Internal Controls and Compliance - The company has identified material weaknesses in its internal controls over financial reporting (ICFR) and is taking measures to remediate these deficiencies, but cannot guarantee full remediation[91]. - The company is required to comply with Section 404 of the Sarbanes-Oxley Act, which mandates effective disclosure controls and procedures, and may face challenges in meeting these requirements timely[92]. - If the company fails to maintain adequate ICFR, it could result in material misstatements in financial statements and potential sanctions from regulatory authorities[94]. - The company faces risks related to compliance with Circular 59 and Circular 7, which may require significant resources to address potential tax obligations[163]. - The SEC and PCAOB have called for stricter criteria for auditors of companies based in emerging markets, adding uncertainties to the company's offerings[165]. - The HFCAA requires foreign companies to certify they are not controlled by foreign governments, with potential trading prohibitions if PCAOB cannot inspect auditors for two consecutive years[167]. - The PCAOB signed a Statement of Protocol with Chinese authorities to allow complete inspections of audit firms, but future access remains uncertain[174]. - The SEC has adopted interim final rules requiring companies identified as having a "non-inspection" year to comply with additional disclosure and documentation requirements[178]. Financial Operations and Cash Flow - The company relies on dividends from its operating subsidiaries for cash flow, and any restrictions on these payments could adversely affect its business operations[95]. - The operating subsidiaries generate revenue primarily in Renminbi, which is not freely convertible, potentially limiting the company's ability to repatriate funds[96]. - A withholding tax rate of up to 10% may apply to dividends paid by Chinese companies to non-PRC resident enterprises, affecting the company's cash flow[98]. - The company may face difficulties in obtaining financing from banks in China, which could impact its liquidity and operational capabilities[109]. - Regulatory requirements for loans to PRC subsidiaries may delay or prevent the company from utilizing proceeds from recent offerings for business expansion[113]. - The company believes that offering proceeds will be available for investments in PRC operations after completing necessary registrations, but timely approvals are not guaranteed[115]. - The company must remit proceeds from future offerings to the PRC, a process that may take several months and could delay business growth[140]. Regulatory Environment and Compliance Risks - The PRC government may impose stricter capital controls, which could hinder the company's ability to make investments or pay dividends[97]. - The PRC government may impose stricter regulations that could require additional expenditures for compliance, impacting business operations[120]. - The Filing Rules effective March 31, 2023, require PRC domestic enterprises to file with the CSRC within three business days after submitting listing application documents, with potential fines between RMB1 million and RMB10 million for non-compliance[125]. - Future capital raising activities may also be subject to filing requirements with the CSRC, and failure to comply could result in sanctions that adversely affect business operations[126]. - The Foreign Investment Law, effective January 1, 2020, establishes a regulatory framework for foreign investments, including a negative list for restricted industries[128]. - PRC subsidiaries can only pay dividends from accumulated after-tax profits, and must set aside at least 10% of profits for statutory reserves until reaching 50% of registered capital[130]. - The PRC tax authorities have the discretion to adjust taxable capital gains based on the difference between fair value and investment cost, which could increase tax costs for potential acquisitions[164]. Currency and Exchange Rate Risks - Fluctuations in exchange rates between RMB and U.S. dollars could materially affect revenues and financial position, as most revenues and expenditures are in RMB[133]. - The RMB has fluctuated significantly against the U.S. dollar since 2010, and future changes in exchange rate policies could impact the company's financial results[134]. - Significant international pressure exists for the PRC to adopt a flexible currency policy, which could affect the value of Class A Ordinary Shares and dividends payable in U.S. dollars[135]. - Limited hedging options in China may expose the company to foreign currency exchange risk, with no hedging transactions currently in place[136]. - The PRC government imposes controls on RMB convertibility, affecting the company's ability to utilize cash effectively and potentially impacting investment value[138]. Operational and Market Risks - The Chinese government has significant control over business operations, which may lead to material changes in operations and the value of Class A Ordinary Shares[119]. - The company faces risks associated with the PRC's unique political and economic environment, which may affect results due to changes in governmental policies and regulations[624]. - Major operations are located in the PRC, where political, economic, and legal environments may influence business performance[623]. - Recent geopolitical tensions, including the war in Ukraine, could adversely affect the global economy and, in turn, the company's operations and financial condition[186]. - Changes in U.S. and Chinese regulations or relations may impact the company's ability to raise capital and the market price of its shares[187]. - The company may face significant operational disruptions if custodians of its non-tangible assets fail to fulfill their responsibilities[185]. Taxation and Profitability - If classified as a PRC resident enterprise, the company could face unfavorable tax consequences, including a 25% tax rate on global income[155]. - The company may be subject to a PRC enterprise income tax rate of 25% on worldwide income if deemed a PRC resident enterprise, which could materially reduce net income[156]. - A withholding tax rate of 10% currently applies to dividends paid by a PRC "resident enterprise" to foreign investors, potentially reduced to 5% under certain conditions[157]. - Labor costs in China are expected to rise, which may adversely affect profitability unless these costs can be passed on to customers[145]. Corporate Structure and Governance - The dual-class voting structure allows directors and officers to hold approximately 98% of the voting power, potentially limiting shareholder influence[189]. - The company has not been identified as a critical information infrastructure operator and does not anticipate collecting personal information of over one million users, thus avoiding cybersecurity review[183]. - The new Cybersecurity Review Measures effective February 15, 2022, require operators with over one million users to undergo cybersecurity review before listing abroad[182]. - The company has not received any inquiries or sanctions regarding its overseas listing from the CSRC or other PRC governmental authorities[184]. - The company has no current plans for acquisitions but may pursue them in the future, which could involve complex corporate structures and increased tax liabilities[164]. - The company is at risk of delisting under the HFCAA if the PCAOB cannot fully inspect its auditor for three consecutive years starting in 2021[177]. - Enhanced scrutiny by PRC tax authorities on acquisition transactions may negatively impact future acquisitions[158].
Li Bang International(LBGJ) - 2025 Q4 - Annual Report