ZK International(ZKIN) - 2023 Q4 - Annual Report

Regulatory Environment - ZK International is not expected to be identified under the Holding Foreign Companies Accountable Act (HFCAA) and its current auditor, Fortune CPA, Inc., is subject to PCAOB inspections[13]. - The PCAOB announced it secured complete access to inspect and investigate PCAOB-registered public accounting firms in mainland China and Hong Kong in 2022[12]. - Recent regulatory actions in China may create uncertainties regarding the ability to list on U.S. exchanges, potentially leading to significant depreciation of the company's ordinary shares[19]. - The approval from Chinese authorities may be required for future offerings, which could hinder the company's ability to operate and offer securities[23]. - Intense scrutiny of U.S.-listed Chinese companies may negatively impact the company's operations and reputation, potentially affecting investor confidence[27]. - The PRC Data Security Law and Personal Information Protection Law may impose new compliance requirements, affecting the company's operations and ability to attract foreign investments[21]. - The Measures for Cybersecurity Review (2021) require online platform operators with over one million users' personal information to undergo a cybersecurity review before listing in foreign markets[102]. - The Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, effective March 31, 2023, mandates filing procedures for PRC domestic enterprises seeking to list overseas, which could hinder future offerings[110]. - The PRC government may strengthen oversight over overseas offerings, which could hinder the company's ability to raise additional capital[131]. - The SEC has taken the position that certain cryptocurrencies may be classified as securities, impacting regulatory obligations for trading[208]. - If a stablecoin offered on xSigma's platform is deemed a security, the company could face legal or regulatory actions[208]. - The CFTC generally classifies cryptocurrencies as commodities, which may also subject xSigma Corporation to regulatory scrutiny[208]. Financial Stability and Operations - The company relies on dividends from its subsidiaries for cash needs, and any limitations on these payments could affect its financial stability[16]. - The company operates without a variable interest entity structure, which presents unique risks to investors[16]. - The company conducts substantially all of its operations in China, making it significantly influenced by the political, economic, and social conditions in the region[28]. - The company faces risks related to trade barriers and taxes that may reduce its ability to conduct international business, potentially harming profitability[29]. - There are uncertainties regarding the enforcement of laws in China, which could adversely affect the company's operations and financial performance[31]. - The PRC government imposes controls on currency conversion, which may affect the company's ability to pay dividends in foreign currencies[32]. - The company relies on dividends from its PRC subsidiaries to meet cash needs, and any limitations on these payments could impact financial stability[35]. - The ongoing COVID-19 pandemic has materially impacted operations in Zhejiang Province, with future effects on financial condition remaining uncertain[36]. - The company operates in a highly competitive industry, facing pressure on margins from both regional and importing manufacturers[37]. - Fluctuations in the availability and prices of raw materials could materially increase costs and lower earnings[38]. - Supply chain disruptions due to local protectionism and other factors could adversely impact the company's ability to produce and deliver products[41]. - The company may incur liability for unpaid taxes, including interest and penalties, as it faces challenges from PRC taxing authorities regarding tax amounts due[147]. - The company may require additional capital to support business growth and may need to engage in equity or debt financings[152]. - The company’s financial condition and results of operations may be adversely affected by failure to make adequate contributions to employee benefit plans as required by PRC regulations[143]. - The company’s ability to produce and deliver products may be adversely impacted by disruptions in the supply chain of raw materials[160]. Corporate Governance and Management - The company is heavily dependent on senior management and key personnel for its operations, with a particular reliance on the CEO Jiancong Huang[173]. - The company may face challenges in retaining key employees and customers post-acquisition, which could impact future earnings[168]. - The company’s ability to manage growth effectively is critical, as failure to do so could strain resources and adversely affect business prospects[169]. Market and Competitive Risks - The company is exploring strategic acquisitions in the PRC to complement its existing business, but currently has no commitments or agreements in place[167]. - The company’s growth strategy includes enhancing research and development capabilities, improving information technology systems, and increasing marketing and sales activities[169]. - The company acknowledges that the adoption of cryptocurrencies may slow or not develop as anticipated, which would negatively impact its business and financial results[201]. - The cryptocurrency market is subject to significant volatility, and the trading volume of digital assets can be influenced by various factors, including market conditions and regulatory changes[196][198]. - The online gaming and interactive entertainment industry, which includes CG Malta Holding Limited, presents significant uncertainty and business risks due to evolving regulations and competition[192][193]. Revenue Generation and Financial Performance - The company is dependent on the volume of transactions on its stablecoin exchange platform, with low trading volume posing risks to revenue generation[48]. - xSigma Corporation's revenue is dependent on the transaction volume conducted on its stablecoin exchange platform, and failure to grow this volume could adversely affect its business and financial condition[194]. - For the fiscal years ended September 30, 2023, 2022, and 2021, xSigma Corporation decided not to recognize revenue for its token SIG due to low trading volume and unstable market price[195]. - The stablecoin exchange platform launched by xSigma Corporation in February 2021 aims to generate commission revenue based on transaction fees, which could be a flat fee or a percentage of the transaction value[195]. - xSigma Corporation's stablecoin exchange currently supports the exchange of DAI, USDC, and USDT, which are fiat-backed stablecoins but not considered legal tender[200]. Taxation and Compliance - PRC regulations require subsidiaries to set aside at least 10% of their net income after taxes as statutory surplus reserves until the cumulative amount reaches 50% of their registered capital[75]. - A withholding tax rate of up to 10% applies to dividends payable by Chinese companies to non-PRC-resident enterprises, which could affect cash distributions[90]. - The 10% withholding tax rate may be reduced to 5% under certain conditions, but obtaining the necessary tax resident certificate is not guaranteed[91]. - The company may be classified as a "Resident Enterprise" under the PRC Enterprise Income Tax Law, which could subject it to a 25% tax rate on worldwide income[119]. - If classified as a "Resident Enterprise," dividends from PRC subsidiaries would be considered "tax-exempt income," but a 10% withholding tax may apply to dividends paid to non-PRC stockholders[121]. - The company has no current non-China source income, but future developments could lead to adverse tax consequences if such income is generated[121]. - The RMB is subject to government controls on currency conversion, which may restrict the ability to remit foreign currency for dividends or other payments[133]. - For the fiscal year ended September 30, 2023, the company reported a foreign currency translation adjustment loss of $(542,114)[136]. Cybersecurity and Data Protection - The company implements know-your-customer (KYC) procedures to mitigate risks associated with outdated or misleading information from users, but cannot fully guarantee the accuracy of such information[56]. - xSigma Collectibles must safeguard customers' fiat and crypto assets; failure to do so could lead to significant financial losses and reputational harm[57]. - xSigma Corporation has implemented know-your-customer (KYC) procedures to prevent sales of CFD and crypto assets to U.S. persons[210]. - The company will reject all account applications with any U.S. exposure, including U.S. citizens or residents[211]. - xSigma Trading will establish a blacklist of IP addresses to block users from U.S. sanctioned countries[211]. - The company faces risks related to outdated or inaccurate client information provided during the account registration process[210]. - xSigma Corporation cannot fully confirm the accuracy of client information beyond reasonable efforts, which may lead to compliance risks[210].