volatility and transaction costs, and reduce the value of our assets. As a result, our financial condition and results of operations could be materially adversely affected, and the trading price of our securities could also be negatively impacted.
Risks Associated With Doing Business in China
Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of our business.
The PRC’s economy is in a transition from a planned economy to a market-oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions within the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, there can be no assurance that this will be the case. A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Implementation of the negative list system. Although the PRC government has been pursuing economic reform policies for more than two decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political , or other circumstances affecting the PRC’s political, economic and social environment.
Our Hong Kong subsidiary, DZR Tech, is subject to various evolving Hong Kong laws and regulations regarding data security and antimonopoly, which could subject it to government enforcement actions and investigations, fines, penalties, and suspension or disruption of its operations.
Our Hong Kong subsidiary, DZR Tech, and its subsidiary, Braincon HK, are subject to laws and regulations in Hong Kong in respect of data privacy, data security, and data protection. The main legislation in Hong Kong concerning data security is the Personal Data (Privacy) Ordinance (Cap. 486 of the Laws of Hong Kong), or the “PDPO,” which regulates the collection, use, storage, and transfer of personal data and imposes a statutory duty on data users to comply with the six data protection principles contained therein. Pursuant to section 33 of the PDPO, the PDPO is applicable to the collection and processing of personal data if such activities take place in Hong Kong, or if the personal data is collected by a data user whose principal place of business is in Hong Kong. We believe that DZR Tech and Braincon HK have complied with the applicable laws and requirements in respect of data security in Hong Kong. Our directors believe that: (i) none of our directors, DZR Tech, or Braincon HK has been involved in any litigation or regulatory action relating to a breach of the PDPO; and (ii) there have been no non-compliance incidents relating to the PDPO since the date of incorporation of DZR Tech and Braincon HK. We believe that the incumbent data security statutory requirements under Hong Kong laws do not materially affect its business. However, the laws on cybersecurity and data privacy are constantly evolving and can be subject to varying interpretations, resulting in uncertainties about the scope of our responsibilities in that regard. to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, may subject us or our Hong Kong subsidiaries to consequences, including, but not limited to, government enforcement actions and , , , and or of operations.
The Competition Ordinance (Cap. 619 of the Laws of Hong Kong) prohibits and deters undertakings in all sectors from adopting anti-competitive conduct which has the object or effect of preventing, restricting, or distorting competition in Hong Kong. It provides for general prohibitions in three major areas of anti-competitive conduct described as the first conduct rule, the second conduct rule, and the merger rule. The first conduct rule prohibits business entities from making or giving effect to agreements or decisions or engaging in concerted practices that have as their object or effect the prevention, restriction, or distortion of competition in Hong Kong. The second conduct rule prohibits business entities that have a substantial degree of market power in a market from engaging in conduct that has as its object or effect the prevention, restriction, or distortion of competition in Hong Kong. The merger rule prohibits mergers that have or are likely to have the effect of substantially lessening competition in Hong Kong. The scope of application of the merger rule is limited to carrier licenses issued under the Telecommunications Ordinance (Cap. 106 of the Laws of Hong Kong). As of the date of this Report, we believe that we and our Hong Kong subsidiaries have complied with all three areas of anti-competition laws and requirements in Hong Kong. DZR Tech and Braincon HK have not engaged in any concerted practices that have an object or effect to prevent, restrict, or competition in Hong Kong. Additionally, neither we, DZR Tech, nor Braincon HK possesses a substantial degree of market power in the Hong Kong market that could trigger the second conduct rule. We believe the merger rule is not applicable to us, DZR Tech, or Braincon HK since neither we, DZR Tech, nor Braincon HK holds any carrier license issued under the Telecommunications Ordinance.
Accordingly, we believe neither the data security nor the antimonopoly laws and regulations in Hong Kong restrict our ability to accept foreign investment or impose limitations on our ability to list on any U.S. stock exchange under Hong Kong laws and regulations.
The PRC government may intervene in, or influence, the conduct of our business to ensure our compliance with PRC laws and regulations, which could result in a material change in our operations and/or the value of our Common Stock
The Chinese government has significant oversight and discretion over the conduct of our business and may supervise our operations to ensure we comply with PRC laws and regulations, which could result in a material change in our operations and/or the value of shares of our Common Stock.
The Chinese government has recently published new policies that have significantly affected certain industries, such as the education and internet industries, and we cannot rule out the possibility that it will, in the future, issue regulations or policies regarding our industry that could adversely affect our business, financial condition, and results of operations. Furthermore, if China adopts more stringent standards with respect to certain areas such as environmental protection or corporate social responsibilities, we may incur increased compliance costs or become subject to additional restrictions on our operations. Certain areas of PRC law, including intellectual property rights and confidentiality protections, may also not be as effective as in the United States or other countries. In addition, we cannot predict the effects of future developments in the PRC legal system on our business operations, including the promulgation of new laws, or changes to existing laws or their interpretation or enforcement. Uncertainties regarding our ability to comply with these changes could limit the legal protections available to us and our investors, including you.
The approval and/or other requirements of the CSRC or other mainland China governmental authorities may be required in connection with our issuance of securities overseas under mainland China rules, regulations or policies, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete such other requirements.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, purport to require offshore special purpose vehicles that are controlled by mainland China companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of mainland China domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If CSRC approval is required, it is uncertain how long it will take for us to obtain such approval, and, even if we obtain such CSRC approval, the approval could be rescinded. Any failure to obtain or a delay in obtaining CSRC approval for our future issuance of securities overseas may subject us to sanctions imposed by the CSRC and other mainland China regulatory agencies, which could include fines and penalties on our operations in mainland China, restrictions or limitations on our ability to pay dividends outside of mainland China, and other forms of sanctions that may materially and adversely affect our business, financial condition, and results of operations.
Furthermore, on July 6, 2021, the PRC government promulgated the Opinions on Strictly Cracking Down on Illegal Securities Activities, or the July 6 Opinions, which, among other things, called for enhanced administration and supervision of overseas-listed mainland China-based companies, proposed to strengthen the supervision of the overseas issuance and listing of shares by mainland China-based companies and clarified the responsibilities of competent domestic industry regulators and government authorities. On December 28, 2021, the CAC, together with other relevant administrative departments, jointly released the Cybersecurity Review Measures, which took effect on February 15, 2022. Pursuant to the Cybersecurity Review Measures, network platform operators with personal information of over one million users shall apply with the Cybersecurity Review Office for a cybersecurity review before going to list abroad.
The new rules for the filing-based administration of overseas securities offerings and listings by Chinese domestic companies released on February 17, 2023, or New Filing Rules, establish a new filing-based regime to regulate overseas offerings and listings by domestic companies. According to the New Filing Rules, (i) an overseas offering and listing by a domestic company, whether directly or indirectly, shall be filed with the CSRC; and (ii) the issuer or its affiliated domestic company, as the case may be, shall file with the CSRC for its initial public offering, follow-on offering, issuance of convertible bonds, offshore relisting after go-private transactions and other equivalent offing activities. In addition, after a domestic company has offered and listed securities in an overseas markets, it is required to file a report to the CSRC after the occurrence and public disclosure of certain material corporate events, including but not limited to change of control and voluntary or mandatory delisting. From March 31, 2023, enterprises that have been listed overseas shall constitute existing enterprises and are not required to conduct the overseas listing filing procedure immediately, but shall carry out filing procedures as required if they conduct future offshore offerings or capital raising activities or are involved in other circumstances that require filing with the CSRC.
On February 24, 2023, the CSRC, together with other relevant government authorities, issued the Provisions on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies, or the Archives Rules, which became effective on March 31, 2023. According to the Archives Rules, domestic mainland China companies, whether offering and listing securities overseas directly or indirectly, must strictly abide the applicable laws and regulations when providing or publicly disclosing, either directly or through their overseas listed entities, documents and materials to securities companies, securities services providers such as accounting firms, or overseas regulators in the process of their overseas offering and listing. If such documents or materials contain any state secrets or government authorities work secrets, domestic companies must obtain the approval from competent governmental authorities according to the applicable laws, and file with the secrecy administrative department at the same level with the approving governmental authority. Furthermore, the Archives Rules also provides that securities companies and securities service providers shall also fulfill the applicable legal procedures when providing overseas regulatory institutions and other relevant institutions and individuals with documents or materials containing any state secrets or government authorities work secrets or other documents or materials that, if divulged, will national security or public interest.
A slowdown or other adverse developments in the PRC economy may harm our customers and the demand for our services and our products.
Part of our operations are conducted in the PRC. Although the PRC economy has grown significantly in recent years, there is no assurance that this growth will continue. A slowdown in overall economic growth, an economic downturn, a recession, or other adverse economic developments in the PRC could significantly reduce the demand for our products and services.
If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease .
In recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries that may affect our business and economic outlook in both the United States and China. Any political or trade controversies between the United States and China, whether or not directly related to our business, could reduce the price of our Common Stock.
Future inflation in China may inhibit the profitability of our business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our services and products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on our profitability. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our services and products.
The fluctuation of the Renminbi may have a material adverse effect on your investment.
The change in value of the Renminbi against the U.S. dollar and other currencies is affected by, various factors, such as changes in China’s political and economic conditions and China’s foreign exchange controls. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under such policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Later on, the People’s Bank of China has decided to further implement the reform of the RMB exchange regime and to enhance the flexibility of RMB exchange rates. Such changes in policy have resulted in a significant appreciation of the Renminbi against the U.S. dollar since 2005. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant adjustment of the Renminbi against the U.S. dollar. Any significant appreciation or revaluation of the Renminbi may have a material adverse effect on the value of, and any dividends payable on, shares of our Common Stock in foreign currency terms. More specifically, if we decide to convert our Renminbi into U.S. dollars, appreciation of the U.S. dollar the Renminbi would have a effect on the U.S. dollar amount available to us. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi the U.S. dollar would have an effect on the Renminbi amount we would receive from the conversion. In addition, appreciation or depreciation in the exchange rate of the Renminbi to the U.S. dollar could materially and affect the price of shares of our Common Stock in U.S. dollars without giving effect to any underlying change in our business or results of operations.
Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.
Part of our revenue is denominated in Renminbi. As a result, restrictions on currency exchange may limit our ability to use revenue generated in Renminbi to fund any business activities we may have outside China in the future or to make dividend payments to our shareholders in U.S. dollars. Under current PRC laws and regulations, Renminbi is freely convertible for current account items, such as trade- and service-related foreign exchange transactions and dividend distributions. However, Renminbi is not freely convertible for direct investment or loans or for investments in securities outside China, unless such use is approved by SAFE. For example, foreign exchange transactions under the subsidiary’s capital account, including principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls and the approval requirement of SAFE. These limitations could affect our ability to convert Renminbi into foreign currency for capital expenditures. The Chinese government is further strengthening the control of foreign exchange controls, and we may not be able to influence such decisions.
Our subsidiary in China is subject to restrictions on making dividends and other payments to us.
We are a holding company and rely partially on dividends paid by the PRC Subsidiaries for our cash needs, including paying dividends and other cash distributions to our shareholders to the extent we choose to do so, servicing any debt we may incur and paying our operating expenses. Current PRC regulations permit the PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Under the applicable requirements of PRC law, Beijing Zhongyan may only distribute dividends after it has made allowances to fund certain statutory reserves. These reserves are not distributable as cash dividends. In addition, if the subsidiaries or affiliated entities in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any such restrictions may materially affect such entities’ ability to pay dividends or make other payments, in service fees or otherwise, to us, which may materially and adversely affect our business, financial condition and results of operations.
Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil law system may be cited as references but have limited precedential value. Since 1979, newly introduced PRC laws and regulations have significantly enhanced the protections of interests relating to foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to evolve rapidly, the interpretations of such laws and regulations may not always be consistent, and enforcement of these laws and regulations in different administrative areas involves significant uncertainties, any of which could limit the available legal protections. In addition, the PRC administrative and judicial authorities have significant discretion in interpreting, implementing or enforcing statutory rules and contractual terms, and it may be more difficult to predict the outcome of administrative and judicial proceedings and the level of legal protection we may enjoy in the PRC than under some more developed legal systems. These uncertainties may affect our decisions on the policies and actions to be taken to comply with PRC laws and regulations, and may affect our ability to enforce our contractual or tort rights. In addition, the regulatory uncertainties may be exploited through unmerited legal actions or threats in an attempt to extract payments or benefits from us. Such uncertainties may therefore increase our operating expenses and costs, and materially and affect our business and results of operations.
The PRC’s legal and judicial system under special circumstances may not adequately protect our business and operations and the rights of foreign investors.
The legal and judicial systems in the PRC are still rudimentary, and enforcement of existing laws is uncertain. As a result, it may be impossible to obtain swift and equitable enforcement of laws that do exist, Different administrative regions have different legal and judicial interpretations or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The PRC’s legal system is based on the civil law regime, that is, it is based on written statutes. A decision by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may be varied to reflect domestic political changes.
The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting the PRC’s political, economic or social life, will not affect the PRC government’s ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.
Certain PRC regulations, including the M&A Rules and national security regulations, may require a complicated review and approval process which could make it more difficult for us to pursue growth through acquisitions in China.
The M&A Rules established additional procedures and requirements that could make merger and acquisition activities in China by foreign investors more time-consuming and complex. For example, the Ministry of Commerce (“MOFCOM”) must be notified in the event a foreign investor takes control of a PRC domestic enterprise. In addition, certain acquisitions of domestic companies by offshore companies that are related to or affiliated with the same entities or individuals of the domestic companies, are subject to approval by the MOFCOM. In addition, the Implementing Rules Concerning Security Review on Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by the MOFCOM in August 2011, require that mergers and acquisitions by foreign investors in “any industry with national security concerns” be subject to national security review by the MOFCOM. In addition, any activities attempting to circumvent such review process, including structuring the transaction through a proxy or contractual control arrangement, are strictly prohibited. There is significant uncertainty regarding the interpretation and implementation of these regulations relating to merger and acquisition activities in China. In addition, complying with these requirements could be time-consuming, and the required notification, review or approval process may materially delay or affect our ability to complete merger and acquisition transactions in China. As a result, our ability to seek growth through acquisitions may be materially and affected. In addition, if the MOFCOM determines that we should have obtained its approval for our entry into contractual arrangements with the affiliated entities, we may be required to file for remedial approvals. There is no assurance that we would be to obtain such approval from the MOFCOM. We may also be subject to administrative or by the MOFCOM that may require us to limit our business operations in the PRC, or restrict the conversion and remittance of our funds in foreign currencies into the PRC or take other actions that could have material and effect on our business, financial condition and results of operations.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to the PRC Subsidiaries and affiliated entities, which could harm our liquidity and our ability to fund and expand our business.
We are a Nevada corporation that conduct part of our operations in China and Hong Kong through our subsidiaries. We may make loans to such subsidiaries, subject to governmental approval and limitations on the amount, or we may make additional capital contributions to our subsidiaries in the PRC.
Any loans to the subsidiaries in the PRC are subject to foreign investment and are under PRC regulations and foreign exchange loan registrations. For example, loans by us to the wholly foreign-owned subsidiaries or VIE entities in China to finance their activities must be registered with the local counterpart of SAFE. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly use for investment in securities or investments other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises). On October 23, 2019, the SAFE promulgated the Notice of the State Administration of Foreign Exchange on Further Promoting the Convenience of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows all foreign-invested companies to use Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine, does not violate applicable laws, and does not with the list on foreign investment. However, since the SAFE Circular 28 is newly promulgated, it is unclear how SAFE and competent banks will carry this out in practice. In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot you that we will be to complete the necessary government registrations or obtain the necessary government approvals on a timely basis.
We must remit offering proceeds to China in a future securities issuance before they may be used to benefit our business in China, the process of which may be time-consuming, and we cannot assure that we can complete all necessary governmental registration processes in a timely manner.
The proceeds of a future offering may be remitted back to the PRC, and the process for wiring such proceeds back to the PRC may be time-consuming after the closing of a future offering. We may be unable to use these proceeds to grow our business until the PRC Subsidiaries receive such proceeds in the PRC. Any transfer of funds by us to the PRC Subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration or filing with relevant governmental authorities in China. Any foreign loans procured by the PRC Subsidiaries is required to be registered with China’s State Administration of Foreign Exchange (“SAFE”) or its local branches or satisfy relevant requirements, and the PRC subsidiaries may not procure loans which exceed the difference between their respective total project investment amount and registered capital or 2 times (which may be varied year by year due to the change of PRC’s national macro-control policy) of the net worth of the PRC subsidiary. According to the relevant PRC regulations on foreign-invested enterprises in China, capital contributions to the PRC subsidiaries are subject to the approval of or filing with State Administration for Market Regulation in its local branches, the Ministry of Commerce in its local branches and registration with a local bank authorized by SAFE.
In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to the PRC subsidiary or with respect to future capital contributions by us to the PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund the PRC operations may be negatively affected, which could materially and adversely affect our liquidity, our ability to fund and expand our business and our securities.
A failure by the beneficial owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability under PRC law.
SAFE has promulgated regulations, including the Notice on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles (or SAFE Circular No. 37), effective on July 4, 2014, and its appendices, that require PRC residents, including PRC institutions and individuals, to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular No. 37 as a “special purpose vehicle.” SAFE Circular No. 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange .
These regulations apply to our direct and indirect shareholders who are PRC residents and may apply to any offshore acquisitions or share transfers that we make in the future if our shares are issued to PRC residents. However, in practice, different local SAFE branches may have different views and procedures on the application and implementation of SAFE regulations, and since SAFE Circular No. 37 was relatively new, there remains uncertainty with respect to its implementation. As of the date of this report, all PRC residents known to us that currently hold direct or indirect interests in our company have completed the necessary registrations with SAFE as required by SAFE Circular 37. However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with the requirements of SAFE Circular 37. However, we cannot assure you that these individuals or any other direct or indirect shareholders or beneficial owners of our company who are PRC residents will be able to successfully complete the registration or update the registration of their direct and indirect equity interest as required in the future. If they fail to make or update the registration, our shareholders could be subject to and legal , and SAFE could restrict our cross-border investment activities and our foreign exchange activities, including restricting the PRC subsidiary’s ability to distribute dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and affected.
We may be subject to fine due to our insufficient payment of the social insurance and housing fund of the employees.
Pursuant to the Social Insurance Law of the PRC, as amended on December 29, 2018,and the Regulation on the Administration of Housing Accumulation Funds, as amended on March 24, 2019, employers in China shall register with relevant social insurance agency and relevant housing provident fund management center and open special housing provident fund accounts for each of their employees, and pay contributions to the social insurance plan and the housing provident fund for their employees, such contribution amount payable shall be calculated based on the employee’s actual salary in accordance with the relevant regulations. In case the employer fails to make sufficient payment of the social insurance, it may be subject to fine up to three times of the insufficient amount and pay late fees. If the employer failed to register with relevant housing provident fund management center or failed to open special housing provident fund accounts for the employees within the ordered time limit, a fine of not less than RMB10,000 nor more than RMB50,000 may be imposed. In addition, if the employer fails to pay sufficient contributions to housing provident fund as required, the housing provident fund management center shall order it to make the payment and deposit within a prescribed time limit; where the payment has not been made after the expiration of the time limit, the housing provident fund management center may request the people’s court for compulsory enforcement. On July 20, 2018, the General Office of the Communist Party of China and the General Office of the State Council jointly issued the Reform Plan on Tax Collection and Administration Systems for Local Offices of the State Administration of Taxation and Local Taxation Bureaus, according to which the collection and administration of social insurance will be transferred from the social insurance departments to competent tax authorities, and the supervision over the payment of social insurance will be significantly in the way that an enterprise must pay social insurance for its employees based on their overall salary at certain legally required rates. If we are due to payment of the social insurance and housing fund of the employees, our business operations could be materially and affected.
You may face difficulties in protecting your interests and exercising your rights as a stockholder of ours since we conduct part of our operations in China and part of our officers and directors reside in China.
We conduct part of our operations in the PRC through the PRC Subsidiaries. Some of our current officers and directors reside outside the United States and part of the assets of those persons are located outside of the United States. Because of this, it may be difficult for you to conduct due diligence on our Company, our executive officers or directors, or to attend stockholder meetings if the meetings are held in China. As a result, our public stockholders may have more difficulty in protecting their interests through actions against our management, directors or major stockholders than would stockholders of a corporation doing business entirely or predominantly within the United States.
You may experience difficulties in protecting your rights through the United States courts.
As of the date of this Report, part of our operations is conducted in China and part of our assets are located in China. Part our officers are nationals or residents of the PRC and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a stockholder to effect service of process within the United States upon these persons, or to enforce judgments against us which are obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
In addition, it may be difficult or impossible for you to effect service of process within the United States upon us our directors and officers in the event that you believe that your rights have been violated under United States securities laws or otherwise. Even if you are successful in effecting service of process and bringing an action of this kind, the laws of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the PRC of judgments obtained in the United States.
Increases in labor costs in the PRC may adversely affect our business and our profitability.
The economy of China has been experiencing significant growth, leading to inflation and increased labor costs. China’s overall economy and the average wage in the PRC are expected to continue to grow. Future increases in China’s inflation and material increases in the cost of labor may materially and adversely affect our profitability and results of operations.
Our auditor is headquartered in Singapore and is subject to inspection by the PCAOB on a regular basis. To the extent that our independent registered public accounting firm’s audit documentation related to their audit reports for our company become located in China, the PCAOB may not be able inspect such audit documentation and, as such, you may be deprived of the benefits of such inspection and our Common Stock could be delisted from the stock exchange pursuant to the Holding Foreign Companies Accountable Act and Accelerating Holding Foreign Companies Accountable Act.
Our independent registered public accounting firm issued an audit opinion on the financial statements included in this report filed with the SEC and will issue audit reports related to our company in the future. As auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, our auditor is required by the laws of the United States to undergo regular inspections by the PCAOB. However, to the extent that our auditor’s work papers become located in China, such work papers will not be subject to inspection by the PCAOB because the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities. Inspections of certain other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. On December 2, 2021, the Securities and Exchange Commission adopted amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. We are required by the HFCA Act to have an auditor that is subject to the inspection by the PCAOB. Pursuant to the HFCA Act, the PCAOB issued a Determination Report on December 16, 2021, which found that the PCAOB was unable to inspect or investigate completely certain named registered public accounting firms headquartered in mainland China and Hong Kong. Our independent registered public accounting firm is headquartered in the Singapore and has been inspected by the PCAOB on a regular basis and as such, it is not affected by or subject to the PCAOB’s Determination Report. To the extent this status changes in the future and our auditor’s audit documentation related to their audit reports for our company becomes outside of the inspection by the PCAOB, our Common Stock could be from the stock exchange pursuant to the Holding Foreign Companies Accountable Act.
Our securities may be prohibited from trading on a national exchange or over-the-counter in the United States under the Holding Foreign Companies Accountable Act, if the PCAOB determines that it cannot inspect or fully investigate our auditors for two consecutive years. As a result, an exchange may determine to delist our securities.
In light of recent events indicating greater oversight by the CAC over data security, we may be subject to a variety of PRC laws and other obligations regarding cybersecurity and data protection, and any failure to comply with applicable laws and obligations could have a material adverse effect on our business and our securities.
Since 2021, the Chinese government has strengthened its anti-monopoly supervision, mainly in three aspects: (1) establishing the National Anti-Monopoly Bureau; (2) revising and promulgating anti-monopoly laws and regulations, including: the Anti-Monopoly Law (draft Amendment published on October 23, 2021 for public opinions), the anti-monopoly guidelines for various industries, and the detailed Rules for the Implementation of the Fair Competition Review System; and (3) expanding the anti-monopoly law enforcement targeting Internet companies and large enterprises. As of the date of this report, the Chinese government’s recent statements and regulatory actions related to anti-monopoly concerns have not impacted our ability to conduct business, accept foreign investments, or list on a U.S. or other foreign exchange because neither the Company nor its PRC operating entities engage in monopolistic behaviors that are subject to these statements or regulatory actions.
On November 14, 2021, the CAC released the Regulations on the Network Data Security Management (Draft for Comments), or the Data Security Management Regulations Draft, to solicit public opinion and comments till December 13, 2021, which has not been promulgated as of the date of this report. Pursuant to the Data Security Management Regulations Draft, data processors holding more than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad. Data processing activities refers to activities such as the collection, retention, use, processing, transmission, provision, disclosure, or deletion of data. According to the latest amended Cybersecurity Review Measures, which was promulgated on November 16, 2021 and became effective on February 15, 2022, an online platform operator holding more than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad.
As of the date of this Report, CIMG and its subsidiaries have not received any notice from any authorities requiring the PRC subsidiaries to go through cybersecurity review or network data security review by the CAC. Given that CIMG and its subsidiaries do not possess personal data of at least one million individual clients and do not collect data that affects or may affect national security in their business operations as of the date of this report and do not anticipate that they will be collecting over one million users’ personal information or data that affects or may affect national security in the near future. There remains uncertainty, however, as to how the Cybersecurity Review Measures and the Security Administration Draft will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Cybersecurity Review Measures and the Security Administration Draft. If any such new laws, regulations, rules, or implementation and interpretation come into effect, we will take all reasonable measures and actions to comply and to minimize the adverse effect of such laws on us. We cannot guarantee, however, that we will not be subject to cybersecurity review and network data security review in the future, which could materially and adversely affect our business, financial conditions, and results of operations.
Compliance with China’s new Data Security Law, Measures on Cybersecurity Review (revised draft for public consultation), Personal Information Protection Law (second draft for consultation), regulations and guidelines relating to the multi-level protection scheme and any other future laws and regulations may entail significant expenses and could materially affect our business.
China has implemented or will implement rules and is considering a number of additional proposals relating to data protection. China’s new Data Security Law promulgated by the Standing Committee of the National People’s Congress of China in June 2021, or the Data Security Law, will take effect in September 2021. The Data Security Law provides that the data processing activities must be conducted based on “data classification and hierarchical protection system” for the purpose of data protection and prohibits entities in China from transferring data stored in China to foreign law enforcement agencies or judicial authorities without prior approval by the Chinese government. As the Data Security Law has not yet come into effect, we may need to make adjustments to our data processing practices to comply with this law.
Additionally, China’s Cyber Security Law, requires companies to take certain organizational, technical and administrative measures and other necessary measures to ensure the security of their networks and data stored on their networks. Specifically, the Cyber Security Law provides that China adopt a multi-level protection scheme (MLPS), under which network operators are required to perform obligations of security protection to ensure that the network is free from interference, disruption or unauthorized access, and prevent network data from being disclosed, stolen or tampered. Under the MLPS, entities operating information systems must have a thorough assessment of the risks and the conditions of their information and network systems to determine the level to which the entity’s information and network systems belong-from the lowest Level 1 to the highest Level 5 pursuant to the Measures for the Graded Protection and the Guidelines for Grading of Classified Protection of Cyber Security. The grading result will determine the set of security protection obligations that entities must comply with. Entities classified as Level 2 or above should report the grade to the relevant government authority for examination and approval.
Recently, the Cyberspace Administration of China has taken action against several Chinese internet companies in connection with their initial public offerings on U.S. securities exchanges, for alleged national security risks and improper collection and use of the personal information of Chinese data subjects. According to the official announcement, the action was initiated based on the National Security Law, the Cyber Security Law and the Measures on Cybersecurity Review, which are aimed at “preventing national data security risks, maintaining national security and safeguarding public interests.” On July 10, 2021, the Cyberspace Administration of China published a revised draft of the Measures on Cybersecurity Review, expanding the cybersecurity review to data processing operators in possession of personal information of over 1 million users if the operators intend to list their securities in a foreign country.
It is unclear at the present time how widespread the cybersecurity review requirement and the enforcement action will be and what effect they will have on the life sciences sector generally and the Company in particular. China’s regulators may impose penalties for non-compliance ranging from fines or suspension of operations, and this could lead to us delisting from the U.S. stock market.
In addition, our securities may be prohibited from trading on a national exchange or over-the-counter in the United States under the Holding Foreign Companies Accountable Act, if the PCAOB determines that it cannot inspect or fully investigate our auditors for two consecutive years.
Also, on August 20, 2021, the National People’s Congress passed the Personal Information Protection Law, which will be implemented on November 1, 2021. The law creates a comprehensive set of data privacy and protection requirements that apply to the processing of personal information and expands data protection compliance obligations to cover the processing of personal information of persons by organizations and individuals in China, and the processing of personal information of persons in China outside of China if such processing is for purposes of providing products and services to, or analyzing and evaluating the behavior of, persons in China. The law also proposes that critical information infrastructure operators and personal information processing entities who process personal information meeting a volume threshold to-be-set by Chinese cyberspace regulators are also required to store in China personal information generated or collected in China, and to pass a security assessment administered by Chinese cyberspace regulators for any export of such personal information. Lastly, the draft contains proposals for significant fines for serious violations of up to RMB 50 million or 5% of annual revenues from the prior year.
Interpretation, application and enforcement of these laws, rules and regulations evolve from time to time and their scope may continually change, through new legislation, amendments to existing legislation and changes in enforcement. Compliance with the Cyber Security Law and the Data Security Law could significantly increase the cost to us of providing our service offerings, require significant changes to our operations or even prevent us from providing certain service offerings in jurisdictions in which we currently operate or in which we may operate in the future. Despite our efforts to comply with applicable laws, regulations and other obligations relating to privacy, data protection and information security, it is possible that our practices, offerings or platform could fail to meet all of the requirements imposed on us by the Cyber Security Law, the Data Security Law and/or related implementing regulations. Any failure on our part to comply with such law or regulations or any other obligations relating to privacy, data protection or information security, or any compromise of security that results in unauthorized access, use or release of personally identifiable information or other data, or the perception or allegation that any of the foregoing types of failure or compromise has occurred, could our reputation, new and existing counterparties from contracting with us or result in , , or other by Chinese government authorities and private or , any of which could materially affect our business, financial condition and results of operations. Even if our practices are not subject to legal , the perception of privacy , whether or not valid, may our reputation and brand and affect our business, financial condition and results of operations. Moreover, the legal uncertainty created by the Data Security Law and the recent Chinese government actions could materially affect our ability, on terms, to raise capital, including engaging in follow-on offerings of our securities in the U.S. market.
On November 14, 2021, the Cyberspace Administration of China released the Regulations on the Network Data Security Management (Draft for Comments), or the Data Security Management Regulations Draft, to solicit public opinion and comments till December 13, 2021, which has not been promulgated as of the date of this report. Pursuant to the Data Security Management Regulations Draft, data processors holding more than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad. Data processing activities refers to activities such as the collection, retention, use, processing, transmission, provision, disclosure, or deletion of data. According to the latest amended Cybersecurity Review Measures, which was promulgated on November 16, 2021 and became effective on February 15, 2022, an online platform operator holding more than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad.
As of the date of this Report, CIMG and its subsidiaries have not received any notice from any authorities requiring the PRC subsidiaries to go through cybersecurity review or network data security review by the CAC. Given that the PRC subsidiaries do not possess personal data of at least one million individual clients and do not collect data that affects or may affect national security in their business operations as of the date of this report and do not anticipate that they will be collecting over one million users’ personal information or data that affects or may affect national security in the near future. There remains uncertainty, however, as to how the Cybersecurity Review Measures and the Security Administration Draft will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Cybersecurity Review Measures and the Security Administration Draft. If any such new laws, regulations, rules, or implementation and interpretation come into effect, we will take all reasonable measures and actions to comply and to minimize the adverse effect of such laws on us. We cannot guarantee, however, that we will not be subject to cybersecurity review and network data security review in the future, which could materially and adversely affect our business, financial conditions, and results of operations.
Failure to comply with the Foreign Corrupt Practices Act could adversely affect our business.
We are required to comply with the United States Foreign Corrupt Practices Act (or FCPA), which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in mainland China. If our competitors engage in these practices, they may receive preferential treatment from personnel of other companies or government agencies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage.
We have operations and agreements with third parties, and we make sales, in China. Companies with operations in China have been accused and found guilty of sales practices that involve unlawful activity, including violations of the FCPA. We believe to date we have complied in all material respects with the provisions of the FCPA. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants and/or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
Risks Related to Ownership of our Common Stock
The market price of our stock may be volatile, and you could lose all or part of your investment.
The trading price of our Common Stock is likely to be highly volatile and subject to wide fluctuations in response to various factors, some of which we cannot control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Report, these factors include but are not limited to:
the success of, or developments in, competitive products, services or technologies;
regulatory actions with respect to our products and our competitors;
the level of success of our marketing strategy;
announcements by us or our competitors of significant acquisitions, strategic collaborations, joint ventures or capital commitments;
regulatory or legal developments in the United States and other countries;
recruitment or departure of key personnel;
expenses related to any of our development programs and our business in general;
actual or anticipated changes in financial estimates, development timelines or recommendations by securities analysts;
failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
variations in our financial results or those of companies that are perceived to be similar to us;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
our ability or failure to raise additional capital in equity or debt transactions;
costs associated with our sales and marketing initiatives;
sales of our Common Stock by us, our insiders or our other stockholders; and
general economic, business, industry, market and political conditions, including prevailing interest rates and the rate of inflation.
In addition, the stock market in general has in the past experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the relevant companies. Broad market and industry factors may negatively affect the market price of our Common Stock, regardless of our actual operating performance. The realization of any of the above risks or any of a broad range of other risks, including those described in this “Risk Factors” section, could have a dramatic and material adverse impact on the market price of our Common Stock.
Despite our listing on the Nasdaq Capital Market, there can be no assurance that an active trading market for our Common Stock will be sustained.
In June 2020, our Common Stock commenced trading on the Nasdaq Capital Market under the symbol “NUZE.” On October 31, 2024, we changed our symbol to “IMG.” Although our Common Stock is listed on the Nasdaq Capital Market, an active trading market for our shares may never be sustained. You may not be able to sell your shares quickly or at the market price if trading in shares of our securities is not active. Further, an inactive market may also impair our ability to raise capital by selling shares of our securities and may impair our ability to enter into strategic partnerships or acquire companies or products by using shares of our securities as consideration, which could have a material adverse effect on our business, financial condition, and results of operations.
The Nasdaq Capital Market may subsequently delist our securities if we fail to comply with ongoing listing standards.
The Nasdaq Capital Market’s rules for listed companies requires us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our Common Stock. In addition to specific listing and maintenance standards, the Nasdaq Capital Market has broad discretionary authority over the continued listing of securities, which it could exercise with respect to the listing of our Common Stock.
As a listed company, we are required to meet the continued listing requirements applicable to all Nasdaq Capital Market companies. On September 20, 2022, the Company received a notification letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“NASDAQ”) indicating that the Company was not in compliance with the minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing (the “Bid Price Rule”). On December 28, 2022, the Company completed a 1-for-35 reverse stock split, which became effective on December 28, 2022. On January 17, 2023, the Company received notice that the Company had regained compliance with the Bid Price Rule. In addition to the Bid Price Rule previously described, Nasdaq Capital Market listing rules require us to maintain a minimum stockholders’ equity of $2.5 million under Nasdaq Listing Rule 5550(b)(1), a minimum market value of listed securities of $35 million under Nasdaq Listing Rule 5550(b)(2), or a minimum net income of $500,000 under Nasdaq Listing Rule 5550(b)(3).
The Company received a notification letter from Nasdaq on January 23, 2024 (the “NASDAQ Notification Letter”), indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(b)(1) (the “Stockholders’ Equity Requirement”). The Nasdaq Notification Letter stated that the Company failed to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing, as required by the Stockholders’ Equity Requirement. Subsequently, the Company completed a convertible note financing of $320,000 on April 27, 2024, an equity financing of $1,500,000 on June 4, 2024, and an equity financing of $3,000,000 on July 11, 2024. On July 23, 2024, the Company received a letter from Nasdaq stating that based on the Company’s Form 8-K, filed with the Commission on July 19, 2024, Nasdaq has determined that the Company has complied with Listing Rule 5550(b)(1).
On January 14, 2025, the Company received a notification letter (the “Minimum Bid Price Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC indicating that the Company was not in compliance with the minimum bid price requirement for continued listing set forth in Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. The Minimum Bid Price Notice had no immediate effect on the listing of the Company’s Common Stock, which continued to trade on The Nasdaq Capital Market under the symbol “IMG.” In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company had 180 calendar days from the date of the Minimum Bid Price Notice, or until July 14, 2025, to regain compliance. If, at any time before July 14, 2025, the closing bid price of the Common Stock closed at or above $1.00 per share for a minimum of 10 consecutive business days, Nasdaq would provide written notification that the Company had regained compliance and the matter would be resolved. If the Company did not compliance during the compliance period ending July 14, 2025, Nasdaq could, in its discretion, grant the Company an additional 180-calendar-day period to compliance, provided that the Company met the continued listing requirement for market value of publicly held shares and all other applicable initial listing standards for The Nasdaq Capital Market as of July 14, 2025 (except for the minimum bid price requirement) and provided Nasdaq with written notice of its intent to cure the during the second compliance period.
On January 17, 2025, the Company received another notice (the “Annual Report Notice”) from Nasdaq indicating that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) because the Company did not timely file its Annual Report on Form 10-K for the fiscal year ended September 30, 2024 with the SEC. The Annual Report Notice had no immediate effect on the listing of the Company’s Common Stock on Nasdaq and stated that the Company was required to submit a plan to regain compliance with Nasdaq Listing Rule 5250(c)(1) within 60 calendar days from the date of the Annual Report Notice. If the plan was accepted by Nasdaq, Nasdaq could grant the Company up to 180 calendar days from the due date of the Form 10-K for the fiscal year ended September 30, 2024 to regain compliance. In determining whether to accept such plan, Nasdaq would consider factors such as the likelihood that the remedial filing, along with any subsequent periodic filings that became due, could be made within the 180-day period, the Company’s past compliance history, the reasons for the late filing, other corporate events that might occur during Nasdaq’s review period, the Company’s overall financial condition, and its public disclosures. Any subsequent periodic filing due within the 180-day exception period was required to be filed no later than the end of that period.
On February 19, 2025, the Company received a notification letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC indicating that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) because the Company did not timely file its Quarterly Report on Form 10-Q for the period ended December 31, 2024 with the SEC.
The Company submitted a compliance plan to Nasdaq on March 18, 2025, and Nasdaq granted the Company an extension to (i) file its Form 10-K for the fiscal year ended September 30, 2024 on or before June 13, 2025, and (ii) file its Form 10-Q for the quarter ended December 31, 2024 on or before July 14, 2025.
On May 19, 2025, the Company received a notice (the “Quarterly Report Notice”) from Nasdaq indicating that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) because the Company did not timely file its Quarterly Report on Form 10-Q for the three months ended March 31, 2025 with the SEC. The Quarterly Report Notice had no immediate effect on the listing of the Company’s Common Stock on Nasdaq.
As a result of this additional delinquency relating to the Form 10-Q for the three months ended March 31, 2025, the Company submitted an update to its original compliance plan on June 3, 2025.
On June 13, 2025, the Company did not file its Form 10-K for the fiscal year ended September 30, 2024. On June 27, 2025, the Company received a delisting determination letter from the Listing Qualifications Department of The Nasdaq Stock Market LLC (the “Nasdaq Delist Determination Letter”). According to the Nasdaq Delist Determination Letter, unless the Company requested an appeal of this determination by July 7, 2025, trading of the Company’s Common Stock would be suspended from The Nasdaq Capital Market at the opening of business on July 9, 2025, and Nasdaq would file a Form 25-NSE with the SEC to remove the Company’s securities from listing and registration on The Nasdaq Stock Market.
On July 7, 2025, the Company appealed the Nasdaq delisting determination letter dated June 27, 2025, and the Nasdaq Hearings Panel scheduled a hearing for the appeal on August 14, 2025. Nasdaq also notified the Company that the Panel would consider this matter in rendering a determination regarding the Company’s continued listing on The Nasdaq Capital Market. Pursuant to Listing Rule 5810(d), the Company intended to present its views with respect to this additional deficiency at the Panel hearing.
On July 17, 2025, the Company received an additional delisting determination letter from Nasdaq, which stated that the Company had not regained compliance with Nasdaq Listing Rule 5550(a)(2) by July 14, 2025 and was not eligible for a second 180-calendar-day compliance period, primarily because the Company did not satisfy the initial listing requirements for The Nasdaq Capital Market under the Equity Standard or the alternative standards. According to the letter, this matter served as an additional basis for delisting the Company’s securities from The Nasdaq Stock Market.
On July 21, 2025, the Company filed with the SEC its Annual Report on Form 10-K for the fiscal year ended September 30, 2024, which was subsequently amended on July 30, 2025.
Following a hearing held on August 14, 2025, the Nasdaq Hearings Panel issued a decision on September 2, 2025 granting the Company’s request to continue its listing on The Nasdaq Stock Market, subject to the Company’s timely satisfaction of specified conditions, including (i) filing all required periodic reports and (ii) demonstrating compliance with Nasdaq Listing Rule 5550(b)(1), to be affirmed in a report to be filed under the Exchange Act on or before September 30, 2025.
On August 20, 2025, the Company received a delinquency notification letter from the Listing Qualifications Staff of Nasdaq indicating that the Company was not in compliance with Nasdaq Listing Rule 5250(c)(1) because the Company did not timely file its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2025 with the SEC.
On August 26, 2025, the Company filed with the SEC its Quarterly Report on Form 10-Q for the three months ended December 31, 2024.
In its effort to regain compliance with the Nasdaq equity requirement, and subsequent to the quarter ended June 30, 2025 and through September 30, 2025, the Company completed certain unregistered issuances of equity securities, which increased stockholders’ equity.
On September 30, 2025, the Company filed with the SEC its Quarterly Report on Form 10-Q for the three months ended March 31, 2025.
On October 8, 2025, the Company received a delinquency notification letter from Nasdaq indicating that the Company was not in compliance with Nasdaq Listing Rule 5620(a) and Nasdaq Listing Rule 5810(c)(2)(G) because the Company did not hold an annual meeting of stockholders within 12 months of the end of the Company’s fiscal year. The Company subsequently held its Annual Meeting of Stockholders on October 28, 2025.
On November 3, 2025, the Company filed with the SEC its Quarterly Report on Form 10-Q for the three months ended June 30, 2025.
On December 4, 2025, Nasdaq notified the Company that it had regained compliance with Nasdaq Listing Rule 5250(c)(1), as well as Nasdaq Listing Rules 5550(b)(1) and 5620(a), following a hearing before the Nasdaq Hearings Panel. The Company remains subject to a bid price compliance deadline under Nasdaq Listing Rule 5550(a)(2) and a Mandatory Panel Monitor through November 14, 2026.
If we fail to meet one of those standards or any other applicable Nasdaq continued listing requirement relevant to the listing of our securities, our Common Stock may be subject to delisting, as applied by Nasdaq in its discretion. We intend to take all commercially reasonable actions to maintain our Nasdaq Capital Market listing. If our Common Stock is delisted in the future, it is not likely that we will be able to list our Common Stock on another national securities exchange on a timely basis or at all and, as a result, we expect our securities would be quoted on an over-the-counter market; however, if this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our Common Stock and reduced liquidity for the trading of our securities. In addition, in the event of such delisting, we could experience a decreased ability to issue additional securities and obtain additional financing in the future.
We have broad discretion in the use of the net proceeds from our recent offering and may not use them effectively, which could affect our results of operations and cause our stock price to decline.
Our management will have broad discretion in the application of the net proceeds from our recent offering. We intend to use the net proceeds from the offering to acquire complementary businesses, acquire or license products or technologies that are complementary to our own, although we have no current plans, commitments or agreements with respect to any such use of proceeds for acquisitions or licenses, and for working capital and general corporate purposes. As a result, you will be relying upon management’s judgment with only limited information about our specific intentions for the use of the balance of the net proceeds of the offering. You will not have the opportunity, as part of your investment decision, to assess whether we are using the proceeds appropriately. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. If we do not invest or apply the net proceeds from the offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
We incur significant costs as a result of operating as a public company, and our management must devote substantial time to compliance initiatives as a result of the listing of our Common Stock on the Nasdaq Capital Market.
As a listed company, we are required to meet the Nasdaq continued listing requirements. We have breached certain of these requirements in the past. See also “—The Nasdaq Capital Market may subsequently delist our securities if we fail to comply with ongoing listing standards” and “Corporate Information.”
We expect our ongoing compliance with such rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. These requirements may divert the attention of our management and personnel from other business concerns, and they could have a material adverse effect on our business, financial condition, and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot accurately predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our Board, our Board committees or as executive officers.
We expect to incur significant costs and devote substantial management time to maintaining our disclosure controls and procedures and internal control over financial reporting, and regardless we may be unable to prevent or detect all errors or acts of fraud or to accurately and timely report our financial results or file our periodic reports in a timely manner.
As a publicly traded company, our management is required to report annually on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation.
We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls.
Because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected. We cannot assure you that the measures we have taken will be effective in mitigating or preventing significant deficiencies or material weaknesses in our internal control over financial reporting in the future.
If we fail to maintain effective internal control over financial reporting to meet the demands that are placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or to report them within the timeframes required by law or exchange regulations.
Additionally, we have engaged only a very limited number of accounting and finance personnel and we rely in part on outside consultants. We may need to incur additional expenses to hire additional personnel with public company financial reporting expertise to build our financial management and reporting infrastructure, and further develop and document our accounting policies and financial reporting procedures. In the event we need to hire additional personnel with public company financial reporting expertise but we are unable to do so, we may not be able to accurately report our financial results or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
If we are unable to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud.
Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, detected or corrected on a timely basis.
If material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, then there exists a risk that our consolidated financial statements may contain material misstatements that are unknown to us at that time, and such misstatements could require us to restate our financial results. The existence of a material weakness in our internal control over financial reporting may result in current and potential stockholders losing confidence in our financial reporting, which could negatively impact the market price of our Common Stock.
In addition, the existence of any material weaknesses in our internal control over financial reporting may affect our ability to timely file periodic reports under the Exchange Act and may consequently result in the SEC revoking the registration of our Common Stock, or the delisting of our Common Stock. Any of these events, if they were to occur, could have a material adverse effect on the market price of our Common Stock or on our business, financial condition and results of operations.
Anti-takeover provisions in our third amended and restated bylaws and Nevada law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our securities.
Our third amended and restated bylaws contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our Board. Our third amended and restated bylaws include provisions:
limiting the liability of, and providing indemnification to, our directors, including provisions that require the Company to advance payment for defending pending or threatened claims;
controlling the procedures for the conduct and scheduling of board and stockholder meetings; and
limiting the number of directors on our board and the filling of vacancies or newly created seats on the board to our Board then in office.
In addition, we are subject to anti-takeover laws for Nevada corporations. These anti-takeover laws prevent Nevada corporations from engaging in a business combination with any shareholder, including all affiliates and associates of the shareholder, who is the beneficial owner of 10% or more of the corporation’s outstanding voting stock, for two years following the date that the shareholder first became the beneficial owner of 10% or more of the corporation’s voting stock, unless specified conditions are met. If those conditions are not met, then after the expiration of the two-year period the corporation may not engage in a business combination with such shareholder unless certain other conditions are met.
These provisions, alone or together, could delay hostile takeovers and changes in control or changes in our management. The existence of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our Common Stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that our stockholders could receive a premium for their Common Stock in an acquisition.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our Common Stock, the price of our Common Stock could decline.
The trading market for our Common Stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our Common Stock could decline if one or more equity analysts downgrade our Common Stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of our Common Stock has been, and may in the future be, volatile. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities litigation, including but not limited to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could have a material adverse effect on our business and financial condition.
We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any profits from an investment in our Common Stock will depend on whether the price of our Common Stock increases.
We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our Common Stock will be our stockholders’ sole source of gain for the foreseeable future.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful third-party claims against us and may reduce the amount of money available to us.
Our third amended and restated bylaws provide that we will indemnify our directors and officers, in each case to the fullest extent permitted by Nevada law. In addition, our third amended and restated bylaws and our indemnification agreements that we have entered into with our directors and officers provide for the following:
We will indemnify our directors and officers for serving us in those capacities or for serving other business enterprises at our request, to the fullest extent permitted by Nevada law. Nevada law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such person’s conduct was unlawful.
We will also indemnify employees and agents in those circumstances where indemnification is permitted by applicable law.
We are required to advance expenses, as incurred, to any indemnitee in connection with defending a proceeding, except that such indemnitee shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification.
The rights conferred in our third amended and restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons.
