ATV Acorn International Inc New

The following selected consolidated statements of operations data for the three years ended December 31, 2017, 2018 and 2019, and the selected consolidated balance sheet data as of December 31, 2018 and 2019, have been derived from our audited consolidated financial statements for the years ended December 31, 2017, 2018 and 2019, and are included elsewhere in this annual report. Our selected consolidated statements of operations data for the years ended December 31, 2015 and 2016, and our consolidated balance sheet data as of December 31, 2015, 2016, and 2017 have been derived from our audited consolidated financial statements that are not included in this annual report. Our selected consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

In 2017, we reached an agreement to sell a majority stake in our HJX electronic learning products business, or the HJX Business, to a third-party investor and operator, allowing us to focus on existing businesses and brands with higher profit margins, and on achieving profitable growth of new, potentially high margin businesses. We maintain a 37.5% stake in a joint venture established with this third party. As a result of this transaction, we are required by applicable accounting rules to treat the historical operations of the wholly owned HJX Business as discontinued operations and the minority stake in the HJX Business as equity in losses of affiliates in the consolidated statements of operations for all periods presented, subject to the consolidation of the HJX Business into the joint venture entity. The financial data presented herein reflect HJX Business as discontinued operations.

In the third quarter of 2019, we completed closing of our call center in Wuxi, China. As a result, we are required by applicable accounting rules to treat the historical operations of the call center operations as discontinued operations for all periods presented. The financial data derived from our audited consolidated financial statements for the years ended December 31, 2017, 2018 and 2019, presented herein present call center operations as discontinued operations.

Our historical results for any period are not necessarily indicative of results to be expected for any future period. The selected consolidated financial data should be read in conjunction with those consolidated financial statements and related notes and Item 5. “Operating and Financial Review and Prospects” in this annual report.

Note:  Accumulated other comprehensive income in 2019 primarily reflects net change of unrealized losses of available-for-sales securities, net of tax. See Note 7 to our audited consolidated financial statements included elsewhere in this annual report.

Not applicable.

Not applicable.

 Risks Relating to Our Business and Industry

While we maintained operating profitability in 2019, in the recent past we have experienced significant net losses and negative cash flows, and we cannot assure you that our recent results constitute a new trend. Moreover, we believe we must consistently achieve operating profitability in order to position the business for long term sustainable success.

Although we achieved operating profit of $5.5 million and $2.7 million in 2019 and 2018, respectively, we experienced operating losses of approximately $3.8 million in 2017 as well as operating losses in the prior few years before that.

Over the past several years, we have continued to implement a series of initiatives, some of which are ongoing, designed to liquidate our non-core assets, reduce our expenses and losses, and generate additional cash flow. Our liquidity position has improved in subsequent years, in part due to these measures, allowing us to realize our assets and satisfy our liabilities in the normal course of business. Moreover, these measures have helped us to achieve profitability in recent years. Such measures include, among other related actions, the following, with a number of them continued through early 2020:

Our ability to maintain profitability and positive cash flow from operating activities depends on various factors, including our ability to grow revenue and control our costs and expenses, the effectiveness of our selling and marketing activities, consumer acceptance of our products and the growth and maintenance of our customer base. We may fail to sustain profitability or positive cash flow from operating activities. See Item 5. “Operating and Financial Review and Prospects—A. Operating Results—Overview” and “—B. Liquidity and Capital Resources”.

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations. Specifically the novel coronavirus could have a material adverse impact on our business, results of operations, financial condition, cash flows or liquidity.

Our business could be materially and adversely affected by natural disasters, such as snowstorms, earthquakes, fires or floods, the outbreak of a widespread health epidemic, such as swine flu, avian influenza, severe acute respiratory syndrome (SARS), coronavirus or COVID-19, Ebola, Zika or other events, such as wars, acts of terrorism, environmental accidents, power shortage or communication interruptions. The occurrence of a disaster or a prolonged outbreak of an epidemic illness or other adverse public health developments in China or elsewhere in the world could materially disrupt our business and operations. These events could also significantly impact our industry and cause a temporary closure of the facilities we use for our operations, which would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. Our operations could be disrupted if any of our employees or employees of our business partners were suspected of contracting an epidemic disease, since this could require us or our business partners to quarantine some or all of these employees or disinfect the facilities used for our operations. In addition, our revenue and profitability could be materially reduced to the extent that a natural disaster, health epidemic or other outbreak harms the global or PRC economy in general. Our operations could also be severely disrupted if our consumers, merchants or other participants were affected by natural disasters, health epidemics or other outbreaks.

The outbreak of a novel coronavirus (which causes the disease now known as COVID-19), was first identified in December 2019 in Wuhan, China, and has since spread globally. Government efforts to contain the spread of the coronavirus through lockdowns of cities, business closures, restrictions on travel and emergency quarantines, among others, and responses by businesses and individuals to reduce the risk of exposure to infection, including reduced travel, cancellation of meetings and events, and implementation of work-at-home policies, among others, have caused significant disruptions to the global economy and normal business operations across a growing list of sectors and countries.  The foregoing is likely to adversely affect business confidence and consumer sentiments, and has been, and may continue to be, accompanied by significant volatility in financial and commodity markets.  The spread of the coronavirus, particularly as it develops into a worldwide health crisis, is also likely have broader macro-economic implications, including reduced levels of economic growth and possibly a global recession, the effects of which could be felt well beyond the time the spread of infection is contained.

The outbreak of the coronavirus could have a material impact on our business in 2020. There has been disruption to our production capacity and our ability to deliver to customers in parts of China. There is also uncertainty about whether our ability to import raw material for our Acorn Fresh business will be affected materially. Finally, while we are adapting to work-from-home and flexible working arrangements, we have historically operated within a traditional office environment in Shanghai. Some of our employees, including certain senior officers, are foreign passport holders and they are currently prohibited from entering China.

Some of our online businesses (such as sale of fresh seafoods) appear to be experiencing increased demand, as customers need to shop necessities such as food from home. Our Babaka® product sales experienced reduction and may continue to be negatively affected by the COVID-19. In general, the combination of supply-side disruption, delivery challenges and potential, long-term waning consumer demand caused by COVID-19, potentially exacerbated by other factors, have negatively impacted and could continue to negatively impact our business. While we continue to monitor the situation, at this point it is difficult to assess the probable significance or duration of any disruption. As a result, we are taking a number of defensive measures to cut costs and conserve our cash resources, including salary reductions and the indefinite suspension of the quarterly dividend until we have more confidence concerning the current situation.

We currently are unable to predict the duration and severity of the spread of the coronavirus, and responses thereto, on our business and operations, and on our results of operations, financial condition, cash flow and liquidity, as these depend on rapidly evolving developments, which are highly uncertain and will be a function of factors beyond our control, such as the speed of contagion, the implementation of effective preventative and containment measures, the development of effective medical solutions, the timing and scope of governmental restrictions on public gatherings, mobility and other activities, financial and other market reactions to the foregoing, and reactions and responses of the populace both in affected regions and regions yet to be affected.  While we expect we will suffer adverse effects, the more severe the outbreak and the longer it lasts, the more likely it is that the effects on us and our business will be materially adverse.

Our best-selling Babaka® product line accounted for, and is expected to continue to account for, the substantial majority of our sales in the near term. Babaka® product line sales may decline, or reach the end of a product lifecycle, and we may fail to introduce new products to offset declines in sales of our featured products.

Our best-selling featured product line, the Babaka^® product line, accounted for 90.5%, 92.5% and 89.8% of our gross revenues in 2017, 2018 and 2019 respectively.

Our Babaka^® product line may fail to maintain consumer market popularity, and sales may decline due to, among other factors, the introduction of competing products, entry of new competitors, customer dissatisfaction with the value or quality offered by our products, negative publicity or market saturation. Consequently, our future sales success depends in part on our ability to successfully identify, develop, introduce and distribute in a timely and cost-effective manner new and upgraded products. Some reasons that sales of our Babaka® product line may fail to continue to increase, or even decline, include the following:

● Competition. Competition from current or future competitors could cause our products to lose market acceptance or require us to significantly reduce our prices or increase our promotional activities to maintain and attract customers. Our current or future competitors may have larger scale, longer operating histories, better brand recognition and consumer trust, stronger media management capabilities, better media and supplier relationships, a larger technical staff and sales force and/or greater financial, technical or marketing resources than we do. Currently, our Babaka^® product line faces competition from brands such as MTG, MINGZHEN, and Nuotai.

● Counterfeit Products. We have discovered unauthorized Babaka^® products on e-commerce platforms and in the marketplace that are counterfeit reproductions of our products. The existence of such counterfeit products could reduce our market share, and if they are of lower quality than our products are, and the customers are not aware that they are using counterfeits, that could bring reputational harm to our products. In addition, the lower prices of such counterfeits could impose pressure on us to reduce our prices to attract customers.

● Negative Publicity. If our Babaka^® product line faces any negative publicity, regardless of veracity, we will need to incur expenditure of funds and management time to respond to such negative publicity, and there may be material adverse effect on our reputation, our business and the trading price of our ADSs. Negative publicity may arise for various reasons, such as complaints about the quality of our products and related services or other public relations incidents of us. For example, in 2018, there was negative news coverage about the founder of our Babaka^® products who left the Company years ago and subsequently negative media coverage extended to the Babaka^® products and similar posture correction products.

● Failure of Trademark Protection. We rely on a combination of patent (utility model), copyright, trademark and unfair competition laws, nondisclosure agreements and other methods to protect our intellectual property rights. In particular, we rely on the trademark law in China to protect our product brands. As of February 29, 2020, among the trademarks we maintain, 54 trademarks contain either the Chinese name of Babaka^® (or Chinese characters similar to the Chinese name of Babaka^®) or the English name of Babaka^® for our best-selling featured product line. We take prompt actions to extend trademarks that are expiring and to apply for registration of more trademarks that contain either the Chinese name or English name of Babaka^® or a mixture of both. We may be unable to enforce our proprietary rights in connection with these trademarks before such registrations are approved by the relevant authorities and it is possible that such registrations may not be approved at all. There can be no assurance that our trademark applications will be approved, that any registered trademark will adequately protect our intellectual property, or that such trademark will not be challenged by third parties or found by a judicial authority to be invalid or unenforceable. 

We have vigorously prosecuted our trademark rights by challenging third party trademark registration similar to our trademarks, filed law suits/claims against improper and unauthorized use of the “Babaka^®” trademarks, or issued takedown notices or initiates discussions with the third parties to correct the issues. However, there can be no assurance that we will be able to protect against the unauthorized use of our brand, trademarks or other assets. If we fail to maintain and enforce our trademark rights, the value of our brand could be diminished. There is also a risk that one or more of our trademarks could become generic, which could result in them being declared invalid or unenforceable. For example, there’s a risk that one or more “Babaka^®” trademarks could become so commonly used that it becomes synonymous with any posture correction products, and if this happens, we could lose protection of this trademark.

  Our Babaka^® product line sales for a given period will depend upon, among other things, a positive customer response to our “direct sales” efforts, including our e-commerce channel, as well as the efforts of our distributors, our effective management of product inventory, and the stage of our products’ lifecycles during the period. Positive customer responses depend on many factors, including the appeal of the products and services being marketed, the effectiveness of our “direct sales” platforms and the viability of competing products. Moreover, any new products we develop may not receive market acceptance. In addition, from time to time, we experience delays in the supply of our products to customers due to production delays or shortages or inadequate inventory management, and we lose potential product sales as a result. Furthermore, during a product’s lifecycle, problems may arise regarding regulatory, intellectual property, product liability or other issues which may affect the continued viability of the product for sale.

If we fail to identify and introduce additional successful products, including those to replace existing featured products, such as the Babaka^® product line, if they suffer from declining sales or approaching the end of their product lifecycle, our gross revenues may not grow or may decline and our market share and value of our brand may be materially and adversely affected. 

Our evolving business model and the evolution of China’s retail industry make it difficult to evaluate our business and future prospects.

Our business model has varied throughout our operating history in response to changes in China’s retail industry and the regulatory environment in China. In response to regulatory changes, what we refer to as our “direct sales” model (to contrast with sales we make via distributors, whether online or offline) now consists primarily of Internet sales. Furthermore, as China’s retail industry has evolved, we have begun to focus on sourcing other branded products to complement our own proprietary-branded product lines (e.g. Babaka^® posture correction products), for distribution through our “direct sales” channel and our distribution channel. More recently we have invested significant resources in new businesses, such as Acorn Fresh and Acorn Digital, each of which represents a more significant departure from our historical business model and has no assurance of success.

 The evolution of our business model makes it difficult for you to evaluate our business and future prospects. Our longer term goal is to leverage our success as the leading TV informercial company in China in prior years to now become a leading direct marketing and branding company in China that markets and distributes, particularly through our e-commerce channel, which we are continuing to develop, both our proprietary, self-owned brands and products and well-established or promising new third-party brands and products, as well as to expand Acorn Fresh and Acorn Digital, and incubate new businesses, within our Group. To achieve this goal, we need to continue to grow our business across platforms and product lines. Our ability to successfully implement our strategy is subject to various risks and uncertainties, including:

There can be no assurance that we will be able to effectively manage these risks or execute our business strategies, which could have a material adverse effect on our growth, results of operations and business prospects.

Our operating results fluctuate from period to period, making them difficult to predict.

Our operating results are highly dependent upon, and will fluctuate based on, the following product-related factors:

In addition, factors not directly relating to our products which could cause our operating results to fluctuate in a particular period or in comparison to a prior period include:

Due to these and other factors, our operating results will likely vary from period to period, will be difficult to predict for any given period, may be adversely affected from period to period and may not be indicative of our future performance. If our operating results for any period fall below our expectations or the expectations of investors or any market analyst that may issue reports or analyses regarding our ADSs, the price of our ADSs is likely to decrease.

Our failure to quickly identify and adapt to changing industry conditions may have a material and adverse effect on our business, financial condition and results of operations.

The online and offline consumer marketing and sales industries are subject to changing consumer preferences and industry conditions. Consequently, we must stay abreast of emerging fashion, lifestyle, design, technological and other industry and consumer trends. This requires timely collection of market feedback, accurate assessments of market trends, deep understanding of industry dynamics and flexible manufacturing capabilities.

We must also maintain relationships with suppliers who can adapt to fast-changing consumer preferences. If one or more of our existing suppliers cannot meet these requirements effectively, we will need to find and source from new suppliers, which may be costly and time-consuming. We or our suppliers may overestimate customer demand, face increased overhead expenditures without a corresponding increase in sales and incur inventory write-downs, which will adversely affect our results of operations.

If we cannot offer appealing products on our websites or through our other “direct sales” platforms or distributors, our customers may purchase fewer products from us or stop purchasing products from us altogether. Our reputation may also be negatively affected. If we do not anticipate, identify and respond effectively to consumer preferences or changes in consumer trends at an early stage, we may not be able to generate our desired level of sales. Failure to properly address these challenges may materially and adversely affect our business, financial condition and results of operations.

Our business depends significantly on the strength of our product brands and corporate reputation; our failure to develop, maintain and enhance our product brands and corporate reputation may materially and adversely affect the level of market recognition of, and trust in, our products.

In China’s fragmented, developing and increasingly competitive consumer market, product brands and corporate reputation have become critical to the success of our new products and the continued popularity of our existing products. We undertake promotional activities to market our brands and enhance our reputation, but our promotional activities may be expensive and may fail to either effectively promote our product brands or generate additional sales. In addition, our product brands, corporate reputation and product sales could be harmed by factors including but not limited to the following:

Our products may also be subject to negative publicity for various reasons, such as complaints about the quality of our products and related services or other public relation incidents relating to us, which may adversely affect our reputation and the sales of our products. For example, in 2018, there was negative news coverage about the founder of our Babaka^® products and subsequently negative media coverage extended to the Babaka^® products and similar posture correction products. Any such negative publicity, regardless of veracity, could result in the expenditure of funds and management time and may have a material and adverse effect on our reputation, our business and the trading price of our ADSs.

We rely on our distributors for a substantial portion of our revenues. Failure to maintain good distributor relations could materially disrupt our distribution business and harm our net revenues.

In 2017, 2018 and 2019, 7.0%, 19.1% and 15.5% respectively, of our net revenues were generated through our distributors across China. Our largest distributor accounted for approximately 2.9%, 14.1% and 13.2% of our gross revenues in 2017, 2018 and 2019, respectively. We do not maintain long-term contracts with our distributors. Maintaining relationships with existing distributors and replacing any distributor may be difficult or time consuming. In addition, we are in the process of rationalizing and streamlining our distribution business to adapt to our evolving business model. If we cannot negotiate favorable terms regarding our distribution agreement with our existing distributors, they may discontinue their relationships with us and we may not be able to identity and attract new distributors or find suitable replacement of our existing distributors. Our failure to maintain good relationships with our distributors could materially disrupt our distribution business and harm our net revenues.

We may be unable to effectively manage our distributors. Any failure by our distributors to operate in compliance with our distribution agreements and applicable law may result in liability to us, may interrupt the effective operation of our distributors, may harm our brands and our corporate image and of which may result in decreased sales.

We have limited ability to manage the activities of our distributors, who operate independently from us. In addition, our distributors may violate our distribution agreements with them. Such violations may include, among other things:

If we determine to fine, suspend or terminate our distributors for acting in violation of our distribution agreements, our ability to effectively sell our products could be negatively impacted. In addition, violations with our distribution agreements by the distributors could negatively affect our brands and our corporate image, possibly resulting in loss of customers and a decline in sales.

The Company relies, for product sales, on third-party e-commerce platform TMall, which could adopt policies or take other actions that may negatively affect or even prevent our product sales. The Company also relies, to a lesser extent, for product sales on its Taobao Partners, who may decide to terminate their relationship with the Company in the future or fail to maintain or increase their sales volume of our products.

The Company relies heavily on the e-commerce platform, TMall, run by Alibaba, as one of the channels for its Internet sales. Specifically, the Company contracts with a number of entities which market, sell and distribute the Company’s products on TMall and calls such entities Taobao Partners, or TPs. We had 3 TPs as of December 31, 2019. If TMall were to adopt any policy or take any other action that would restrict or even prevent the sale of our products, disrupt the business of our TPs, or increase the cost of sales of our products, then our Internet sales may be materially adversely affected. The Company relies on such TPs to generate sales through e-commerce channels. However, the Company does not have long-term contracts with such TPs, and it is possible that such TPs decide not to contract with the Company in the future or terminate their existing contracts. In addition, such TPs may fail to maintain or increase their sales volume in the future, and we may fail to timely find and contract with new TPs who are capable of generating satisfactory sales volume. Further, our agreements with TPs typically do not restrict the TPs from procuring products from other sellers, and such other sellers’ products may be competing products of ours. If any such events occur, the Company may face decreasing revenue from e-commerce sales. Our agreements with TPs do restrict the TPs from procuring posture correction products similar to our Babaka® products.

Changes in the quoted prices for E-Money on the China National Equities Exchange and Quotations (“NEEQ”) will cause the carrying value of our E-Money shares to vary and affect our comprehensive net income; and our ability to sell our E-Money shares at desired prices or in desired volumes will be affected by related developments in the NEEQ market and the market for E-Money shares.

In July 2015, E-Money (NEEQ: 832950) began trading on the NEEQ and on December 31, 2016, our 8.5% ownership stake in E-Money was valued at $74.7 million. During 2017 and 2018, we continued to sell E-Money shares on the NEEQ. The E-Money stock we hold as at December 31, 2019 was valued at $25.7 million. We did not reduce the amount of shares held in 2019. E-money announced on December 18, 2019 that it would repurchase between 5 million and 10 million of its shares in the public market at a price of no more than RMB 4.5 for a 6-month period commencing from December 2, 2019 (i.e. the date E-Money’s board of directors approved the aforesaid repurchase plan). From January 1, 2020 through the date of this report, Acorn has sold 12.5 million E-Money Shares under this repurchase plan, along with sales to individual buyers in the market, and received proceeds of $ 7.5 million. As at the date of this report, Acorn holds approximately 20.2 million shares, or 4.6% of total shares of E-Money.

The NEEQ is an over-the-counter (“OTC”) market in China listing companies not otherwise eligible for listing on China’s other markets including the Shanghai and Shenzhen Main Boards. Both the NEEQ and E-Money’s shares on the NEEQ have experienced significant volatility and limited liquidity, as well as periods when trading halted. For example, on November 19, 2019, E-Money announced a temporary trading halt commencing on November 20, 2019, in anticipation of a potential material event, and did not resume trading until December 4, 2019. On March 28, 2017, E-Money announced a temporary trading halt commencing on March 29, 2017, in anticipation of a potential material event, and did not resume trading until May 24, 2017. We may be unable to sell our E-Money shares at prices equal to the then-quoted price and or in desired volumes. Sales of E-Money shares by us or others could also impact the price of E-Money shares due to the limited trading volume. Actions by E-Money may also restrict our ability to sell E-Money shares.  For example, on June 5, 2017, E-Money announced that on the same day its board of directors has approved the proposal for E-Money’s initial public offering, and would choose an appropriate time to submit E-Money’s applications for initial public offering to China Securities Regulatory Commission, or the CSRC, after performing all necessary procedures. The announcement further reminded investors that E-Money would apply for temporary trading halt at NEEQ and if the application is approved, the investors (including us) would not be able to sell their E-Money shares within one (1) or more years after the date of such initial public offering. There is no assurance that E-Money’s application for initial public offering will be accepted or approved or E-Money will conduct an initial public offering at all. Currently E-Money is still a publicly traded company on NEEQ, although with almost no trading volume.

If we are deemed an “investment company” under the U.S. Investment Company Act of 1940 (as amended, the “Investment Company Act”), it would adversely affect the price of our ADSs and ordinary shares and could have a material adverse effect on our business.

As at the date of this report, our assets include an approximately 5.8% interest in E-Money. This may be deemed to be “investment securities” within the meaning of the Investment Company Act. Our investment in E-Money and other factors may cause us to be deemed an “investment company” under the Investment Company Act. As a foreign private issuer, we would not be eligible to register under the Investment Company Act, so if we are deemed an investment company within the meaning of the Investment Company Act, we would either have to obtain exemptive relief from the SEC or dispose of investments in order to fall outside the definition of an investment company. Additionally, we may have to forego potential future acquisitions of interests in companies that may be deemed investment securities within the meaning of the Investment Company Act. Failure to avoid being deemed an investment company under the Investment Company Act coupled with our inability as a foreign private issuer to register under the Investment Company Act could make us unable to comply with our reporting obligations as a public company in the United States and lead to our being delisted from the NYSE, which would have a material adverse effect on the liquidity and value of our ADSs and ordinary shares.

In fulfilling sales through our “direct sales” platforms, we face customer acceptance, delivery, payment and collection risks that could adversely impact our “direct sales” net revenues and overall operating results. We are dependent on delivery companies to make our product deliveries.

Substantially all of the products that we sell through our “direct sales” platforms are delivered and paid for by customers via electronic payment.

We rely on delivery companies such as Cainiao, JD Delivery, Zhai-ji-song, SF Express, EMS, etc. to deliver products sold through our “direct sales” platforms, including our e-commerce channel. Products delivered through delivery companies accounted for over 95% of our total sales in each of 2017, 2018 and 2019. However, of our total accounts receivable balance as of December 31, 2017, 2018 and 2019, no single delivery company accounted for more than 10% of our total accounts receivable. While we do use another delivery service, we rely primarily on SF Express’s cold chain delivery service, for the delivery of fresh food products in our Acorn Fresh business.

We do not maintain a long-term contract with any delivery companies. If they become unwilling or unable to provide these services to us, our business could be disrupted. If service quality of the delivery companies deteriorates, for example, if the frequency at which their personnel fail to locate a delivery address increases or cold chain service quality deteriorates, our business and financial performance could be adversely affected as well.

We may not realize the anticipated benefits of our potential future joint ventures, acquisitions or investments or be able to integrate any acquired employees, businesses, products, which in turn may negatively affect their performance and respective contributions to our results of operations.

From time to time, we conduct acquisitions, make investments or enter into joint ventures or other investment structures with other entities as a means of developing new products or acquiring managerial expertise. In addition to the three joint ventures and other minority investments that we currently maintain, we may continue to enter into similar joint ventures or make other acquisitions or investments when proper opportunities occur. Risks related to our existing and future joint ventures, acquisitions and investments include, as applicable:

Any of these events could distract our management’s attention and result in our not obtaining the anticipated benefits of our joint ventures, acquisitions or investments and, in turn, negatively affect the performance of such joint ventures, acquisitions and investments and their respective contributions to our results of operations.

Our business could be disrupted and our business prospects could be adversely affected if we were to lose the services of key members of our management team.

Our co-founder and Executive Chairman, Mr. Robert W. Roche, has played an important role in the growth and development of our business since its inception. Similarly, our President and Chief Executive Officer, Mr. Jacob A. Fisch, has played an important role in the development of our Company since joining in 2014. If either Mr. Roche or Mr. Fisch is unable or unwilling to continue in his present position, we may be unable to replace him easily or at all, our business could be severely disrupted, and our financial condition and results of operations could be materially and adversely affected. We do not maintain key-man life insurance for any of the aforesaid key members of our management team.

If we are unable to attract, retain and motivate key personnel or hire qualified personnel, or if such personnel do not work well together, our growth prospects and profitability will be harmed.

Our business is supported and enhanced by a team of highly skilled employees who are critical to maintaining the quality and consistency of our business and reputation. It is important for us to attract qualified employees, especially marketing personnel, supply chain managers and employees with high levels of experience in e-commerce.

From 2014 to 2018, we have implemented a substantial reduction in our work force across all functions of our operations and restructured our senior management, which reductions are primarily driven by cost control efforts as well as restructuring and streamlining our business structure and operation. In addition, through voluntary attrition, certain key personnel have recently left, and we have yet to recruit replacements. The reductions and adjustments in our workforce and the loss of such key personnel could seriously harm the morale of existing employees and our ability to attract prospective employees in key areas of need or retain current key personnel in critical areas of operations, which could disrupt our business and operations and negatively affect our financial performance.

We must also provide continuous training to our employees so that they have up-to-date knowledge of various aspects of our operations and can meet our demand for high quality services. If we fail to do so, the quality of our services may deteriorate in one or more of the markets where we operate, which may cause a negative perception of our brand and adversely affect our business. Finally, disputes between us and our employees may arise from time to time and if we are not able to properly handle our relationship with our employees, our business, financial condition and results of operations may be adversely affected.

 We expect competition in China’s consumer market to intensify. If we do not compete successfully against new and existing competitors, we may lose our market share, and our profitability may be adversely affected.

Competition from current or future competitors could cause our products to lose market acceptance or require us to significantly reduce our prices or increase our promotional activities to maintain and attract customers. Many of our current or future competitors may have larger scale, longer operating histories, better brand recognition and consumer trust, strong media management capabilities, better media and supplier relationships, a larger technical staff and sales force and/or greater financial, technical or marketing resources than we do. We face competition from numerous domestic and international sellers of consumer branded products that sell in China such products that compete with our products; for example, posture-correction products from MTG, MINGZHEN, Nuotai and other brands compete with our Babaka^® posture-correction products.

 Interruption or failure of our IT system and management information systems could impair our ability to effectively sell and deliver our products, collect payments on product sales, or result in a loss or corruption of data, which could damage our reputation and negatively impact our results of operations.

Our e-commerce business relies heavily on management information systems, or MIS, to process customer orders, arrange product delivery and collect sales-related data. Our IT system and MIS are each primarily provided and maintained by a third-party vendor and we have limited in house capacity to address any interruptions or failure of the IT system or MIS. Interruptions to or failures in our IT system or MIS could prevent the timely or proper delivery of products to consumers, or payment to the delivery companies, which would harm our reputation and cause the loss of our customers. Interruptions to or failures in our MIS could also lead to loss or inaccuracy of data stored in the MIS, causing inaccuracies in our payment processing (e.g. our failure to collect payment on orders) or analysis of the data. These interruptions or failures may be due to events that are beyond our control, such as inclement weather, natural disasters, transportation disruptions or labor. As our business evolves and our MIS requirements change, we may need to modify, upgrade and replace our systems. We work closely with third-party vendors and our related party vendors to provide service tailored to our specific needs. We are and will continue to be substantially reliant on these third-party vendors for the provision of maintenance, modifications, upgrades and replacements to our systems. Any such modification, upgrading or replacement of our systems may be costly and could create disturbances or interruptions to our operations. If these third-party vendors can no longer provide these services, it may be difficult, time consuming and costly to replace them. Similarly, errors or inadequacies in our MIS may be difficult or expensive to timely correct and could result in substantial service interruptions.

From time to time, our IT systems may experience short periods of power outage resulted from unexpected damage of the facilities where our IT system is located, natural disasters or other reasons. Any IT or MIS failure (including as a result of natural disaster or power outage), particularly during peak or critical periods, could inhibit our ability to receive calls and complete orders or evaluate the effectiveness of our promotions or consumer acceptance of our products or otherwise operate our business. These events could, in turn, impair our ability to effectively sell and deliver our products or result in the loss or corruption of customer, supplier and distributor data, which could damage our reputation and negatively impact our results of operations.

Failure to protect personal and confidential information of our customers could damage our reputation and substantially harm our business, financial condition and results of operations and expose us to liability. 

We collect and store personally identifiable information of our customers in our database through which we sell and market our products. We may not be able to prevent our employees or other third parties, such as hackers, criminal organizations, our external service providers and business partners, from stealing or leaking information provided by our customers to us. In addition, significant capital and other resources may be required to protect against security breaches or to alleviate problems caused by such breaches. The methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Even if we are successful in adapting to and preventing new security breaches, any perception by the public that the privacy of customer information is becoming increasingly unsafe or vulnerable to attack could inhibit the growth of online business generally, which in turn may reduce our customers’ confidence and materially and adversely affect our business and prospects. Moreover, we are required to comply with laws and regulations in connection with protection of electronic personal information of our customers in China and we may be obligated to comply with the privacy and data security laws of foreign countries where our customers reside. With the promulgation of the PRC Cyber Security Law on November 7, 2016 and effective from June 1, 2017 and the subsequent promulgation of related measures or regulations, practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet and mobile platforms are under increased public scrutiny, we are facing more stringent requirements to protect the personal information we collect from being divulged or tampered with. We currently do not share consumer information with external service providers and business partners. However, we may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information that could affect how we collect, store and share data with our external service providers and business partners. For example, on March 6, 2020, the SAMR and the Standardization Administration of China, or the SAC, jointly promulgated the Information Security Technology – Personal Information Security Specification, or 2020 Specification, which will be effective on October 1, 2020. Pursuant to this 2020 Specification, the personal information controllers refer to entities or persons who are authorized to determine the purposes and methods for using and processing personal information. The personal information controller (i) shall collect personal information in accordance with the principles of legality and minimization, (ii) is required to differentiate between basic business functions and additional or expanded business functions and is prohibited from bundling all these functions together, and (iii) shall also obtain a consent from the information provider. Failure to comply with such requirements will result in more severe administrative penalties, damage to our reputation and credibility and could have a negative impact on revenues and profits. Our exposure to the PRC and foreign countries’ privacy and data security laws impacts our ability to collect and use personal data, increases our legal compliance costs and may expose us to liability. As such laws proliferate, there may be uncertainty regarding their application or interpretation, which consequently increases our exposure to potential compliance costs and liability. Even if a claim of noncompliance against us does not ultimately result in liability, investigating or responding to a claim may present significant costs and demands on our management.

We could be liable for security breaches of our service and third-party payment systems, which may have a material and adverse effect on our reputation and business.

In recent years, we have generated an increasingly significant proportion of our net revenues from payments collected through third-party online payment systems, which are primarily generated from our Internet sales. In such transactions, confidential information, such as customers’ debit and credit card numbers and expiration dates, personal information and billing addresses, is transmitted over public networks and security of such information is essential for maintaining customer confidence. While we have not experienced any security breaches to date, current security measures may prove to be inadequate. In addition, we expect that an increasing number of our sales will be conducted over the Internet as a result of our expanding customer base and the growing use of online payment systems. We also expect that associated online criminal activities will likely increase accordingly. We strive to be prepared to increase our security measures and efforts in order to maintain customer confidence in the reliability of our online payment systems. However, we may not be able to prevent future breaches of our security, which may have a material and adverse effect on our reputation and business.

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our product brand, reputation and competitive position. In addition, we may have to enforce our intellectual property rights through litigation. Such litigation may result in substantial costs and diversion of resources and management attention.

We rely on a combination of patent (utility model), copyright, trademark and unfair competition laws, nondisclosure agreements and other methods to protect our intellectual property rights. In particular, we rely on the trademark law in China to protect our product brands. As of February 29, 2020, we maintain 511 trademark registrations in China which will expire between 2020 and 2025, among which, 54 trademarks contain either the Chinese name of Babaka^® (or Chinese characters similar to the Chinese name of Babaka^®) or the English name of Babaka^® for the posture correction products. We are in the process of extending the trademarks which are expected to expire in the near future. Separately, we are in the process of applying for registration or transfer of approximately 111 trademarks from HJX Digital Technology Co., Ltd to Acorn Trade (Shanghai) in China. We may be unable to enforce our proprietary rights in connection with these trademarks before such registrations or transfers are approved by the relevant authorities and it is possible that such registrations or transfers may not be approved at all. There can be no assurance that our trademark applications will be approved, that any registered trademark will adequately protect our intellectual property, or that such trademark will not be challenged by third parties or found by a judicial authority to be invalid or unenforceable.

In addition, manufacturers or suppliers in China may imitate our products, copy our various brands and infringe our intellectual property rights. We have discovered unauthorized products on e-commerce platforms and in the marketplace that are counterfeit reproductions of our products sold by the retailers within our distribution network and by third parties in retail stores and on websites. The most common counterfeit products that we found are counterfeits of our Babaka^® posture correction products.

It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Policing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the infringement or misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources, and could put our intellectual property at risk of being invalidated or narrowed in scope. We can provide no assurance that we will prevail in such litigation, and even if we do prevail, we may not obtain a meaningful recovery. Any failure in maintaining, protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to adequately protect our intellectual property rights and exclusive rights.

We have vigorously prosecuted our trademark rights by challenging third party trademark registration similar to our trademarks, filed law suits/claims against improper and unauthorized use of the “Babaka^®” trademarks, or issued takedown notices or initiates discussions with the third parties to correct the issues. However, there can be no assurance that we will be able to protect against the unauthorized use of our brand, trademarks or other assets. If we fail to maintain and enforce our trademark rights, the value of our brand could be diminished. There is also a risk that one or more of our trademarks could become generic, which could result in them being declared invalid or unenforceable. For example, there’s a risk that one or more “Babaka^®” trademarks could become so commonly used that it becomes synonymous with any posture correction products, and if this happens, we could lose protection of this trademark.

We have in the past been, and in the future may again be, subject to intellectual property rights infringement claims by third parties, which could be time-consuming and costly to defend or litigate, divert our attention and resources, or require us to enter into licensing agreements. These licenses may not be available on commercially reasonable terms, or at all.

We have in the past been, and in the future may again be, the subject of claims for infringement, invalidity, or indemnification relating to other parties’ proprietary rights. The defense of intellectual property suits, including copyright infringement suits, and related legal and administrative proceedings can be costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceeding to which we may become a party could cause us to pay damages, seek licenses from third parties, pay ongoing royalties, redesign our products or become subject to injunctions, each of which could prevent us from pursuing some or all of our businesses and result in our customers or potential customers deferring or limiting their purchase or use of our products, which could materially and adversely affect our financial condition and results of operations.

We may from time to time be involved in legal or other disputes, or become a party to legal, administrative or other proceedings which, if adversely decided, could lead to significant liabilities and materially adversely affect us.

We may from time to time be involved in disputes with various parties we encounter in our daily operations, including but not limited to our suppliers, customers and distributors. These disputes may lead to legal, administrative or other proceedings to which we are a party, and defense of which may increase our expenses and divert management attention and resources. For example, in September 2015, Beijing Mai-La-Ke Technology Center, or the Mai-La-Ke, the previous holder of the trademark of our Youngleda oxygen generating products, filed a suit in the Haidian People’s Court in Beijing against Beijing Acorn and Beijing Acorn Younglide Science and Technology Co., Ltd., alleging that the two defendants should provide relevant sales data of our Youngleda products from November 2000 to November 2005 in order for them to claim for 50% of the net profit we obtained from such sales during such period pursuant to a prior agreement with the two defendants. On July 25, 2016, the Haidian People’s Court in Beijing issued the first-instance judgment in which all claims raised by Mai-La-Ke were rejected. Mai-La-Ke did not appeal and this judgment is final.

We were also the subject of the legal dispute between our shareholders as described immediately below.

Any adverse outcome in any legal, administrative or other similar proceedings that we are a party could lead to significant liabilities and could have a material adverse effect on our business, results of operations and financial condition.

 Historical and future disputes regarding control of our strategic direction and control of our board of directors could adversely impact our business, operating results and prospects.

As described in greater detail in Item 8.A, “Financial Information—Consolidated statements and other financial information— Legal Proceedings,” from mid-2014 through mid-2015, we and our board of directors were involved in a protracted dispute between various shareholders for the control of our strategic direction and our board of directors. As a result of this dispute and in connection therewith, in May 2015, we entered into the Transitional Services and Separation Agreement, or the TSSA, with Mr. Dongjie Yang, a co-founder, former executive chairman and chief executive officer of our Company, with respect to his resignation as a director and officer of the Company (as described in greater detail in “Item 7 Major Shareholders and Related Party Transactions—Related Party Transactions— Transitional Services and Separation Agreement”); and in January 2016, we entered into a settlement agreement with Mr. Robert Roche and REL, a company wholly owned by Mr. Roche. On December 1, 2016, we filed a related action in the Cayman Islands Court against three directors, Mr. Andrew Yan, Gordon Xiaogang Wang, and Jing Wang, for damages resulting from breach of fiduciary duties and related misconduct and mismanagement. On July 28, 2017, we entered into, with REL, SAIF and the aforesaid three directors, a settlement agreement, pursuant to which, all parties thereto would, among other things, discontinue and/or withdraw all claims, counterclaims and taxation proceedings in the Cayman Islands Court related to the above mentioned matters.

The dispute previously resulted in, and, if it were to restart, could again result in disruption to our operations and diversion of the attention of management and our employees as a result of responding to these matters, which were and may continue to be costly and time-consuming. This could result in our business being adversely affected. We also may be subject to claims for indemnification related to these matters, and we cannot predict the impact that indemnification claims may have on our business, cash position or financial results.

Mr. Robert W. Roche, our executive chairman, is a significant beneficial shareholder, which makes it possible for him to have significant influence over the outcome of all matters submitted to our shareholders for approval and which influence may be alleged to conflict with our interests and the interests of our other shareholders.

As of April 10, 2020, Mr. Roche beneficially owned (although Mr. Roche disclaims ownership of all such shares) approximately 78.88% of our outstanding ordinary shares as calculated according to the SEC rules, including approximately 33.75% of our outstanding ordinary shares for which Ms. Ritsuko Hattori-Roche, the wife of Mr. Roche, is the record owner, giving him substantial influence over the outcome of all matters submitted to our shareholders for approval. Our current memorandum and articles of association provide that the chairman of our board of directors or any one or more shareholders who collectively own at least 30% of our outstanding ordinary shares may convene an EGM, or an extraordinary general meeting of our shareholders, to vote on matters proposed for consideration at such EGM. As a 30% plus shareholder and chairman of our board of directors, Mr. Roche has the ability to unilaterally convene an EGM. This influence may conflict with the interests of our other shareholders. In addition, such concentration of ownership and influence by Mr. Roche may discourage, delay or prevent a change in control of our Company, which could deprive our shareholders of an opportunity to receive a premium for their ADSs as part of any contemplated sale of our Company and may reduce the price of our ADSs or could create actual or perceived governance instabilities that could adversely affect the price of our ADSs.

We have limited general business insurance coverage and we may be subject to losses that might not be covered by our existing insurance policies, which may result in our incurring substantial costs and the diversion of resources.

We maintain various insurance policies to safeguard against risks and unexpected events. We have purchased product transportation insurance covering risk of product loss during transportation, and vehicle insurance for three cars covering the risk of loss. We have also purchased product liability insurance for Acorn Fresh. We maintain Directors and Officers (D&O) liability insurance covering our directors, supervisors and officers liabilities. We also provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance, maternity insurance and medical insurance for our employees. However, we do not maintain business liability, interruption or litigation insurance, nor do we maintain key-man life insurance. We cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully claim our losses under our current insurance policy on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies, or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially and adversely affected.

Our sale of our and other parties’ products could subject us to product liability claims, potential safety-related regulatory actions or product recalls. These events could damage our brand and reputation and the marketability of the products that we sell, divert our management’s attention and result in lower net revenues and increased costs.

The manufacture and sale of our products, in particular, Acorn Fresh, and our sale of other parties’ products could each expose us to product liability claims for personal injuries or food safety related liability claims. Also, if our products are deemed by the PRC authorities to fail to conform to product quality, personal safety or food safety requirements in China, we could be subject to PRC regulatory action. Violation of PRC product quality and safety and food safety requirements by our or others’ products sold by us may subject us to confiscation of the products, imposition of penalties or an order to cease sales of the violating products or to cease operations pending rectification. If the offense is determined to be serious, our business license could be suspended and subject to criminal liabilities. Any product liability claim or food safety claim or governmental regulatory action could be costly and time-consuming to defend. If successful, product liability claims or food safety claims may require us to pay substantial damages. Also, a material design, manufacturing or quality failure in our and other parties’ products sold by us, other safety issues or heightened regulatory scrutiny could each warrant a product recall by us and result in increased product liability claims. Furthermore, customers may not use the products sold by us in accordance with our product usage instructions, possibly resulting in customer injury. All of these events could materially harm our brand and reputation and marketability of our products, divert our management’s attention and result in lower net revenues and increased costs.

Any disruption of our or our manufacturing service providers’ manufacturing operations could negatively affect the availability of our products and our net revenues derived therefrom.

We manufactured approximately 2.0% of the products we sell in terms of revenues in 2019, with the balance provided by third-party suppliers and manufacturers.

We rely on the manufacturing services of third party suppliers to produce the substantial majority of our products. If we fail to develop or maintain our relationships with our suppliers, we may be unable to obtain our products, and we could be prevented from supplying our products to our customers in the required quantities. Problems of this kind could cause us to experience loss of market share and result in decreased net revenues. In addition, the failure of a supplier to supply materials and components that meet our quality, quantity and cost requirements in a timely manner could impair our ability to manufacture our products or increase our costs, particularly if we are unable to obtain these materials and components from alternative sources on a timely basis or on commercially reasonable terms.

Other risks for the products manufactured by us, include, among others:

Currently, products manufactured and supplied by third parties for us include mobile phones, cosmetics, posture correction products, pre-packaged seafood, and other products. Some of our products are supplied by third-party manufacturers based on designs or technical requirements provided by us. These manufacturers may fail to produce products that conform to our requirements. In addition, for products manufactured or supplied by third-party manufacturers, we indirectly face many of the risks described above and other risks. For example, our third-party manufacturers may not continue to supply products to us of the quality and/or in the quantities we require. It may also be difficult or expensive for us to replace a third-party manufacturer.

We may incur impairment losses on our investments in equity securities.

We have made non-controlling investments in the equity securities of a number of companies. Under U.S. GAAP that we are subject to, if there is a decline in the fair value of the shares we hold in these companies, or any other company we invest in, over a period of time, and we determine that the decline is other-than-temporary, we will need to record an impairment loss for the applicable fiscal period. We may incur expenses related to the impairment of existing or future equity investments. Any such impairment charge could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our asset impairment reviews may result in future write-downs.

We are required, among other things, to test intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. In connection with our business acquisitions, we make assumptions regarding estimated future cash flows and other factors to determine the fair value of goodwill and intangible assets. In assessing the useful lives of the intangible assets, we must make assumptions regarding their fair value, the recoverability of those assets and our ability to successfully develop and ultimately commercialize acquired technology. If those assumptions change in the future when we conduct our periodic reviews in accordance with applicable accounting standards, we may be required to record impairment charges.

We may not be able to maintain compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and any such failure could have a material adverse impact on our ability to provide financial information in a timely and reliable manner.

As a public company with shares listed in the United States, we are subject to provisions of the Sarbanes-Oxley Act of 2002. Section 404(a) of the Sarbanes-Oxley Act requires that we include a report from management on the effectiveness of our internal control over financial reporting in our annual reports on Form 20-F. In 2014, our management identified several material weaknesses in our internal controls over financial reporting. While our management concluded that these material weaknesses were remediated in 2015, and that our internal control over financial reporting was effective as of December 31, 2015, December 31, 2016, December 31, 2017, December 31, 2018, and December 31, 2019, there is no assurance that our management will conclude that our internal controls are effective in future periods. 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 or prevent fraud, which could result in a loss of investor confidence in the reliability of our reporting processes and could materially and adversely affect the trading price of our ADSs.

Our businesses and growth prospects are dependent upon the expected growth in China’s consumer retail markets. Any future slowdown or decline in China’s consumer retail markets could adversely affect our business, financial condition and results of operations.

Currently, all of our revenues are generated by sales of consumer products in China. Presently, the success of our business depends on the continued growth of China’s consumer retail markets. The consumer retail markets in China are characterized by rapidly changing trends and continually evolving consumer preferences and purchasing patterns and power. The growth of the Chinese economy has slowed since 2012, and such slowdown may continue. According to the National Bureau of Statistics of China, China’s gross domestic product (GDP) annual growth rate decreased slightly from 6.9% in 2017 to 6.6% in 2018, and further to 6.1% in 2019. China’s GDP also contracted by 6.8% on a quarter-to-quarter basis (compared to the immediately preceding quarter) in the first quarter of 2020, the worst downturn since 1979 due primarily to the outbreak of COVID-19. Any slowdown could significantly reduce domestic commerce in China, including through the internet generally and through us. Any slowdown or decline in China’s consumer retail markets, or evolving consumer purchases and purchasing patterns away from our products, would have a direct adverse impact on us and could adversely affect our business, financial condition and results of operations.

Risks Relating to the Regulation of Our Business and Industry

PRC regulations relating to our industry are evolving. Any adverse or unanticipated regulatory changes, particularly those regarding the regulation of our “direct sales” business, could significantly harm our business or limit our ability to operate.

We and our distributors are subject to various laws regulating our advertising and any violation of these laws by us or our distributors could result in fines, penalties and legal liabilities, harm our product brands and disrupt our business.

We advertise and market our proprietary products and other products. Our distributors often advertise our products they distribute.

PRC advertising laws and regulations require advertisers and advertising operators, such as us and our distributors, to ensure the contents of the advertisement they prepare, publish or broadcast are fair and accurate, are not misleading and are in full compliance with applicable laws, through independent review and verification before displaying the advertisement through print media, radio or Internet portals. PRC unfair competition law also prohibits us and our distributors from displaying misleading, false or inaccurate information with respect to quality, function, use, or other features of products, through advertising. Violation of these laws or regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertising, orders to publish an advertisement correcting the misleading information and criminal liabilities. In circumstances involving serious violations, the PRC government may suspend or revoke a violator’s business license. Moreover, government actions and civil claims may be filed against us for misleading or inaccurate advertising, fraud, defamation, subversion, negligence, copyright or trademark infringement or other violations due to the nature and content of our advertising produced by us or our distributors.

In the past, we were fined by the relevant authorities for certain advertising that was considered misleading or false by the authorities. Historically, such fines have not been significant and related investigations into our advertising practices did not consume significant amounts of our management resources. In some cases, we were required to accept product returns. However, it is possible that we may have to expend significant resources in the future in defending against such actions and these actions may damage our reputation, result in reduced net revenues, negatively affect our results of operations, and even result in our business licenses being suspended or revoked and in criminal liability for us and our officers and directors.

We may not fully comply with regulations on personal information protection which may subject us to administrative penalties.

Recently China has been imposing more stringent requirements on personal information protection. In particular, on December 28, 2012, the Standing Committee of the National People’s Congress promulgated the Decision on Strengthening Internet Information Protection, or Internet Information Protection Rules, which required that, among other things, internet service providers and other entities must obtain consent from relevant persons before collecting and using personal electronic information during business activities and must make public rules on collecting and using personal information; personal electronic information collected must be strictly kept confidential and must not be divulged, tampered with, damaged, sold or illegally provided to others; anyone is not allowed to send commercial electronic information to an recipient without his or her consent or request, or after he or she has given an explicit refusal. The MIIT promulgated Provisions on Protecting Personal Information of Telecommunications and Internet Users, or Personal Information Protection Rules, on July 16, 2013 which provides detailed rules for standards on collection and use of users’ personal information by telecommunications business operators and internet information service providers and security measures on protecting users’ personal information. In addition, the Law on the Protection of Consumers’ Rights and Interests amended on October 25, 2013 and effective from March 15, 2014 provides that business operators may not send commercial information to consumers without their consent or request, or after the consumers have expressly refused to receive such information. Furthermore, the Measures for Punishments against Infringements on Consumer Rights and Interests promulgated on January 5, 2015 and effective from March 15, 2015 provides that a business operator must refrain from any of the following acts: (i) collecting or using the consumers’ personal information without the consent of the consumers; (ii) divulging, selling or illegally providing others with the consumers’ personal information collected; and (iii) sending commercial information to consumers without their consent or request, or after the consumers have expressly refused to receive such information. On November 7, 2016, the Standing Committee of the National People’s Congress promulgated the PRC Cyber Security Law which, effective from June 1, 2017, imposes the following new requirements for the internet operators like us: (i) internet operators must notify the relevant consumers and the applicable government authority of the occurrence or potential occurrence of any divulging, damaging or loss of the personal information collected; and (ii) the internet operators must take proper measures to delete or correct the personal information collected at the request of the consumers whose personal information is used inappropriately or contains erroneous information. The PRC Cyber Security Law also increased the administrative punitive measures that the competent government authorities can take as well as the monetary penalty for any noncompliance. On March 6, 2020, the SAMR and the SAC jointly promulgated the Information Security Technology – Personal Information Security Specification, or 2020 Specification, which will be effective on October 1, 2020, to update its previous version effective on May 1, 2018. Under this 2020 Specification, (i) a data controller is required to differentiate between basic business functions and additional or expanded business functions, and is prohibited from bundling all these functions together; (ii) when displaying information, goods, services or research results to a data subject based on his browsing history or transaction records, the subject must also have the option of a non-personalized display. The data subject should be able to control the degree and extent to which his personal data can be utilized to generate a personalized display; (iii) if a third party also collects personal data via a data controller’s products or services (e.g. via plugin tools or certain cooperation mechanisms), the data controller is responsible for evaluating the third party’s data protection capabilities, requiring the third party to obtain the necessary consents from data subjects and to establish channels to receive their inquiries and complaints; (iv) a data controller must established a designated data protection officer and department if its business involves personal data processing and has more than 200 employees working towards this business; if it processes or expects to process personal data for more than one million individuals within 12 months; or if it processes the sensitive personal data of more than 100,000 individuals; and (v) a data controller must separately inform a data subject of the collection or sharing of his personal biometric data (e.g. when other non-biometric personal data is collected at the same time) and obtain his specific consent. Personal biometric data must be stored separately from personal identification data. While both versions are by nature suggested technical standards rather than mandatory regulations, they are considered best practice in China and their detailed suggestions are almost always taken into consideration during enforcement actions by authorities.

 During our business activities we have collected a large amount of our customers’ information, such as names, addresses and phone numbers and frequently send to our customers’ promotion messages and mail in connection with our products through the contact information we have collected. After effectiveness of Internet Information Protection Rules and other relevant laws and regulations, we have taken certain actions to comply with the requirements regarding collection and storage of personal information. However, given the increasingly new regulations, we cannot assure you that our business practices and the additional steps we take in response to the rules will be sufficient to fully comply with the currently effective rules, and that all of our customers’ personal information are legally collected and used and fully protected in all respects. We may become subject to new laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information that could affect how we store, process and share (however, we currently do not share) data with our customers, suppliers and third-party business partners. If relevant competent governmental authority holds that our business activities have violated Internet Information Protection Rules, we may be subject to certain administrative penalties, such as fines, and confiscating illegal gains.

If we are deemed to have failed to obtain permits or approvals required under the complex regulatory environment for internet-based businesses in China, our business, financial condition and results of operations may be materially and adversely affected.

Historically and prior to June 2017, we have posted information such as e-books and video and audio programs on the website www.hjx.com, which was owned by us during that time, for customers to download. We have ceased posting such information on that website since June 2017 and is no longer the owner of the aforesaid website. In addition, we also sell our proprietary products through the website www.xiangguo.com.

 Under applicable PRC laws, rules and regulations, our past conduct of posting information on the website may be deemed as providing internet publication services, pursuant to which both internet publication license and ICP License are required. We applied for, but failed to obtain the internet publication license, which may subject us to potential penalties. On January 17, 2014, Beijing HJX Technology, one of our affiliated entities, obtained an ICP License with a validity period of five years subject to annual inspection. However, due to management changes and our improper management of the original ICP License of Beijing HJX Technology, Beijing HJX Technology was not able to complete its annual inspection on such license, which may subject us to potential penalties. In conjunction with shifting our core business from Beijing to Shanghai and the discontinued operation of the HJX Business, we did not apply or renew such license for Beijing HJX Technology.

According to the Administrative Provisions for the Internet Audio-Video Program Service, or the Audio-Visual Provisions, promulgated by the State Administration of Radio, Film and Television, or SARFT, and the MIIT, providers of internet audio-visual program services are required to obtain a license for online transmission of audio-visual programs, or the Audio-Visual License, issued by SARFT, or complete certain registration procedures with SARFT. Furthermore, pursuant to Internet Live-Streaming Service Provisions promulgated by the State Internet Information Office and effective as of December 1, 2016, “any provider who intends to provide Internet Live-Streaming services in the form of online performances, online audio-visual programs, etc. shall also obtain relevant qualifications prescribed by laws and regulations pursuant to the law.” Pursuant to the Interim Provisions on the Administration of Internet Culture, promulgated by Ministry of Culture and effective on December 15, 2017, an internet service provider shall obtain an Internet Culture Operation License to carry out any business relating to Internet Cultural Products. With respect to our current operations through engaging in live streaming on our accounts of our “direct sales” platforms (e.g., our TMall shop) to facilitates the development of local China influencers with the objective to optimize their ability to convert Acorn’s content into product sales, we were advised by the relevant government authorities on a “no names” basis that none of the Audio-Visual License, the ICP License or the Internet Cultural Operation License would be required. However, if the relevant government authorities conduct a formal inquiry and as a result thereof take a different view, we cannot assure you that we would be able to obtain any of the above license in a timely manner or would be qualified to obtain one and if we failed to do so, our business would likely be disrupted and our revenues would likely be adversely affected.

With respect to our current business of selling our proprietary products through the website www.xiangguo.com, we were advised by the relevant information industry authorities on a “no names” basis that an ICP License is not required, instead an ICP registration from the relevant information industry authorities is required. One of our affiliated entity, Shanghai Network, has completed its ICP registration. However, if the relevant information industry authorities conduct a formal inquiry and as a result thereof take a different view, we cannot assure you that we would be able to obtain one in a timely manner and if we failed to do so, our business would likely be disrupted and our revenues would likely be adversely affected.

Regulation and censorship of information disseminated over the mobile and internet in China may adversely affect our business and subject us to liability for streaming content or posted on our platform.

Internet companies in China are subject to a variety of existing and new rules, regulations, policies, and license and permit requirements. In connection with enforcing these rules, regulations, policies and requirements, relevant government authorities may suspend services by, or revoke licenses of, any internet or mobile content service provider that is deemed to provide illicit content online or on mobile devices, and such activities may be intensified in connection with any ongoing government campaigns to eliminate prohibited content online. For example, in 2016, the Office of the Anti-Pornography and Illegal Publications Working Group, the State Internet Information Office, the MIIT, the Ministry of Culture and the Ministry of Public Security jointly launched a “Clean Up the Internet 2016” campaign. Based on publicly available information, the campaign aims to eliminate pornographic information and content in the Internet information services industry by, among other things, holding liable individuals and corporate entities that facilitate the distribution of pornographic information and content. During the campaign, relevant government authorities shut down approximately 2,500 websites, removed 15,000 links and closed 310,000 accounts. Publicly traded companies, such as Tencent, Baidu, and SINA, voluntarily initiated self-investigations to filter and remove content from their websites and cloud servers.

We endeavor to eliminate illicit content from our businesses under Acorn Digital. We monitor contents provided by our clients or created by us that we may post on third party platforms. We use a variety of methods to ensure the contents create a healthy and positive experience for the viewers. Although we employ these methods to filter contents, we cannot be sure that our internal content control efforts will be sufficient to remove all content that may be viewed as indecent or otherwise noncompliant with PRC law and regulations. Government standards and interpretations as to what constitutes illicit online content or behavior are subject to interpretation and may change in a manner that could render our current monitoring efforts insufficient. The Chinese government has wide discretion in regulating online activities and, irrespective of our efforts to control the contents created by us or provided by our customers, government campaigns and other actions to reduce illicit content and activities could subject us to negative press or regulatory challenges and sanctions, including fines, suspension or revocation of our licenses to operate in China or a ban from the third party platforms, including closure of one or more parts of or our entire business. Further, our senior management could be held criminally liable if we are deemed to be profiting from illicit contents posted on the third party platforms. Although our business and operations have not been materially and adversely affected by government campaigns or any other regulatory actions in the past, we cannot assure you that our business and operations will be immune from government actions or sanctions in the future. If government actions or sanctions are brought against us, or if there are widespread rumors that government actions or sanctions have been brought against us, our reputation could be harmed, we may lose users and customers, our revenues and results of operation may be materially and adversely affected and the value of our ADSs could be dramatically reduced.

We hold a Food Operation Permit and any failure to maintain the Food Operation Permit in the future may result in disruption of our business and fines and penalties. 

China has adopted a licensing system for food supply operations under the Food Safety Law and its implementation rules. Entities or individuals that intend to engage in food production, food distribution or food service businesses must obtain licenses or permits for such businesses. Pursuant to the Administrative Measures on Food Operation Permits issued by the SFDA in August 2015 and was amended in November 2017, or the Food Operation Permits Measures, an enterprise needs to obtain a Food Operation Permit from the local food and drug administration, and the permits already obtained by food business operators prior to the effective date of these new measures will remain valid for their originally approved validity period. We sell pre-packaged refrigerated and frozen food, vitamin gummy bear through third party e-commerce platforms, and two of our affiliated entities, Shanghai Network, Shanghai Advertising, each currently holds a Food Operation Permit for the sale of pre-packaged food (including refrigerated and frozen food) valid until July 24, 2024 and November 23, 2024, respectively. It is possible that we may not be able to renew these permits. The failure to hold and renew such Food Operation Permits under the currently effective Food Operation Permits Measures may subject us to fines and penalties and would likely disrupt the relevant portion of our business.

We may be subject to claims under consumer protection laws, including health and safety claims, if people are harmed by the products and services sold by us.

Through third party e-commerce platforms, we offer to sell products that are frequently purchased by consumers, such as seafood and provide e-commerce service to our customers who is selling other food products, such as vitamin gummy bears. Due to several high-profile incidents involving safety, including food safety, and consumer complaints that have occurred in China in recent years, the PRC government, media outlets and public advocacy groups are increasingly focused on consumer protection. These activities could expose us to increasing liability associated with consumer protection laws in those areas. In addition, we are facing increasing levels of activist litigation in China by plaintiffs claiming damages based on consumer protection laws. This type of activist litigation could increase in the future, and if it does, we could face increased costs defending these suits and damages should we not prevail, which could materially and adversely affect our reputation and brand and our results of operations.

We have purchased product liability insurance for products and services transacted under Acorn Fresh. Our rights of indemnity from the merchants supplying our products or using our services in connection with Acorn Fresh’s sale of pre-packaged food may not adequately cover us for any liability we may incur. Even unsuccessful claims could result in significant expenditure of funds and diversion of management time and resources, which could materially and adversely affect our business operations, net income and profitability.

As a foreign private issuer, we are permitted to and we will, rely on exemptions from certain New York Stock Exchange corporate governance standards applicable to domestic U.S. issuers. This may afford less protection to holders of our ordinary shares and the ADSs.

We are exempted from certain corporate governance requirements of the New York Stock Exchange by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by domestic U.S. companies listed on the New York Stock Exchange. The standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. For instance, we are not required to:

We have relied on and intend to continue to rely on some of these exemptions. As a result, holders of our ADSs may not be provided with the benefits of certain corporate governance requirements of the New York Stock Exchange.

If the PRC government takes the view that our acquisition of Shanghai Advertising did not comply with the then rules and regulations on foreign investment, we could be subject to penalties.

 On September 24, 2007, we acquired 100% of the legal ownership of Shanghai Advertising, which had been one of our affiliated entities, through Shanghai Acorn Enterprise Management Consulting Co., Ltd., or Acorn Consulting.

At the time of our acquisition, the advertising industry was a restricted industry for foreign investment under the Guideline Catalog of Foreign Investment Industries (2004 Revision). Acorn Consulting, as a domestic subsidiary of foreign invested enterprises, might have been required under PRC law to obtain the approval of the Ministry of Commerce, or MOFCOM, or its local counterpart to invest in restricted industries, such as the advertising industry. However, since October 31, 2007, advertising industry has been a permitted industry under the revised versions of Guideline Catalog of Foreign Investment Industries or similar rules and regulations. As a permitted industry, approval of MOFCOM or its local counterpart is not required for a foreign invested enterprise or its domestic subsidiary to invest in advertising unless required by other specific PRC laws and regulations.

In addition, at the time of our acquisition, under the Administrative Regulation on Foreign-Invested Advertising Enterprises jointly promulgated by MOFCOM and SAIC on March 2, 2004 and amended on October 1, 2008, foreign investors are required to have had at least three years of experience in directly operating an advertising business outside of China before they may receive approval to own 100% of an advertising business in China. The Administrative Regulation on Foreign-Invested Advertising Enterprises was revoked on June 29, 2015.

Prior to the acquisition, in an anonymous consultation we were advised by SFIC that because our acquisition was completed through Acorn Consulting, a domestic subsidiary of a foreign invested enterprise, the acquisition should not be subject to the requirements of the aforesaid rules and regulations. Based on the advice of SFIC, Pudong Administration of Industry and Commerce in Shanghai accepted the registration of our acquisition and issued a new business license to Shanghai Advertising on September 24, 2007, without requiring approval from SFIC or us to have three-years of operating experience in the advertising industry.

As such, we did not obtain any approval for our acquisition from the SFIC, and neither Acorn Consulting nor its shareholders had the requisite years of experience in the advertising industry under the aforesaid rules and regulations. If the government takes a different view from that of SFIC, and determines that our acquisition was subject to the aforesaid rules and regulations, then we may be deemed not in strict compliance with the then effective rules and could be subject to severe penalties including among others, the revocation of the business licenses of our related subsidiaries, discontinuance of our advertising operations, the imposition of conditions with which we or our PRC subsidiaries may be unable to comply, or the restructuring of Shanghai Advertising. The imposition of any of these penalties could result in a material adverse effect on our ability to do business.

Risks Relating to Our Corporate Structure

If the PRC government takes the view that our contractual arrangements that established the structure for operating our relevant business in China in the past did not comply with the PRC laws and regulations, we may be subject to penalties.

Historically, the PRC laws and regulations required strict approvals for foreign investment enterprises to engage in retail sales through television, telephone, mail order, and internet. In order to address such high-standard approval requirement on foreign investment enterprises, we set up three consolidated affiliated entities, Shanghai Network, Beijing Acorn, and Beijing HJX Technology, to conduct our retail sales based on a series of contractual arrangements by and among these consolidated affiliated entities and its shareholders, Acorn Information, and Acorn Trade (Shanghai). As a result, we exert control over these consolidated affiliated entities (these ownership structures and contractual arrangements are collectively called the “VIE structure”). Even though (i) since November 2016, the retail sales through television, telephone, mail order, and internet have been deemed as permitted industry under the current PRC laws and regulations, and (ii) by early 2015 we suspended our TV “direct sales” business (except for the periodic procurement of an insignificant amount of TV time until final discontinuation in 2018), we still have our VIE structure.

 Based on the relevant PRC laws and regulations, we understand each of the contracts among our PRC subsidiaries (i.e., Acorn Information and Acorn Trade (Shanghai)), these consolidated affiliated entities and its shareholders is valid, binding and enforceable in accordance with its terms; we also understand in practice the PRC government will not be likely to hold us responsible for our past retail sales conduct if newly enacted laws and regulations have permitted such conduct. However, if the PRC government takes different view on our contractual arrangements for operating our past retail sales business through television, telephone and others, we may be subject to certain penalties.

Uncertainties may exist with respect to the interpretation and implementation of the Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operation.

The National People’s Congress promulgated the Foreign Investment Law on March 15, 2019, which came into effect on January 1, 2020. The State Council promulgated the Implementing Regulations of the Foreign Investment Law on December 26, 2019, which came into effect on January 1, 2020. The Foreign Investment Law and its implementing regulations (i) replace the trio of existing laws regulating foreign investment in China, (ii) embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, the new Foreign Investment Law stipulate three forms of foreign investment, but does not explicitly stipulate the contractual arrangements as a form of foreign investment. Notwithstanding the foregoing, the Foreign Investment Law stipulates that the concept of a foreign investment includes foreign investors investing in China through “any other methods” under laws, administrative regulations, or provisions prescribed by the State Council. Therefore, there are possibilities that future laws, administrative regulations or provisions prescribed by the State Council may regard contractual arrangements as a form of foreign investment, at which time it will be uncertain whether the contractual arrangements will be deemed to be in violation of the foreign investment access requirements and how the above-mentioned contractual arrangements will be handled. Nevertheless, given these consolidated affiliated entities no longer conduct the above TV “direct sales” business, we understand the risks posed by these contractual arrangements is relatively low. If future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be completed by companies with existing contractual arrangements, we may face uncertainties as to the timely completion of such actions. In the extreme case scenario, we may be required to unwind the contractual arrangements and/or dispose our VIE structure, which could have an adverse effect on our business.

The contractual arrangements with our consolidated affiliated entities and their shareholders relate to certain aspects of our operations, but may not be as effective in providing operational control as direct ownership and may be difficult and costly to enforce under PRC law.

We rely on contractual arrangements with our consolidated affiliated entities and their shareholders to operate certain aspects of our business in China. For a description of these contractual arrangements, see Item 4.C, “Information on the Company—Organizational Structure”. These contractual arrangements may not be as effective as direct ownership in providing us control over our consolidated affiliated entities. Direct ownership would allow us, for example, to directly exercise our rights as a shareholder to effect changes in the board of each consolidated affiliated entity, which, in turn, could effect changes, subject to any applicable fiduciary obligations, at the management level. If our consolidated affiliated entities or their shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by our consolidated affiliated entities is indirect and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system.

In addition, all of these contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Moreover, there have been certain instances where similar contractual arrangements with consolidated affiliated entities such as ours have been found unenforceable in PRC arbitration, and we cannot assure that will not happen to us. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult to exert effective control over our consolidated affiliated entities, and our ability to conduct a portion of our business may be adversely affected. See “—Risks Related to Doing Business in China—The PRC legal system embodies uncertainties which could limit the available legal protections.”

 The shareholders of our consolidated affiliated entities may have potential conflicts of interest with us, which may adversely affect our business and result in our having difficulty to control our VIEs.

Shanghai Network, Beijing Acorn, and Beijing HJX are our consolidated affiliated entities. Mr. Kuan Song and Ms. Pan Zong collectively hold 100% of the equity interest in Shanghai Network, Beijing Acorn and Beijing HJX Technology.

The interests of Mr. Kuan Song and Ms. Pan Zong as the shareholders of our consolidated affiliated entities may differ from the interests of our Company as a whole, as what is in the best interests of our consolidated affiliated entities may not be in the best interests of our Company. We cannot assure you that if conflicts of interest arise, any or all of these individuals will act in the best interests of our Company or that conflicts of interest will be resolved in our favor. In addition, these individuals may breach or cause our consolidated affiliated entities and their subsidiaries to breach or refuse to renew the existing contractual arrangements with us.

Currently, we do not have arrangements to address potential conflicts of interest that the shareholders of our consolidated affiliated entities may encounter, except that we could, at all times, exercise our option under the optional share purchase agreement to cause them to transfer all of their equity ownership in our consolidated affiliated entities to a PRC entity or individual designated by us as permitted by the then applicable PRC laws. In addition, if such conflicts of interest arise, we could, in the capacity of attorney-in-fact of the then existing shareholders of our consolidated affiliated entities as provided under the power of attorney, directly appoint new directors of our consolidated affiliated entities.

If we cannot resolve any conflicts of interest or disputes between us and the shareholders of our consolidated affiliated entities, we would have to rely on legal proceedings, which could result in disruption of a portion of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings. Under the current contractual arrangements, as a legal matter, if any consolidated affiliated entity or Mr. Kuan Song or Ms. Pan Zong fails to perform its or their respective obligations under these contractual arrangements, we may have to incur substantial costs and expend significant resources to enforce those arrangements, and rely on legal remedies under PRC law. These remedies may include seeking specific performance or injunctive relief, and claiming damages, any of which may not be effective. For example, if either Mr. Kuan Song or Ms. Pan Zong refuses to transfer his or her equity interest in any affiliated entity to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if either Mr.  Kuan Song or Ms. Pan Zong otherwise acts in bad faith toward us, we may have to take legal action to compel him or her to fulfill his or her contractual obligations. In addition, as each of our affiliated entity is jointly owned by Mr.  Kuan Song or Ms. Pan Zong, it may be difficult for us to change our corporate structure or to bring claims against any affiliated entity or Mr.  Kuan Song or Ms. Pan Zong if any of them fails to perform its or his or her obligations under the related contracts or does not cooperate with any such actions by us.

We may lose the ability to use and enjoy assets held by our PRC consolidated affiliated entities that are related to the operation of a portion of our business if such entities go bankrupt or become subject to a dissolution or liquidation proceeding.

As part of our contractual arrangements with our consolidated affiliated entities, such entities hold certain assets, such as trademarks for our branded products and service that are related to the operation of a portion of our business. If any of our consolidated affiliated entities goes bankrupt and all or part of its assets become subject to liens or rights of third party creditors, we may be unable to continue some of our business activities, which could adversely affect our business. If any of our consolidated affiliated entities undergoes a voluntary or involuntary liquidation proceeding, the unrelated third party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate portion of our business, which could adversely affect our business.

Our ability to enforce the equity pledge agreements between us and PRC consolidated affiliated entities’ shareholder may be subject to limitations based on PRC laws and regulations.

Pursuant to the equity interest pledge agreements between our wholly owned subsidiaries in China and the shareholders of our consolidated affiliated entities, each shareholder of each consolidated affiliated entities agrees to pledge his or her equity interests in the consolidated affiliated entity to one of our subsidiaries to secure performance by the relevant consolidated affiliated entity, as well as by the shareholders of such consolidated affiliated entity, of his or her obligations under the relevant contractual arrangements. The equity interest pledges of shareholders of consolidated affiliated entities under these equity pledge agreements have been registered with the relevant local branch of the SAIC (currently known as the State Administration for Market Regulation). We may change our consolidated affiliated entities structure in the future. In addition, in the registration forms of the local branch of SAIC for the pledges over the equity interests under the equity interest pledge agreements, the aggregate amount of registered equity interests pledged to our wholly owned subsidiaries in China represents 100% of the registered capital of our consolidated affiliated entities. The equity interest pledge agreements with each of the consolidated affiliated entities’ shareholders provide that the pledged equity interest shall constitute continuing security for any and all of the indebtedness, obligations and liabilities under all of the principal service agreements and the scope of pledge shall not be limited by the amount of the registered capital of that consolidated affiliated entity. However, it is possible that a PRC court may take the position that the amount listed on the equity pledge registration forms represents the full amount of the collateral that has been registered and perfected. If this is the case, the obligations that are supposed to be secured in the equity interest pledge agreements in excess of the amount listed on the equity pledge registration forms could be determined by the PRC court as unsecured debt, which takes last priority among creditors.

Our corporate structure may limit our ability to receive dividends from, and transfer funds to, our PRC subsidiaries, which could restrict our ability to act in response to changing market conditions and reallocate funds from one affiliated PRC entity to another in a timely manner.

We are a Cayman Islands holding company and substantially all of our operations are conducted through our 8 PRC subsidiaries and 3 consolidated affiliated entities. We may rely on dividends and other distributions from our PRC subsidiaries to provide us with our cash flow and allow us to pay dividends on the shares underlying our ADSs and meet our other obligations. Current regulations in China permit our PRC subsidiaries to pay dividends to us only out of their accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of these subsidiaries to make dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange and other laws and regulations. In particular, under PRC law, these operating subsidiaries may only pay dividends after 10% of their net profit has been set aside as reserve funds, unless such reserves have reached at least 50% of their respective registered capital. Such reserve may not be distributed as cash dividends. In addition, if any of our PRC operating subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Moreover, the retained earnings available for distribution from our Chinese operating subsidiaries are determined in accordance with generally accepted accounting principles in China, and may differ from the retained earnings determined in accordance with U.S. GAAP. As a result, we may not have sufficient distributions from our PRC subsidiaries to enable necessary profit distributions to us or any distributions to our shareholders in the future, which calculation would be based upon our financial statements prepared under U.S. GAAP. Furthermore, distributions by our PRC subsidiaries to us other than as dividends may be subject to governmental approval and taxation.

In addition, any transfer of funds from our offshore company to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, is subject to registration or approval of Chinese governmental authorities, including the relevant administration of foreign exchange and/or the relevant examining and approval authority. Therefore, it is difficult to change our capital expenditure plans once the relevant funds have been remitted from our offshore company to our PRC subsidiaries. These limitations on the free flow of funds between us and our PRC subsidiaries could restrict our ability to act in response to changing market conditions and reallocate funds from one Chinese subsidiary to another in a timely manner.

The contractual arrangements entered into among our consolidated affiliated entities and their shareholders and those arrangements entered into between us or one of our Chinese subsidiaries and our consolidated affiliated entities may be subject to audit or challenge by the Chinese tax authorities. A finding that we, Acorn Information, Acorn Trade (Shanghai), our consolidated affiliated entities or any of our Chinese subsidiaries owe additional taxes could reduce our net earnings and the value of your investment.

Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. As a result of our corporate structure and the contractual arrangements among our PRC subsidiaries, our PRC consolidated affiliated entities and their shareholders, we are effectively subject to 6% PRC value added tax and related surcharges on revenues generated by our subsidiaries from our contractual arrangements with our PRC consolidated affiliated entities. The current EIT Law, which became effective on January 1, 2008 and was amended on February 24, 2017 and was further amended on December 29, 2018, provides authority for the PRC tax authority to make special adjustments to taxable income as well as additional reporting requirements. In particular, an enterprise must submit its annual tax return together with information on related party transactions to the tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s-length principles. In addition, the PRC tax authorities issued Announcement of the State Administration of Taxation on Matters Relating to the Improvement of Affiliated Declaration and Contemporaneous Document Management on June 29, 2016 which set forth tax-filing disclosure and contemporaneous documentation requirements, clarify the definition of “affiliated relationship,” guide the selection and application of transfer pricing methods, and outline the due process procedures for transfer pricing investigation and assessment. These transactions may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year during which the transactions are conducted. We may be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between us and our PRC consolidated affiliated entities were not on an arm’s length basis and therefore constitute a favorable transfer pricing arrangements. If this occurs, the PRC tax authorities could request that either of our PRC consolidated affiliated entities adjust its taxable income upward for PRC tax purposes. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions for PRC tax purposes recorded by us, our consolidated affiliated entities, or our PRC subsidiaries or an increase in taxable income, all of which could increase our tax liabilities. In addition, the PRC tax authorities may impose certain late payment fees and other penalties on us, our consolidated affiliated entities or our PRC subsidiaries for under-paid taxes.

Risks Relating to Doing Business in China

Our operations may be adversely affected by changes in China’s economic, political and social conditions.

All of our business operations are conducted in China and all of our revenues are derived from our marketing and sales of consumer products in China. Accordingly, our results of operations, financial condition, and future prospects are subject to a significant degree to economic, political and social conditions in China. The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the Chinese economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage foreign investment and sustainable economic growth and to guide the allocation of financial and other resources, which have for the most part had a positive effect on our business and growth. However, we cannot assure you that the PRC government will not repeal or alter these measures or introduce new measures that will not have a negative effect on us. For example, our financial condition and results of operation may be adversely affected by changes in tax regulations applicable to us.

 Although the Chinese economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through the allocation of resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and regulations could adversely affect the overall economy in China, which could harm our business.

 In particular, our business is primarily dependent upon the economy and the business environment in China. Our growth strategy is based upon the assumption that demand in China for our products will continue to grow with the growth of Chinese economy. However, the growth of the Chinese economy has been uneven across geographic regions and economic sectors, and experienced an economic slowdown in 2009 as a result of the global economic crisis. In addition, while the PRC economy has experienced significant growth in the past three decades, that growth has slowed in recent years compared to prior years. According to the National Bureau of Statistics of China, China’s real GDP growth rate was 6.7% in 2016, which increased to 6.9% in 2017 and slowed to 6.6% in 2018 and further to 6.1% in 2019. China’s GDP also contracted by 6.8% on a quarter-to-quarter basis (compared to the immediately preceding quarter) in the first quarter of 2020, the worst downturn since 1979 due primarily to the outbreak of COVID-19. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such changes in China’s political or social conditions may also adversely affect our operations and financial results and may lead to reduction in demand for our services. In recent years, to encourage economic development, the PRC government has implemented various measures, many of which benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, future measures to control the pace of economic growth may also cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.

Our revenues and financial results may be adversely affected by any economic slowdown in China as well as globally.

The success of our business ultimately depends on consumer spending. We derive substantially all of our revenues from China. As a result, our revenues and financial results are affected to a significant extent by economic conditions in China and globally, as well as economic conditions specific to online retail. The global macroeconomic environment is facing numerous challenges. The growth rate of the Chinese economy has gradually slowed since 2010, and then contracted in the first quarter of 2020. Slow growth or even contraction may continue in the foreseeable future, especially in light of the challenges the global economy is facing due to the COVID-19 global pandemic. Any economic slowdown could significantly reduce domestic commerce in China, including through the internet generally and through us. In addition, there is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.

The discontinuation of any of the government subsidies available to us in China could adversely affect our results of operations and financial condition.

Our subsidiaries received tax holidays and subsidies for certain taxes paid by us, as well as subsidies which formed part of the incentives provided by local government for our investment in our local district. These incentives were granted by local government agencies and may be deemed inappropriate by the central government, and the tax incentives granted to us by PRC governmental authorities are subject to review and may be adjusted or revoked at any time in the future. The discontinuation or revocation of any tax incentive currently available to us will cause our effective tax rate to increase, which will decrease our net income and adversely affect our financial condition and results of operations. See Item 5.A, “Operating and Financial Review and Prospects—Operating Results—Taxation.”

Under China’s New EIT Law, we may be classified as a “resident enterprise” of China and such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

The New EIT Law provides that enterprises established outside China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their global income. Under the Regulations on the Implementation of the EIT Law, promulgated on December 6, 2008 and effective on January 1, 2008 and amended on April 23, 2019 (2019 version), or the Implementation Regulations (2019 version), a “de facto management body” is defined as substantial and overall management and control over such aspects as the manufacturing and business operations, personnel and human resources, finances and properties of an enterprise. In addition, two tax circulars issued by the State Administration of Taxation, or SAT, on April 22, 2009 and amended on December 29, 2017 (or SAT Circular 82), and July 27, 2011 and amended on April 17, 2015, June 28, 2016 and June 15, 2018 (or SAT Bulletin 45), respectively, regarding the standards used to classify certain offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise Groups as “resident enterprises” clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. These two circulars also subject such “resident enterprises” to various reporting requirements with the PRC tax authorities. In addition, the SAT Circular 82 mentioned above details that certain offshore incorporated Chinese-controlled enterprises will be classified as “resident enterprises” if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seals, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights. SAT Bulletin 45 further clarifies the resident status determination, post-determination administration as well as competent tax authorities.

Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining “de facto management bodies” which are applicable to our Company or our overseas subsidiary. The above two circulars only apply to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign corporations like us. In the absence of detailed implementing regulations or other guidance determining that offshore companies controlled by PRC individuals or foreign corporations like us are PRC resident enterprises, we do not currently consider our Company or any of our overseas subsidiaries to be a PRC resident enterprise.

However, if the PRC tax authorities determine that our Cayman Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and other non-China source income would be subject to PRC enterprise income tax at a rate of 25%, in comparison to no taxation in the Cayman Islands. Second, although under the New EIT Law and its implementation rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes but not controlled by PRC enterprise or enterprise group like us. Finally, if our Cayman Islands holding company is deemed to be a PRC tax resident enterprise, a 10% withholding tax shall be imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived from our non-PRC shareholders transferring our shares or ADSs. Similar results would follow if our BVI holding company is considered a PRC “resident enterprise.”

The PRC legal system embodies uncertainties which could limit the available legal protections.

The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. Seven (7) of our eleven (11) PRC operating subsidiaries are wholly foreign owned enterprises in China. They are subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to foreign-invested enterprises in particular. However, these laws, regulations and legal requirements change frequently, and their interpretation and enforcement involve uncertainties. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. In addition, such uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operations. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC legal system, particularly with regard to the media, ecommerce, education, advertising and retail industries, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us, and our foreign investors, including you.

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, after complying with certain procedural requirements, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

Because our revenues are generated in Renminbi and our results are reported in U.S. dollars, ongoing devaluation of the Renminbi could negatively impact our results of operations.

The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. For instance, in August 2015, the People’s Bank of China, or PBOC, changed the way it calculates the mid-point price of Renminbi against the U.S. dollar, requiring the market-makers who submit for reference rates to consider the previous day’s closing spot rate, foreign-exchange demand and supply as well as changes in major currency rates. In 2017 and 2018, the value of the Renminbi appreciated approximately 6.3% and depreciated approximately 1.1% and against the U.S. dollar, respectively. From the end of 2018 through the end of 2019, the value of the Renminbi appreciated by approximately 1.7% against the U.S. dollar. Specifically, the Renminbi appreciated against the U.S. dollar to approximately RMB 6.98 per U.S. dollar on December 31, 2019. More recently, the Renminbi has depreciated further against the U.S. dollar, with an exchange rate equal to approximately RMB 7.13 per U.S. dollar on May 28, 2020. It is difficult to predict how market forces or PRC or U.S. government policy may affect the exchange rate between the Renminbi and the U.S. dollar in the future.

There also remains significant international pressure on the Chinese government to adopt a flexible currency policy to allow the Renminbi to appreciate against the U.S. dollar, which could result in greater fluctuation of the Renminbi against the U.S. dollar. Significant revaluation of the Renminbi may have a material adverse effect on your investment. Substantially all of our revenues and costs are denominated in Renminbi. Any significant devaluation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars into Renminbi for capital expenditures and working capital and other business purposes, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, a significant depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs, and if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us, our management or the experts named in the annual report.

We conduct all of our operations in China and substantially all of our assets are located in China. In addition, almost all of our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon some of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, we understand that the PRC currently does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.

Regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross-border investment activity, and a failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose our PRC resident shareholders to liability under PRC law.

On July 4, 2014, the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, was promulgated by SAFE, which replaced the former circular commonly known as “Notice 75” promulgated by SAFE on October 21, 2005 and requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 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 subsidiary 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. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. Pursuant to the Circular on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies, or SAFE Circular 13, promulgated by SAFE on and effective from February 13, 2015, banks shall directly examine and handle foreign exchange registration under domestic direct investment and foreign exchange registration under overseas direct investment. The SAFE and its branches (hereinafter referred to as the “Foreign Exchange Bureau”) shall conduct indirect regulation of Foreign Exchange Registration of Direct Investment via banks.

We have already notified our shareholders and the shareholders of the offshore entities in our corporate group, who are PRC residents known by us to urge them to make the necessary applications and filings, as required under SAFE Circular 37. We understand that the relevant shareholders have registered their offshore investments in us with Shanghai SAFE, where most of our PRC subsidiaries are located. We are committed to complying, and to ensuring that our shareholders who are subject to the regulation comply, with the relevant rules. However, we cannot assure you that all of our shareholders who are PRC residents will comply with our request to make or obtain any applicable registrations or approvals required by SAFE Circular 37 and SAFE Circular 13. The failure or inability of our PRC resident shareholders to receive any required approvals or make any required registrations may limit our PRC subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected.

Upon the completion of our acquisition of Yiyang Yukang in December 2008, shareholders of Yiyang Yukang became our shareholders. To our knowledge, some of the prior shareholders of Yiyang Yukang did not file applications for SAFE registration, which may adversely affect our ability to distribute dividends to our shareholders as stated above. To our knowledge, a separate registration in respect of Notice 75 which was effective at the moment of the above acquisition is not applicable to our acquisition of Yiyang Yukang.

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.

The PRC Labor Contract Law, which became effective on January 1, 2008, and its implementing rules impose requirements concerning contracts entered into between a PRC employer and its employees and establish time limits for probationary periods. Because the Labor Contract Law and its implementing rules lack clarity with respect to their implementation and potential penalties and fines, there may be a risk that certain of our employment policies and practices could be determined by relevant PRC authorities as being in violation of the Labor Contract Law or its implementing rules, which could result in penalties, fines or other sanctions. If we are subject to large penalties or fees related to the Labor Contract Law or its implementing rules, our business, financial condition and results of operations may be materially and adversely affected. In addition, according to the Labor Contract Law and its implementing rules, under certain cases an employee who is terminated by us is entitled to receive a severance payment equal to his or her average monthly salary during the 12-month period immediately preceding to the termination for each year of service up to the date of termination. If we terminate a labor contract in any circumstance other than those specified under the PRC Labor Contract Law and its implementing rules, including termination without cause, we must either reinstate and continue to perform the employee’s employment contract or pay the employee damages calculated at twice the rate for calculating the severance payment, subject to the employee’s own request. Due to our cost controls and internal business restructuring, we are in the process of termination of our employees’ labor contracts on a large scale and we have to pay to terminated employees a large amount of severance payment or damages. As such, our business, financial condition and results of operations may be materially and adversely affected. Furthermore, the PRC Labor Contract Law and subsequently passed rules and regulations have tended to provide greater rights to employees and impose more onerous requirements on employers in China. As a result of regulations designed to enhance labor protection, our labor costs in China may increase in the future.

On December 28, 2012, the Labor Contract Law was amended to impose more stringent requirements on labor dispatch which became effective on July 1, 2013. For example, an employer shall strictly control the number of dispatched employees not to exceed certain percentage of its total number of employees. Moreover, the Interim Provisions on Labor Dispatch, or the Dispatch Rule, effective on March 1, 2014, provides that dispatched employees are only allowed to work in temporary, ancillary and replaceable positions. The number of dispatched employees hired by an employer may not exceed 10% of its total labor force and the employer has a two-year transition period to comply with such requirement. Pursuant to the current Labor Contract Law, a labor-dispatching enterprise or an employer using dispatched workers who violates requirements of labor dispatching under the Labor Contract Law may be subject to fine by competent labor administrative authority and, if losses are caused to any dispatched employee, such labor- dispatching enterprise and employer shall assume liabilities jointly and severally. Prior to the sale of 100% of the equity interests of Zhuhai Acorn Electronic Technology Co., Ltd., or Zhuhai Acorn, by our wholly-owned subsidiary, China DRTV, Inc. in the fourth quarter of 2019, the number of dispatched workers in certain of our PRC subsidiaries exceeded 10% of their respective total number of employees as required by the Dispatch Rule. Thereafter, we no longer hire any dispatched employees. We may be subject to penalties by competent labor administrative authority for our prior failure to comply with the Dispatched Rule.

If the custodians or authorized users of controlling non-tangible assets of our Company, including our corporate chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.

Under PRC law, legal documents for corporate transactions are executed using the chops or seals of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant branch of the Administration of Industry and Commerce.

Although we usually utilize chops to enter into contracts, the designated legal representatives of each of our PRC subsidiaries and consolidated affiliated entities have the apparent authority to enter into contracts on behalf of such entities without chops and bind such entities. All designated legal representatives of our PRC subsidiaries and consolidated affiliated entities are members of our senior management team who have signed employment agreements with us or our PRC subsidiaries and consolidated affiliated entities under which they agree to abide by various duties they owe to us. In order to maintain the physical security of our chops of our PRC entities, we generally store these items in secured locations accessible only by the authorized personnel and the usage of which is subject to approval by department head of relevant business unit, the legal department and finance department. Although we monitor such authorized personnel, there is no assurance that such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and experience significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain control over any of our PRC subsidiaries or consolidated affiliated entities, we or our PRC subsidiary and consolidated affiliated entity would need to pass a new shareholder or board resolution to designate a new legal representative and we would need to take legal action to seek the return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress for the violation of the representative’s fiduciary duties to us, which could involve significant time and resources and divert management attention away from our regular business. In addition, the affected entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent authority of such representative including both legal representative and the authorized personnel and acts in good faith.

Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board (“PCAOB”), and as such, investors may be deprived of the benefits of such inspection. Moreover, under proposed new US legislation, our securities may ultimately be banned from trading in the US.

Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC and the Ministry of Finance of the PRC, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations, but not inspections, undertaken by the PCAOB, the CSRC, or the Ministry of Finance in the United States and China, respectively. The PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. stock exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China.   As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular the PRC’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress that would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the New York Stock Exchange of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs could be adversely affected. It is unclear whether this proposed legislation will be enacted since it was referred to the House Committee on Financial Services on June 5, 2019 with no apparent progress since that time. On April 21, 2020, the SEC and the PCAOB issued another joint statement reiterating the greater risk that disclosures will be insufficient in many emerging markets, including China, compared to those made by U.S. domestic companies. In discussing the specific issues related to the greater risk, the statement again highlights the PCAOB’s inability to inspect audit work paper and practices of accounting firms in China, with respect to their audit work of U.S. reporting companies.

The Holding Foreign Companies Accountable Act (the “Proposed Legislation”) was unanimously approved by the U.S. Senate on May 20, 2020. Before the Proposed Legislation becomes a law, it also needs to be approved by the U.S. House of Representatives and signed by the President. However, the vote has not been scheduled yet in the House of Representatives, and it is uncertain whether the Proposed Legislation will be enacted eventually in its current form. The Proposed Legislation requires an issuer that, with respect to the preparation of the audit report on the financial statements of such issuer included in a report filed by such issuer under section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, retains a registered public accounting firm that has a branch or office that (i) is located in a foreign jurisdiction, and (ii) the PCAOB is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction (“Covered Issuer”), to submit documentation that establishes that it is not owned or controlled by a foreign government. In accordance with the Proposed Legislation, the SEC shall issue rules that establish the manner and form in which the Covered Issuer shall make the required submission no later than 90 days after the enactment of this Proposed Legislation. Furthermore, if the PCAOB determines that after the date of enactment of this Proposed Legislation, the Covered Issuer has three consecutive years in which the PCAOB is unable to inspect or investigate the Covered Issuer’s audit fully (any such year, a “non-inspection year”), the Covered Issuer’s securities are prohibited from trading on a US stock exchange or market or through any other method that is within the jurisdiction of the SEC to regulate. The initial prohibition would be removed if the issuer then certifies to the SEC that it has retained a registered public accounting firm that the PCAOB has inspected to the satisfaction of the SEC. If there is any subsequent recurrence of a non-inspection year, the SEC is required to ban the issuer for at least five years. If the Proposed Legislation were enacted in its current form, Acorn would be considered as a Covered Issuer and would be required to certify that Acorn is not under the control of a foreign government by submitting documentation in accordance with the subsequent rules. Moreover, if the SEC were to determine that Acorn had three consecutive non-inspection years, which is likely if current circumstances continue as PRC rules prohibit our auditors from being inspected fully by the PCAOB, Acorn’s securities would be banned from trading on the NYSE and other US markets.

Inspections of other audit firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections, and to the extent that such inspections might have facilitated improvements in our auditor’s audit procedures and quality control procedures, investors may be deprived of such benefits. In addition, investors may lose confidence in our reported financial information and procedures and the quality of our financial statements, which may have a material adverse impact on our ADS price.

If administrative proceedings are brought by the SEC alleging our independent registered public accounting firm’s failure to meet specific criteria set by the SEC, with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934.

Starting in 2011, the Chinese affiliates of five of the largest global public accounting firms were affected by a conflict between US and PRC law. Specifically, for certain US listed companies operating and audited in China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under PRC law they could not respond directly to the US regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms would receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding PRC-based, United States-listed companies and the market price of our ADSs may be adversely affected.

Our prior auditor was one of the five global accounting firms involved in the matter described above. Our current auditor, whose appointment was announced on October 21, 2016, was not involved in the matter described above. If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act of 1934, as amended. Such a determination could ultimately lead to the delisting of our ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Risks Relating to Our ADSs.

Our ADSs may be delisted from the New York Stock Exchange which would adversely impact our public float and the trading price of our ADSs.

We must comply with various listing standards to maintain our continued NYSE listing. For example, the average closing price for our ADSs is not permitted to fall below $1.00 over a 30 trading-day period. On two recent occasions we were notified by the NYSE that we were in violation of this listing standard.

 On March 19, 2015, the NYSE notified us that the closing price of our ADSs for the consecutive 30 trading-day period ended on March 13, 2015 was $0.99 and therefore below the NYSE’s continued listing standard relating to minimum average closing share price. Subsequent increases in the closing prices of our ADSs allowed us to regain compliance with the minimum share price rule by April 2015 but on September 15, 2015, the NYSE again notified us that we were below the NYSE’s continued listing criteria because the average per share closing price of our ADS for the consecutive 30 trading-day period ended on September 11, 2015 had fallen below $1.00. We regained compliance with the NYSE continued listing criteria after we changed the ratio of ordinary shares per one ADS from 1 ADS representing three ordinary shares to one ADS representing twenty ordinary shares (equivalent to a three-for-twenty reverse ADS split).

Our efforts to satisfy the relevant continued NYSE listing requirements may not succeed. For example, we will be considered to be below compliance of the NYSE continued listing criteria if our average global market capitalization over a consecutive 30 trading-day period is less than $50 million and, at the same time stockholders’ equity is less than $50 million. As of December 31, 2019, our stockholder’s equity was $66.0 million.

There can be no assurance that any definitive offer will be made with respect to the going private transaction proposed by Mr. Robert W. Roche, that any agreement will be executed or that this or any other transaction will be approved or consummated.

Our board of directors received a preliminary non-binding proposal letter dated November 4, 2019 from Mr. Robert W. Roche, director and Executive Chairman of our Company, to acquire all of our outstanding shares not already owned by the transaction vehicle he will form for the purpose of pursing this going private transaction for $19.50 in cash per ADS (each representing twenty ordinary shares) or $0.975 per ordinary share. Our board of directors has formed a special committee comprised of three independent and disinterested directors, Urs Paul Zimmermann, Jenny Hseau-Jean Wang, Eric Haibing Wu, to consider the proposal and any other alternative proposals or other strategic alternatives that may be available to our company. The special committee has retained Duff & Phelps (Duff & Phelps, LLC and Duff & Phelps Securities, LLC) as its financial advisor and Sheppard Mullin Richter & Hampton LLP as its United States legal counsel in connection with its review and evaluation of the preliminary non-binding proposal. In February, 2020, the aforesaid buyer group informed the Company that it is not prepared to pursue acquisition of the Company citing uncertainty regarding coronavirus outbreak, although it remained interested in continuing negotiations with the special committee regarding the acquisition. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other transaction will be approved or consummated. These uncertainties may increase the volatility of the market price of our ADSs and have a material adverse effect on the market price of our ADSs.

We may be classified as a passive foreign investment company or “PFIC” for U.S. federal income tax purposes for a given taxable year pursuant to an annual factual determination made after the close of that year, and pursuant to a determination made in 2020 we believe we were classified as a PFIC for the 2019 taxable year.

Depending upon the value of our ADSs or ordinary shares and the nature of our assets and income over time, we could be classified as a PFIC for U.S. federal income tax purposes. We will be classified as a PFIC in any taxable year if either: (a) the average quarterly value of our gross assets that produce passive income or are held for the production of passive income is at least 50% of the average quarterly value of our total gross assets, or (b) 75% or more of our gross income for the taxable year is passive income. Based on a determination made in 2020 with respect to the 2019 taxable year, we believe we were classified as a PFIC for the 2019 taxable year.

If we are classified as a PFIC in any taxable year in which you hold our ADSs or ordinary shares and you are a U.S. investor, subject to certain exceptions described in Item 10.E, “Additional Information—Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company,” you would generally be taxed at higher ordinary income rates, rather than lower capital gain rates, if you dispose of ADSs or ordinary shares for a gain in a later year, even if we are no longer a PFIC in that year. In addition, a portion of the tax imposed on your gain would be increased by an interest charge. Moreover, if we were classified as a PFIC in any taxable year, you would not be able to benefit from any preferential tax rate with respect to any dividend distribution that you may receive from us in that year or in the following year. Finally, you would also be subject to special U.S. tax reporting requirements.

We will not able to determine our PFIC status for the 2020 taxable year until after the close of the taxable year ending December 31, 2020. Because we currently hold, and expect to continue to hold, a substantial amount of cash and other passive assets and, because the value of our assets is likely to be determined in large part by reference to the market prices of our ADSs or ordinary shares, which are likely to fluctuate, there can be no assurance that we will not be classified as a PFIC in 2020 and any future taxable year. U.S. investors are urged to consult their independent tax advisors about the application of the PFIC rules and certain elections that may help them relieve any adverse U.S. federal income tax consequences for their particular circumstances for the 2019 taxable year. For more information regarding such elections, please consult Item 10.E, “Additional Information— Taxation—U.S. Federal Income Taxation—Passive Foreign Investment Company” and your independent tax advisor.

The sale, deposit, cancellation and transfer of the ADSs issued after an exercise of rights may be restricted under applicable U.S. securities laws.

If we offer holders of our ordinary shares any rights to subscribe for additional shares or any other rights, the depositary may make these rights available to holders of our ADSs if it is lawful and reasonably practicable to do so. However, the depositary may allow rights that are not distributed or sold to lapse. In that case, holders of our ADSs will receive no value for them. In addition, U.S. securities laws may restrict the sale, deposit, cancellation and transfer of the ADSs issued after exercise of rights. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to holders of ADSs, or are registered under the provisions of the Securities Act. We can give no assurance that we can establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

The trading prices of our ADSs may be volatile, which could result in substantial losses to investors.

The daily closing trading prices of our ADSs ranged from $7.5300 to $19.5100 in 2017, from $14.2200 to $37.7000 in 2018, and from $15.8500 to $31.2600 in 2019. The trading price of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other similarly situated companies in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of these Chinese companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting or other practices at other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in such practices. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, which may have a material adverse effect on the market price of our ADSs.

In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile due to specific factors, including the following: 

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could be adversely affected.

The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ADSs to decline.

Anti-takeover provisions in our charter documents may discourage a third party from acquiring us, which could limit our shareholders’ opportunities to sell their shares at a premium.

Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar transaction.

For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix the powers and rights of these shares, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preferred shares could thus be issued quickly with terms calculated to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues preferred shares, the market price of our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected.

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, our shareholders may have less protection of their shareholder rights than they would under U.S. law.

Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Cayman Islands Companies Law and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands, as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.

Unlike many jurisdictions in the United States, Cayman Islands law does not generally provide for shareholder appraisal rights on an approved arrangement and reconstruction of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offer be appraised or give you additional consideration if you believe the consideration offered is insufficient. Moreover, holders of our ADSs are not entitled to appraisal rights under Cayman Islands law. ADS holders that wish to exercise their appraisal or dissenter’s rights must convert their ADSs into ordinary shares by surrendering their ADSs to the depositary and paying the ADS depositary fee.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our existing articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.

Judgments obtained against us by our shareholders may not be enforceable in our home jurisdiction.

We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our subsidiaries established in China. Most of our directors and officers reside outside the United States and substantially all of the assets of those persons are located outside the United States. As a result, it may be difficult or impossible for our shareholders to bring an action against us or against these individuals in the Cayman Islands or in China in the event that our shareholders believe that their rights have been infringed under the applicable securities laws or otherwise. Even if our shareholders are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render them unable to enforce a judgment against our assets or the assets of our directors and officers.

There are uncertainties as to whether Cayman Islands or China courts would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or entertain original actions brought against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

There is no statutory recognition in the Cayman Islands or China of judgments obtained in the United States. The Cayman Islands will generally recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon, provided that (i) such courts had proper jurisdiction over the parties subject to such judgment, (ii) such courts did not contravene the rules of natural justice of the Cayman Islands, (iii) such judgment was not obtained by fraud, (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands, (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands, and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.

The ability for shareholders to protect their rights as shareholders through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law.

Cayman Islands companies may not have standing to initiate a derivative action in a federal court of the United States. As a result, our shareholders’ ability to protect their interests if they are harmed in a manner that would otherwise enable them to sue in a U.S. federal court may be limited.

The voting rights of holders of ADSs are limited in several significant ways by the terms of the deposit agreement.

Holders of our ADSs may only exercise their voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with these instructions.

You will not be able to directly exercise your right to vote with respect to the underlying ordinary shares unless you withdraw the ordinary shares by surrendering your ADSs to the depositary and paying the ADS depositary fee. Under our amended and restated memorandum and articles of association and Cayman Islands law, the minimum notice period required for convening a general meeting of shareholders is ten days. When a general meeting is convened, holders of our ADSs may not receive sufficient notice of the meeting to permit the holders to withdraw their ordinary shares to allow them to cast their vote with respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to holders of our ADSs or carry out the holders’ voting instructions in a timely manner. We make all reasonable efforts to cause the depositary to extend voting rights to holders of our ADSs in a timely manner, but we cannot assure holders of our ADSs that they will receive the voting materials in time to ensure that they can instruct the depositary to vote their shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, holders of our ADSs may not be able to exercise their right to vote and may lack recourse if their ordinary shares are not voted as requested.

The depositary of our ADSs, except in limited circumstances, grants to us a discretionary proxy to vote the ordinary shares underlying the ADSs if holders of our ADSs do not vote at shareholders’ meetings, which could adversely affect the interests and the ability of our shareholders as a group to influence the management of our Company.

Under the deposit agreement for the ADSs, the depositary gives us a discretionary proxy to vote our ordinary shares underlying the ADSs at shareholders’ meetings if holders of our ADSs do not vote, unless:

The effect of this discretionary proxy is that holders of our ADSs cannot prevent our ordinary shares underlying ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence the management of our Company. Holders of our ordinary shares are not subject to this discretionary proxy.

Holders of ADSs may not receive distributions on our ordinary shares or any value for them if it is illegal or impractical for us to make them available.

The depositary of our ADSs pays holders of our ADSs the cash dividends or other distributions it or the custodian for our ADSs receives on our ordinary shares or other deposited securities after deducting its fees and expenses. Holders of our ADSs receive these distributions in proportion to the number of our ordinary shares their ADSs represent. However, the depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration is required for such distribution. We have no obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that holders of our ADSs may not receive the distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available. These restrictions may have a material and adverse effect on the value of the holders’ ADSs.

Holders of our ADSs may be subject to limitations on transfer of their ADSs.

ADSs, represented by American depositary receipts, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary thinks it is necessary or advisable to do so in connection with the performance of its duty under the deposit agreement, including due to any requirement of law or any government or governmental body, or under any provision of the deposit agreement. As a result, you may be unable to transfer your ADSs when you wish to do so.