ITEM 1. Business

Overview

We are a holding company incorporated in Nevada. We are engaged in a variety of energy-related businesses through our subsidiaries and controlled entities in China.

Xianning Xiangtian Energy Holding Group Co., Ltd. (“Xianning Xiangtian”), our variable interest entity, and its wholly owned subsidiary, Sanhe Xiangtian Electrical Engineering Limited Company (“Sanhe Xiangtian”), are primarily engaged in the sales of air compression equipment and heat pumps as well as the installation of compressed air energy storage power generation systems utilizing our proprietary compressed air energy storage power generation technology.

Xiangtian Zhongdian (Hubei) New Energy Co. Ltd. (“Xiangtian Zhongdian”), a majority owned subsidiary of Xianning Xiangtian, is in the business of manufacture and sales of photovoltaic solar (“PV”) panels utilizing our proprietary technology to enhance the power production capabilities of the PV panels.

Jingshan Sanhe Xiangtian New Energy Technology Co. Ltd. (“Jingshan Sanhe”), a wholly owned subsidiary of Xianning Xiangtian, mainly produces and sells high-grade synthetic fuels. Tianjin Jiabaili Petroleum Products Co., Ltd. (“Tianjin Jiabaili”), a newly acquired subsidiary of Xianning Xiangtian, is expected to produce synthetic fuels in the first quarter of 2019.

Hubei Jinli Hydraulic Co., Ltd. (“Hubei Jinli”), another newly acquired subsidiary of Xianning Xiangtian, is engaged in the manufacture and sale of hydraulic parts and electronic components.

Our products are manufactured and sold in China primarily and we are also exploring foreign markets. We benefit from the Chinese government’s incentives for the production of green energy. We operate in a number of facilities in Tianjin city, Hubei and Hebei provinces and have a distribution network of third-party distributors and sales agencies in China.

Our Business History and Background

We were originally incorporated as Goa Sweet Tours Ltd. in the State of Delaware on September 2, 2008 to provide personalized concierge tour packages to tourists who visit the State of Goa, India. On April 17, 2012, we entered into certain share purchase agreements, with Luck Sky International Investment Holdings Limited, an entity owned and controlled by Zhou Deng Rong, and certain of our former stockholders who owned, in the aggregate, 7,200,000 shares of our Common Stock (90% of the then outstanding shares). Luck Sky International Investment Holdings Limited purchased such shares for an aggregate consideration of $235,000. The sale of such shares closed on May 15, 2012. Since the day of the closing, Zhou Deng Rong had served as our Chief Executive Officer until July 29, 2014, when he was succeeded by Zhiqi Zhang.

On May 29, 2012, we changed our name to “Xiangtian (USA) Air Power Co., Ltd.” through our merger with and into a wholly owned subsidiary.

On June 26, 2013, Luck Sky Holdings Limited was incorporated as a wholly owned subsidiary of the Company under the laws of British Virgin Islands. It has no operations and has been struck off the register of companies.

Pursuant to an agreement and plan of merger, dated as of September 15, 2013, we acquired 100% of the shares of common stock of Lucksky (Hong Kong) Shares Limited, a Hong Kong corporation in exchange for the issuance of shares of our common stock. The acquisition of Lucksky (Hong Kong) Shares Limited was closed on September 20, 2013.

On May 30, 2014, the Company purchased 100% of the issued and outstanding shares of common stock of Luck Sky (Hong Kong) Aerodynamic Electricity Limited (“Xiangtian HK”) from its sole shareholder, Zhou Jian, who is also our Chairman of the Board of Director, for 10,000 Hong Kong dollars (approximately US$1,290) in cash. Xiangtian HK had a direct, wholly-owned subsidiary, Luck Sky (Shen Zhen) Aerodynamic Electricity Limited, a corporation registered under the laws of the People’s Republic of China (“Xiangtian Shenzhen”). As a result of the acquisition, Xiangtian HK became our wholly-owned subsidiary and Xiangtian Shenzhen became our indirect subsidiary.

On July 25, 2014, we, through Xiangtian Shenzhen, entered into a series of agreements known as variable interest agreements (“VIE Agreements”), pursuant to which we gained control over Sanhe Xiangtian Electrical Engineering Limited Company, a PRC limited liability company established in July 2013 (“Sanhe Xiangtian”).

In May 2016, Sanhe Xiangtian established a wholly-owned subsidiary, Xianning Xiangtian, formerly known as Xianning Sanhe Power Equipment Manufacturing Co., in Xianning in Hubei Province, to manufacture and sale of air compression equipment, heat pumps and related products.

Effective October 31, 2016, we reincorporated in Nevada as a result of our merger with and into our wholly-owned subsidiary, Xiangtian (USA) Air Power Co., Ltd., a Nevada corporation.

In March 2018, Xianning Xiangtian formed Xiangtian Zhongdian, a joint venture in China, with Nanjing Zhongdian Photovoltaic Co. Ltd. 70% equity interest of Xiangtian Zhongdian is held by Xianning Xiangtian. Xiangtian Zhongdian is in the business of manufacturing and sales of PV panels.

In April 2018, Xianning Xiangtian formed a wholly owned subsidiary, Jingshan Sanhe, which is engaged in the business of researching, manufacturing and sales of high-grade synthetic products.

In June 2018, Xianning Xiangtian acquired 100% equity interest of Tianjin Jiabaili for RMB 6.8 million (US$1.1 million) pursuant to a certain equity transfer agreement dated June 21, 2018, as amended on August 21, 2018.

In June 2018, Xianning Xiangtian acquired 100% of the capital stock of Hubei Jinli, a company engaged in the business of manufacturing and sales of hydraulic parts and electronic components in China. See “—Hubei Jinli Acquisition.”

On August 9, 2018, Xianning Xiangtian formed a wholly owned subsidiary, Xianning Xiangtian Trade Co., Ltd (“Xiangtian Trade”), to engage in the purchase and sale of chemical raw materials for purpose of providing a staple supply of raw materials for our synthetic fuel operations.

Variable Interest Entity Agreements

On July 25, 2014, Sanhe Xiangtian and Xiangtian Shenzhen and Sanhe Xiangtian’s shareholders entered into certain VIE Agreements pursuant to which Sanhe Xiangtian became Xiangtian Shenzhen’s contractually controlled affiliate. The VIE Agreements provided Xiangtian Shenzhen with all of the management, control and net profits of Sanhe Xiangtian even though Xiangtian Shenzhen did not actually own any of the equity interest in Sanhe Xiangtian, the purpose and effect of the VIE Agreements is to instill in Xiangtian Shenzhen, the Company’s indirect wholly-owned subsidiary, total management and voting control of Sanhe Xiangtian for all material purposes. The use of VIE agreements is a common structure used to acquire PRC corporations, particularly in certain industries in which foreign investment is restricted or forbidden by the PRC government.

On September 30, 2018, we terminated the VIE Agreements as part of our restructuring to facilitate the shift of business focus between entities controlled by the Company. In connection with the termination of the VIE Agreements, Sanhe Xiangtian transferred its 100% equity interest of Xianning Xiangtian to the Sanhe Xiangtian Shareholders and the Sanhe Xiangtian Shareholders transferred their 100% equity interest of Sanhe Xiangtian to Xianning Xiangtian. As a result of the foregoing equity transfers, Sanhe Xiangtian became a wholly owned subsidiary of Xianning Xiangtian.

On September 30, 2018, the Company, through Xiangtian Shenzhen and Xiangtian HK, entered into a new series of variable interest entity agreements (“New VIE Agreements”), pursuant to which Xianning Xiangtian became the Company’s new contractually controlled affiliate. The New VIE Agreements allow us to:

As a result of these contractual arrangements, we have become the primary beneficiary of Xianning Xiangtian, and we treat Xianning Xiangtian as our variable interest entity under U.S. GAAP. We will consolidate the financial results of Xianning Xiangtian in our consolidated financial statements in accordance with U.S. GAAP.  The above reorganization has no effect to the Company’s consolidated financial statements for the current period and thereafter.

The following is a summary of the New VIE Agreements:

Framework Agreement on Business Cooperation  

Pursuant to the Framework Agreement on Business Cooperation between Xiangtian Shenzhen and Xianning Xiangtian, the parties agree to enter into a series of agreements, including Agreement of Exclusive Management, Consulting and Training and Technical Service, Know-How Sub-License Agreement, Equity Pledge Agreement, Exclusive Option Agreement and Power of Attorney. Specifically, Xiangtian Shenzhen will dispatch an operative team to Xianning Xiangtian to assist with Xianning Xiangtian with its planning and managing and regular business operations. The parties agree to share the cooperation profits as set forth in the New VIE Agreements. The term of cooperation is 10 years and may be unilaterally extended by Xiangtian Shenzhen.

Agreement of Exclusive Management, Consulting and Training and Technical Service  

Pursuant to the Agreement of Exclusive Management, Consulting and Training and Technical Service between Xiangtian Shenzhen and Xianning Xiangtian, Xianning Xiangtian engages Xiangtian Shenzhen to provide consulting, training, management services and technical support exclusively for a term of 10 years, which may be unilaterally extended by Xiangtian Shenzhen. Xianning Xiangtian agrees to pay Xiangtian Shenzhen a service fee equal to one hundred percent (100%) of Xianning Xiangtian’s net income determined pursuant to the generally accepted accounting principles, payable quarterly.

Exclusive Option Agreement  

Pursuant to the Exclusive Option Agreement among Xiangtian Shenzhen, Xiangtian HK, Xianning Xiangtian and the shareholders holding an aggregate of 100% of Xianning Xiangtian’s equity interest (“Xianning Xiangtian Shareholders”), the Xianning Xiangtian Shareholders irrevocably grant Xiangtian Shenzhen and Xiangtian HK an exclusive option to purchase from them, at its discretion, to the extent permitted under the PRC law, all or part of their equity interest in Xianning Xiangtian, and the purchase price will be the lowest price permitted by applicable PRC laws. The timing, method and times of exercise of this option to purchase is within Xiangtian Shenzhen and Xiangtian HK’s sole discretion. In addition, each of the Xianning Xiangtian Shareholders agrees to waive their respective preemptive right when the other shareholder transfers the equity interest of Xianning Xiangtian to Xiangtian Shenzhen or its designated party. The Xianning Xiangtian Shareholders further agree, among other things, without prior written consent of Xiangtian Shenzhen and Xiangtian HK, not to transfer, sell or pledge their equity interest of Xianning Xiangtian. Without the prior written consent of Xiangtian Shenzhen and Xiangtian HK, Xianning Xiangtian may not amend its articles of association, change the amount and structure of its registered capital or sell any of its assets or beneficial interest.

Equity Pledge Agreement  

Pursuant to the Equity Pledge Agreement among Xiangtian Shenzhen, Xianning Xiangtian and the Xianning Xiangtian Shareholders, the Xianning Xiangtian Shareholders pledge all of their respective equity interest in Xianning Xiangtian to Xiangtian Shenzhen to guarantee the performance of Xianning Xiangtian’s obligations under the New VIE Agreements, other than this Equity Pledge Agreement. Xiangtian Shenzhen will be deemed to have created the encumbrance of first order in priority on the pledged equity interest. In the event of any breach of the VIE Agreements, other than this Equity Pledge Agreement, or failure to satisfy the guaranteed obligations, Xiangtian Shenzhen will have the right to dispose the pledge equity interest. The Xianning Xiangtian Shareholders may receive dividends or share profits only with prior consent from Xiangtian Shenzhen, and such dividends and profits will be deposited into a bank account designated by and under supervision of Xiangtian Shenzhen and to be used for repayment of any liability due to any breach of the VIE Agreements by Xianning Xiangtian or the Xianning Xiangtian Shareholders. The agreement will remain effective until the termination of the VIE Agreements, other than this Equity Pledge Agreement.

Know-How Sub-License Agreement  

Pursuant to the Know-How Sub-License Agreement between Xiangtian Shenzhen and Xianning Xiangtian, Xiangtian Shenzhen agrees to grant an exclusive and non-transferable sublicense to use the patents, patent applications and all related trade secrets and technology and improvements on photovoltaic installation and the air energy storage power generation technology but without the sublease right in the territory of China, exclusive of Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan Region for the purpose of the agreement. Xianning Xiangtian agrees to pay Xiangtian Shenzhen a quarterly royalty fee equal to five percent (5%) of Xianning Xiangtian’s gross revenue of each quarter. The shareholders of Xianning Xiangtian shall pledge all of their equity interest of Xianning Xiangtian as collateral for the royalty fee payable under this agreement. The agreement will remain effective throughout the entire duration of the operation of Xianning Xiangtian, unless terminated by Xiangtian Shenzhen with a 30-day prior written notice. 

Power of Attorney  

Pursuant to the Powers of Attorney executed by the Xianning Xiangtian Shareholders, each of the shareholders irrevocably appoints Xiangtian Shenzhen as his attorney-in-fact to exercise any and all rights as a shareholder of Xianning Xiangtian, including, but not limited to, the right to attend shareholders’ meetings, to execute shareholders’ resolutions, to sell, assign, transfer or pledge any or all of his equity interest of Xianning Xiangtian, to vote as a shareholder for all matters, as well as full power to execute equity transfer agreement as referenced in the Exclusive Option Agreement and to perform under the Exclusive Option Agreement and Equity Pledge Agreement without limitation. Xiangtian Shenzhen is also authorized to transfer, allocate or use any cash dividends and non-cash income in accordance with the respective shareholder’s instructions and to exercise all the necessary rights associated with the equity interest at Xiangtian Shenzhen’s sole discretion and without the consent of the Xianning Xiangtian Shareholders. The Powers of Attorney will remain effective as long as the Xianning Xiangtian Shareholders remain the shareholders of Xianning Xiangtian.

Spousal Consent Letters  

Pursuant to the Spousal Consent Letters, each of the spouses of the Xianning Xiang Shareholders unconditionally and irrevocably agrees to the execution of the Equity Pledge Agreement, Exclusive Option Agreement and Power of Attorney entered by her spouse and the disposal of equity interest of Xianning Xiangtian held by her spouse. Each of the spouses also agree that she will not assert any rights over the equity interest in Xianning Xiangtian held by and registered in the name of her respective spouse. The Xianning Xiangtian Shareholders’ actions to perform, amend or termination the above-mentioned agreements do not need their spouses’ authorization or consent. In addition, in the event that any of the spouses obtains any equity interest in Xianning Xiangtian held by her respective spouse for any reason, such spouse agrees to enter into similar contractual arrangements.

Because of the common control among us, Xiangtian Shenzhen and Xianning Xiangtian, for accounting purposes, the execution of the New VIE Agreements has been treated as a combination between entities under common control with no adjustment to the historical basis of their assets and liabilities.

Hubei Jinli Acquisition

Hubei Jinli is a company engaged in the business of (1) manufacturing and sales of hydraulic parts; (2) processing and sales of non-ferrous metal; (3) sales of electronic components; and (4) information technology consulting services regarding hydraulic parts. The Company intends to (1) upgrade Hubei Jinli’s present equipment and machinery to increase efficiency and otherwise improve its production capacities and (2) start a new production line to manufacture a new hydraulic hybrid system that will facilitate the production of vehicles that combine electrical and hydraulic technologies.

On June 21, 2018, Xianning Xiangtian entered into a share purchase agreement, as amended (“Share Purchase Agreement”) with Sheng Zhou and Heping Zhang (collectively, the “Sellers”) to acquire 100% of the capital stock of Hubei Jinli. Pursuant to the Share Purchase Agreement, the aggregate consideration for the acquisition is RMB 150 million (approximately US$23.18 million), consisting of the following: (a) RMB 40 million (approximately US$5.8 million) in cash (the “One-Time Cash Portion”); and (b) cash payments in the aggregate amount of RMB 80.07 million in three installments (the first installment of RMB 25 million (approximately US$3.6 million) payable before June 20, 2019, the second installment of RMB 25 million (approximately US$3.95 million) payable before June 20, 2020, and the last installment of RMB 30.07 million (approximately US$4.4 million) payable before June 20, 2021); and (c) an assumption by Xianning Xiangtian of Hubei Jinli’s existing bank loan from Hubei Xianning Rural Commercial Bank in the principal amount of RMB 29.93 million (approximately US$4.63 million). Should Hubei Jinli’s annual net profit (the “Net Profit”) exceed RMB 10 million (approximately US$1.55 million) during the one-year period from June 21, 2018 to June 20, 2019, Xianning Xiangtian will pay the Sellers 20% of the Net Profit and if the Net Profit reaches RMB 5 million (approximately US$772,654), but less than RMB 10 million (approximately US$1.55 million), Xianning Xiangtian will pay the Sellers 10% of the Net Profit. The acquisition consummated on June 30, 2018.  

Tianjin Jiabaili Acquisition

Tianjin Jiabaili was formed on April 10, 2007 and owns one patent on ether fuel, its preparation method in China and has obtained all the permits to produce ether fuel. On June 21, 2018, Xianning Xiangtian entered into a share purchase agreement with Wenhe Han and Guifen Wang, as amended, to acquire 100% equity interest of Tianjin Jiabaili for RMB 6.8 million (US$1 million). Pursuant to the agreement, as the lead engineer and key personnel, Wenhe Han is entitled to 10% of annual net profits of Tianjin Jiabaili without any time limitation. On June 30, 2018, the parties consummated the acquisition.

Our Corporate Structure

All of our business operations are conducted through our subsidiaries, controlled affiliate and its subsidiaries. The chart below presents our corporate structure as of the date of this report:

Industry Background

According to the National Energy Administration, consumption of electricity in China has grown from 5.92 trillion kilowatt-hour (“kWh”) in 2016 to 6.31 trillion kWh in 2017, with consumption in 2017 representing a 6.6 percent increase over 2016. According to China Renewable Energy Outlook 2017 published by China National Renewable energy Centre, in 2016, China’s installed wind and solar PV power generating capacity reached 149 million kWh and 77.42 million kWh, respectively, with their annual energy output accounting for 4.0% and 1.1%, respectively, of the country’s total energy output.

China has started the transformation from a coal-based energy system with high environment costs to a low-carbon and environment-friendly energy system. The heavy reliance on coal is cut and replaced with non-fossil energy sources. According to China Renewable Energy Outlook 2017, non-fossil energy will take up 63% of the energy supply in 2050 in China. In the power sector, renewable energy has a share of 26% of electricity production in 2016, and non-fossil fuel accounted for 29.5%. Coal was used for 67% of the power generation with natural gas covering the remaining 3% of the generation. The total primary energy consumption in China was about 4,360 metric ton of coal equivalent in 2016, 65% of which came from coal, 21% from oil and 6% from natural gas. Among all the energy consumed in 2016 in China, 8% was non-fossil energy and 11% was renewable energy.

We are a pioneer in the field of compressed air energy storage in China. The only competitor in China that we are aware of is a pilot project established in Wuhu city in November 2014 by the Chinese Academy of Science, an academic and research institute.

We are producing electricity generation systems that combine our compressed air storage technology with PV panels to achieve a continuous supply of power, especially under weather conditions that are unfavorable to the generation of electricity from PV panels alone. We chose to initially utilize PV panels to produce the raw power because China has abundant solar energy resources. Many areas of China have long durations of sunshine; and China has vast vacant spaces that are available for the installation of solar energy systems.

The installation of PV systems is developing quickly in China as is the installed PV capacity. China had only one gigawatt (“GW”) of PV installations in 2010. In 2017, the cumulative installed PV capacity reached 130.25 GW compared to 77.42 GW in 2016. According to China’s 13th Five-Year Plan (published in 2015), the Chinese government desires to add 65 GW of PV during the 2016 – 2020 period.

The Chinese solar market has grown rapidly, driven by a favorable policy environment intended to meet a greater portion of the country’s growing energy needs from cleaner sources, while also driving demand for domestic solar panel manufacturers. In July 2013, the State Council of China published the Opinion on Promoting the Healthy Development of PV Industry (the “Opinion”) which initiated establishment of the PV systems ON the national level. In addition to setting targets for the increase in installed PV systems, grid-connection, power acquisition, subsidy, and land policies were further detailed in the Opinion. The Opinion standardized the tax benefit and feed-in tariff for the PV industry on a national level and it also set the target of promoting distributed PV (“DPV”) system. The feed in tariffs for large-scale ground mounted power plants are between RMB 0.9 (US$0.14) and RMB 1 (US$0.16) per kWh of energy generated, based on the radiation levels at the location of the plant. Distribution projects get a payment of between RMB 0.62 (US$0.10) to RMB 0.78 yuan (US$0.12) per kWh. These subsidies will be valid for the next 20 years and will benefit project developers such as ourselves, since the subsidies protect the rate of return on PV projects. In October 2013, China adopted a tax benefit policy which allows a refund of 50% value-added tax for selling the solar photovoltaic power products. China also provides other incentives, including free grid connectivity for small and medium-scale distributed PV solar power producers.

The promotion of the DPV module is encouraging the manufacture and installation of PV in China. The government started to promote the distributed PV model in the proposal of the Opinion in 2012. The DPV systems are smaller PV system installed on the rooftop of building. This system generally can provide the sufficient energy for the building where it is located. On the national level, the national government allows the DPV system to be connected to the State Grid. In this case, the DPV owner can either use the electricity or sell the electricity to the State Grid with feed-in tariff.

The solar panel industry in China is competitive, with around 20 to 30 companies providing installation services and 50 manufacturers. In 2018, 8 of the 10 largest PV panel manufacturers in the world were located in China. However, we believe that we are the only company to offer an electrical generation system that combines compressed air energy storage power generation technology.

Since 2016, China’s air-source heat pump industry has grown significantly. According to the 2017 China’s Air-Source Heat Pump Industry Development Report by hp.hvacrhome.com, a heat pump industry information website, the market sales of air-source heat pump products in 2017 exceeded RMB 160 billion (US$23.5 billion), and the annual growth rate of the industry is 61.0%. The air-source heat pump heating equipment particularly is experiencing growth from the “coal to electricity” project initiated by the Chinese government in northern rural provinces. The air-source heat pump water heater had market sales of RMB 100 billion (US$14.7 billion) for 1.281 million units, which accounted for an 11.9% of market share of the air-source heat pump water heater sales volume, but only 2.3% by number of units sold.

The global methanol market is expected grow at a significant rate during the forecast period, driven mainly by the increasing use of methanol (in the form of fuel and antifreeze agent) in the automotive industry. The methanol industry has experienced an explosive growth, primarily in China and the United States. Methanol is used directly as an affordable transportation fuel for automobile engines due to its efficient combustion, ease of distribution, and easy availability. It can be blended with gasoline to generate a fuel that is efficient and can boost octane number with lower emissions when compared to conventional gasoline. Methanol gasoline blends have widespread use in China and have been introduced in several countries outside of China as well. Asia-Pacific is the leading and fastest growing market for methanol, in terms of value and volume, and this trend is expected to continue till 2023. China is the largest and fastest growing market in the region. The demand for methanol is highly dependent on the increasing production of feedstock and growth in methanol production in China. Furthermore, rapid research and development in the use of methanol as an alternative fuel for vehicles is also paving the way for the growth of its market in the region.

Our Competitive Advantages

Green Energy Products

Our current strong market position and potential future growth of green energy products can be attributed to the following key factors and competitive strengths:

Hydraulic Parts and Electronic Components

We have built long-term relationships with our customers and established good reputation among the industry.

Air Compression Technology

We believe that we possess the following competitive advantages that allow us to maintain our strong market position with respect to our air compression technology:

Environmental Protection:  We believe that if alternative energy sources cannot be fully utilized, including instances when the electricity they produce cannot be economically stored or the source is unstable, then some productive capacity will be wasted. We utilize compressed air energy storage equipment in conjunction with the power generation system of alternative energy sources to produce electricity, which is a novel approach and provides customers with an advanced power generation capability with no carbon or toxic emissions. When power generated by the alternate energy sources, such as solar energy or wind energy, becomes unstable or fluctuates, the compressed air power generation system can start functioning and ensure a stable power supply and better utilize the productive capacity of the alternate energy source. Our compressed air energy storage power generation technology provides a new and unique method for alternative energy source power generation.

Flexibility:  Our compressed air technology can be used with any other power sources. We can use solar energy, wind energy, geothermal energy, tidal energy, water energy and all the available natural energy as a raw power in conjunction with our compressed air energy storage technology. The collected mechanical energy from the raw power source is converted into compressed air and is then converted and released into direct current power. Through our ultra-wide voltage and high-performance power inverter, we produce an output of stable power in compliance with the Chinese national interconnection standards. In addition, our high-grade synthetic fuel products can be mixed into gasoline or diesel reducing exhaust emissions of carbon monoxide—a regulated pollutant lined to smog, acid rain, global warming and other environmental problems.

Enhancement of Use of PV Panels and other Energy Sources:  The use of the compressed air energy storage technology helps overcome structural limitations of the use of PV panels and providing power to the State Grid. The use of PV panels is limited by the capacity of the State Grid, which limits the amount of energy that can be purchased from the PV industry and other sources of alternate energy that lack the capacity to efficiently store electricity but produce more power that can be used when generated. The expansion of the capacity of the PV industry could be constrained by the inability of the power grid to purchase the additional energy and the compressed air energy storage technology allows the energy to be stored until the electricity can be sold to the State Grid when PV panels are not producing electricity, such as when there is insufficient sunshine.

Patent Protection:  Sanhe Xiangtian obtained a Chinese patent in August 2014 for utility module regarding photovoltaic power generation system. In addition, the patents, patent applications and related know-how and trade secrets are subject to an exclusive license for worldwide use to Xiangtian Shenzhen, our indirect wholly-owned subsidiary.

Government Incentives:  The development of alternative sources of energy to reduce the amount of pollution in China caused by burning fossil fuels, particularly the use of coal to generate electric power, is a priority of the Chinese government. The Chinese government offers tax and rebate incentives for the construction of PV production facilities and has become stricter regarding the construction of power plants that rely on coal.

Technical Advantage Compared to Conventional Battery Technologies:  The use of conventional batteries to store excess electricity produced by solar power or other alternative energy sources is less attractive than the compressed air energy storage power generation technology. The most important disadvantages to standard batteries are that industrial batteries lose their capacity to store electricity over time, and also present environmental risks with respect to their production and disposal. Tank storage technology is estimated to have a 30 year lifespan and the steel can be recycled.

Technical Advantage Compared to Conventional Solar Panels and Inverter/Converters:  Our patented technologies increase the efficiency of PV panels to generate direct current (“DC”) by enhancing their ability to operate at levels of lower sunlight and also increase the efficiency of the inverter/converter that converts the DC to alternating current (“AC”) by operating at a wider range of DC than conventional inverter/converters. One licensed patent applies to the array of the PV panels.

Technical Advantage Compared to Conventional Grid-Connected Photovoltaic Power Generation:  We adopted smart micro-grid technology which increases the efficiency of the power generation of the PV systems and significantly reduced the project costs of power plants. The micro-grid technology also helps us improve the flexibility of PV systems, realize real zero emission of our power plant, improve reliability and help restore power more quickly when the macro-grid is down.

Reduced Electrical Costs:  Customers who generate electricity using alternate energy systems that are intermittent or subject to periods of low production need to be linked to the State Grid to meet their power requirements. Our compressed air energy storage power generation system allows consumers to limit or eliminate their reliance on the State Grid by producing power during periods of peak pricing by the State Grid and storing the surplus energy produced by their alternate energy systems when prices charged by the State Grid are less expensive.

Scalability:  The compressed air energy storage power generation system in conjunction with a PV panel installation is easily expanded thru the addition of additional solar panels, more storage tanks and/or bigger generators and engines.

Strong Design Ability:  The extensive experience and specialty in prior large projects by our design and engineering team helps the Company design our heat pump products with more efficiency and stability.

Our Growth Strategy

We believe demand for electricity and solar energy production will continue to grow domestically and globally, thus affording us opportunity to grow and expand our business operations.

We intend to pursue the following strategies:

Products

Air Compression Power Generation System

Our air compression power generation systems are combined with a PV installation that is custom-designed for industrial users such as factories and power plants. We also offer PV systems without the air compression generation technology based on certain technological innovations that we believe increase the efficiency of our PV systems compared to those of competitors.

The air compression power generation systems can be used with multiple forms of natural energy production, including solar, wind, biomass, geothermal and tidal and the selection of the appropriate natural source depends on their relative availability at the customer’s location. Although use of any of these natural energy sources is feasible, we have initially focused on linking our air compression technology to PV installations. The installation of the solar power systems generally requires the lowest investment and shortest building time, in part because the area for building the facility is flexible as solar installations can be used anywhere outdoors and not taking up customer’s room. Wind power is not stable as the turbines may be inoperable at low or high winds. Nuclear and hydropower facilities are only feasible for producing power for the State Grid and are not feasible for factories and homes.

1.  Basic PV Installation.  Conventional PV power generation technology is designed based upon the assumption that the minimum sun exposure would be 200W and the range of maximum power point tracking is from DC480v to DC580v. When sun exposure is reduced and voltage drops below the DC480v, the problem with the conventional system is that it stops working; and the residual power in the photovoltaic panels that are generated under the lower light exposure cannot be utilized. The Company’s new intelligent photovoltaic technology improves power generation and shortens investment recovery time. The PV system uses a variable PV array technology and wide voltage intelligent inverter device developed by the Company. Customers can produce an additional 15% - 30% electricity each year as the system can operate in lower light environments than conventional PV technology.

We sell the PV installation that includes the solar panels installation and solar energy generation converter equipment with proprietary technology without the air compression for customers who do not need to store energy. The conversion advantage provides a higher capacity that allows the solar array to be used more effectively.

2.  Compressed Air Energy Storage Technology.  The power consumption rate of PV systems interconnected into the State Grid varies greatly and the active energy cannot be fully consumed, which causes significant energy waste. Generally, systems interconnected to the State Grid consume only 70% of the produced power and enterprises not connected to the State Grid consume only 60% - 70% of the produced power, and the residual power is wasted. Utilizing our compressed air energy storage system with photovoltaic power generation system improves the efficiency of power generation and reduces the waste of residual power.

Our air compression energy storage generation technology is also designed for customers whose alternative energy source provides intermittent or unstable power. The systems are sold in conjunction with a PV installation. A portion of the electricity produced by the PV panels is used to compress air into the cylinders, which effectively store the energy until it is released. The system includes compression equipment, storage tanks and a modified engine that is linked to a generator. The surplus power generated by the air compression technology may either be used by the customer in its operations or sold to the State Grid.

The following chart illustrates an air compression power generation system that is linked with a PV installation, although the compression system can be linked to other alternative energy sources, such as wind farms, biomass, tidal or geothermal.

Air Source Heat Pump System

In 2017 we developed an Air Source Heat Pump System (the “ASHP”), a system which transfers heat from outside to inside of a building, or vice versa. Under the principles of vapor compression refrigeration, an ASHP uses a refrigerant system involving a compressor and a condenser to absorb heat at one place and release it at another. The ASHP efficiently converts electrical energy into heat energy and can be used as a space heater or cooler. Our ASHP meets the national standard and technical requirements, and has obtained a series of certifications from the China Quality Certification Center and the Beijing East Allreach Certification Center Co. Ltd.

Sales of the ASHP commenced in September 2017 after receipt of the latest certification. We are selling the ASHP through third-party distributors and through employees for direct sales. We use a third party to manufacture the products.

As the Chinese central government is emphasizing sustainable development, and enhancing environmental remediation, local governments are also seeking to replace the traditional coal-fired heating with clean energy heating. We believe that a large potential market exists for the ASHP.

PV Panels

We manufacture three models of PV panels in standard sizes at our factory in Xianning city, Hubei province, China.

Electricity Generation Process

Photovoltaic power generation is greatly affected by the amount of sunlight the PV system receives. The changes in the intensity of sunlight affect the power generation, which causes direct current to fluctuate. Therefore, actions to offset the fluctuation are essential. When fluctuation or disruption in photovoltaic power occurs, or during the night or when power in the storage system is exhausted, the power supply must be converted to a voltage transformer. However, based upon the current power supply equipment in power plants, energy cannot be instantly converted on a per megawatt basis. Therefore, frequent conversions are needed, which might obstruct system security and power production. Our design of the AC/DC non-contact converter rectifier can resolve this issue at a low cost. If DC power is below DC430v, DC offset is automatically incorporated into the electricity network and the transformer photovoltaic power will be shared with the power supply. The inverter won’t lose electricity and the entire system will not fluctuate or have the power shut off.

The system offers double power selection by utilizing a backup switch to ensure that the power supply does not stop. Should the generation of the solar power become unstable or intermittent, the system switches to operate using the air compression generation technology or, if available, to rely on the State Grid.

A. Compressor – fills storage tanks with air.

B. Plasma Heater – heats air being stored into tanks to a temperature of 300 to 400 degrees Fahrenheit to increase the amount of stored energy.

C. Storage Tanks – stores compressed air. Our storage tanks are built with carbon steel to withstand higher pressures. Each one megawatt of generated electricity requires 2 tanks, each with an average capacity of 30 m ³ of compressed air. The standard tank is 50 meters long and 1.5 meters in diameter. The energy capacity per tank is dependent on the temperature and pressure of the air and the capacity of the e cylinder. The quality of the storage tanks is based on International Organization for Standardization (“ISO”) standards.

D. Air Engine – We utilize our patented technology to modify diesel engines purchased from outside vendors to enable the engine to operate on compressed air. A pressure regulator within the air engine turns the generator on. Unlike a conventional combustion engine that explodes fossil fuel to create energy, the compressed air engine utilizes the heat and compression of the air to release energy.

E. Generator – Our proprietary generator utilizes patented and other proprietary technology was developed in 2012 for our air compression storage generation system. The device affords stability by maintaining a consistent supply despite changes in the air pressure that may cause inefficiency in the engine (for example, a piston misfiring). Our tests indicated that the generator is more efficient than the industry standard in maintaining a stable flow of voltage.

The air compression technology is used to produce electricity primarily at night or at other times when the electricity produced by the PV panels is intermittent or unstable. At such times, the compressed air is sent first from the storage tanks to the thermal heater, then to the engine. The engine then spins a flywheel attached to the generator.

We have achieved significant improvement through research and testing on the air compression power generation system. We developed enhanced air compression (liquid power) generation system based on the original models. The primary mechanism is to utilize the compressed air as a power source and the green biodegradable medium of oil as a power transmitter to support the engine running and generating power. The tested output comprehensive conversion efficiency reached 46%-65%. The research improved the conversion efficiency of our air power generation system, laying the foundation for mass industrialization and commercial marketization.

In order to obtain government approval of the commercialization of our air compression energy storage products, we have submitted three enterprise standards, namely, air compression (liquid power) power generation system, air compression (liquid power) power generation unit and air compression radial engine. We are establishing an enterprise standard because these products have no ISO or other qualifying standard for the industry. The certification is therefore based on our design specifications.

We hope that future air power compressed products in this field will follow and adhere to our standards, which we anticipate will become the industrial standards and national standards. We expect that if we set the industry and national standards, our market competitiveness will be enhanced. The declaration we submitted for these three standards is being reviewed by the Provincial Industrial and Information Department of the Sanhe Technical Service Bureau.

Synthetic Fuel and Related Products

Fuel Additives

We develop, produce and sell fuel additives that are blended in gasoline to extend supplies and reduce emissions. Green Energy No.1 and Green Energy No. 2 are two fuel additives we developed are to be blended in gasoline and diesel, respectively, to generate a fuel that is efficient and can boost octane number with lower emissions. Their major component is methanol. The patents for these two products are pending in China. 4 production lines in Jingshan facility are designed for the manufacturing of Green Energy No. 1. The Company has not start to manufacture Green Energy No.2 since we are looking for a factory with certificates and legal document the government requires for manufacturing chemical products.

Engine Lubricant

Green Energy No. 3 is an engine lubricant to reduce friction and wear on moving parts and to clean the engine from sludge. Compared to the traditional chemical lubricant and nanoscale lubricant, Green Energy No. 3 contains rare metals and biodegradable elements, which creates a protection layer for the engine, maximizes the burning rate of the fuels and repairs the scratches from frictions.

Methanol Fuel

Green Energy No. 4 is an alternative fuel based on methanol. It can replace the existing coal, natural gas and compressed natural gas and provide its customers a more economical and safer alternative choice. We plan to produce Green Energy No. 4 in Tianjin Jiabaili in the upcoming fiscal year. This product is designed and aimed to target the rural market in China, mainly in the restaurant cooking application and other similar applications. The main raw material is methanol which is abundant in the market place. Green Energy No. 4 will be sold through our existing sales network of dealers and distributors throughout China.

Hydraulic Parts

Our hydraulic parts line of products mainly includes hydraulic cylinders, diesel pumps, motor oil pumps and hydraulic valves. We also design and manufacture hydraulic pump stations, cylinders and high-pressure valves of various specifications according to customer requirements. Operation lines are mainly consisted of various computer numeric control machines and other fabrication equipment.

The main raw materials for our hydraulic products include aluminum alloy, steel, natural rubber, silicone rubber, nitrile rubber and other materials which are readily available on the market.

Projects

We assist our clients to install air compression power generation systems combined with a PV installation that is custom-designed for industrial users such as factories and power plants. We also offer PV systems without the air compression generation technology.

As of the date of this report, we had a cumulative total of 17 projects, of which 16 are completed and 1 is in process.

The table below summarizes our projects as of the date of this report:

Marketing

We market our products through third-party distributors in 24 provinces in China and through employees for direct sales. The distributors sell our products and receive commissions based on the value of the contracts. We utilize three classes of distributors based on the size of their territory – province, city and town. The distributors target factories and power plants, as well as local governments which may encourage local industry to utilize alternate energy sources. Our marketing focus is on:

Manufacturing

We produce and assemble our PV installations and air energy compression generation systems at our factory in Xianning city, Hubei province, China. We produce many components, including the brackets and supports for the PV panels, an ultra-wideband voltage power inverter and converter, parts to modify the engines to operate using air compression, low-speed aerodynamic generators, and isothermal air compressor and thermal heaters. Other parts, such as solar panels, power cords, engines, carbon fiber tanks and generators and compressors are purchased from third parties and used to assemble our systems.

Our factory in Xianning has a production facility of 7,500 square meters for our core-technology air compression equipment that can supply solar energy systems. We produce the engine generators, related components, and the PV panels. The factory has a total capacity of up to 7 megawatts each month, based on one eight-hour shift working six days per week. Capacity can readily be expanded by adding additional shifts or building up to three more production lines at our facility.

Xianning Xiangtian completed its advanced production line with an annual capacity of 200 megawatts of PV panels in September 2017. We engage one factory to assemble a series of our heat pump products under our name. All of our heat pump products have been certified by China Quality Certification Center.

Hubei Jinli has a production facility of 6,800 square meters for the manufacture of hydraulic parts and electronic components.

Our Tianjin Jiabaili production facility is licensed to produce methanol gasoline, methanol diesel and other fuel products. It is located in Jixian District of Tianjin City. As per our development plan, this facility will start the equipment installation by November 2018. Productions in this facility are expected to commence in 2019.

Jingshan Sanhe has four production lines on an 11,000-square-meters facility and capacities to complete manufacturing, labelling and packaging. It is the main facility for our Green Energy No. 1 products. In addition, this facility also serves the purposes of research and sales with an office space of 3,400 square meters.

Suppliers

We are not heavily dependent on any single supplier for any important product. We purchase our solar panels from six suppliers, engines from one supplier, and carbon fiber storage tanks from two suppliers. We believe that many suitable alternate producers of these products are available should we need an alternate supplier. We also purchase electrical components to the inverter/converters, generators, compressors and control panels that we manufacture and believe that alternate suppliers of such components are also readily available.

We purchase our heat pumps from a single manufacturer but believe that an alternative supplier could be used should the need arise.

We purchase the raw material for high-grade synthetic fuel products from three suppliers. We also incorporated Xiangtian Trade to buy chemical raw material that provide a stable supply for synthetic fuel product operation.

We purchase the raw materials for our hydraulic parts and electronic components from five suppliers.

Intellectual Property

Trademarks

We have registered in the PRC four trademarks which we use on our products sold in China.

Patents  

Sanhe Xiangtian obtained a patent in August 2014 for utility module regarding photovoltaic power generation system. It was also granted a patent from the PRC National Intellectual Property Administration on biodiesel esterification heterogeneous catalyst and preparation method in 2018.

On July 25, 2014, Xiangtian Shenzhen, our Chinese subsidiary, obtained an exclusive, worldwide, royalty-free license from Zhou Deng Rong and Zhou Jian and a second exclusive, worldwide royalty free license from LuckSky Group to 48 Chinese patents and 13 patent applications and trade secrets, including the technology underlying the patent applications for power stations, commercial buildings and residences in China, but not for other uses, including wind towers, vehicles and trains (the “Technology”). The Technology represents all of licensors’ patents with respect to PV power generation installations, the air energy storage power generation technology and trade secrets. Effective as of July 31, 2015, Beijing XiangTian Huachuang Aerodynamic Force Technology Research Institute Company (“XiangTian Huachuang”) granted Xiangtian Shenzhen an exclusive worldwide license to four foreign patents related to air energy storage power generation technology. XiangTian Huachuang obtained three patents in Japan and one patent in Australia in March 2015. XiangTian Huachuang is owned 30% by Zhou Jian and 70% by Zhou Deng Rong.

Xiangtian Shenzhen granted an exclusive sub-license to the use and exploitation of the Technology in China to Sanhe Xiangtian in July 2014, which sub-license provides for a licensing fee of five percent of Sanhe Xiangtian’s revenues. On September 30, 2018, Xiangtian Shenzhen terminated the exclusive sub-license to the use and exploitation of the Technology in China to Sanhe Xiangtian and granted Xianning Xiangtian an exclusive and non-transferable sub-license to use and exploitation of the Technology but without the sublease right in the territory of China, exclusive of Hong Kong, Macao and Taiwan for the purpose of the agreement. Xianning Xiangtian agreed to pay Xiangtian Shenzhen a quarterly royalty fee equal to five percent (5%) of Xianning Xiangtian’s gross revenue of each quarter.

Tianjin Jiabaili also owns a patent on ether fuel, its preparation method in China. In addition, patent applications for our gasoline and diesel synthetic fuels have been filed with the PRC National Intellectual Property Administration.

Hubei Jinli is owner of 10 patents in the PRC on hydraulic related devices or components.

We take reasonable steps to protect our proprietary information and trade secrets, such as limiting disclosure of proprietary plans, methods and other similar information on a need-to-know basis and requiring employees with access to our proprietary technology to enter into confidentiality arrangements. We believe that our proprietary technology and trade secrets are adequately protected.

Research and Development

Our Technology was originally developed principally by Zhou Deng Rong. Sanhe Xiangtian obtained the legal right to use and develop the Technology through the Agreement on Know-How Sub-License executed on July 25, 2014 with Xiangtian Shenzhen, and Xiangtian Shenzhen was granted a license to use and sublease the Technology through licensing agreements with Zhou Deng Rong, Zhou Jian, and LuckSky Group, owners of the Technology. Sanhe Xiangtian’s right to use and develop the Technology was terminated on September 30, 2018. Xianning Xiangtian then obtained the legal right to use and develop the Technology through the Agreement on Know-How Sub-License executed on September 30, 2018 with Xiangtian Shenzhen.

As of July 31, 2018, and July 31, 2017, our research and development department had 1 and 5 employees, respectively. The Company is focusing on the development of its project installation team and sales promotion team.

We have established cooperative relationships with individuals affiliated with Chendu Institute of Petrochemical Technology to assist us on researching and developing our synthetic fuel products.

Warranty

We provide a five-year limited warranty on all models of compressed air energy generators produced by us, and on the parts, we manufacture, such as the inverter/converter and plasma heater. Components that we purchase from third party suppliers, such as the PV panels, storage tanks and the unmodified portions of the engines, are governed by the suppliers’ warranties.

We provide limited warranties on hydraulic parts and electronic components.

Competition

The Company’s business operates in highly competitive markets and industries. These competitors and the degree of competition vary widely by product lines, end markets, geographic scope and/or geographic locations. Although each of the Company’s segments has numerous competitors, given the Company’s market and product breadth, no single competitor competes with the Company with respect to all products manufactured and sold by the Company.

We compete against larger, better capitalized and better known competitors that have become, or are becoming, vertically integrated in the PV industry value chain, from module manufacturing to PV system sales and installation, such as Yingli Green Energy, one of the largest vertically integrated PV module suppliers in the world. In 2017, 8 of the 10 largest PV panel manufacturers in the world were located in China. The ability of the vertically integrated competitors to produce modules and sometimes also be polysilicon manufacturers gives them a cost advantage with respect to the price of PV modules, which we purchase, and which could erode our competitive advantage resulting from our PV installation and air compression technologies. Furthermore, we face competition from conventional energy and non-solar renewable energy providers.

With respect to large integrated PV system projects, we compete primarily in terms of price, design and construction experience, aesthetics and conversion efficiency. We face competition from other providers of renewable energy solutions, including developers of PV, solar thermal and concentrated solar power systems, and developers of other forms of renewable energy projects, including wind, hydropower, geothermal, biomass, and tidal. We also face competition from other engineering and construction contractor (“EPC”) and joint venture type arrangements between EPC companies and solar companies. While the decline in PV modules prices over the last several years has increased demand in solar electricity worldwide, competition at the systems level can be intense, thereby exerting downward pressure on systems level profit margins industry-wide, to the extent competitors are willing and able to bid aggressively low prices for new projects and power purchase agreements (“PPAs”), using low cost assumptions for modules, components, installation, maintenance and other costs. We face intense competition in the PV system markets and our PV and compressed air energy generation systems compete with different solar energy systems as well as other renewable energy sources in the alternative energy market.

Stimulated by the policy promotion initiated by the Chinese government in 2017, the output value of air source heat pump heating (including household and commercial) reached RMB 9.04 billion (US $1.33 billion), accounting for 52.4% of the industry, and began to occupy the largest share according to 2018 industry report by China Energy Conservation Association. Midea, Gree, A.O. Smith, and Haier were the top four brands who sold the most air-source heat pumps as they are major household appliances brands in China. We expect more companies to enter the market which will increase competition.

Although air power technologies are being researched and developed in some countries, such as China, Italy, Germany, the United States, and France, air compression energy storage products in China have not been commercialized significantly. However, there are a few companies in China, such as Jontia Energy Investment Group, who are developing the relevant products.

The sale of our air compression products is also affected by the cost of producing electricity from PV panels operating alone and other sources. The purchase and installation of our air compression technology requires the customer to incur substantial up from costs and the relative inexpensive electricity produced from ample supplies of PV panels in China have inhibited demand for the air compression systems that supplement production of electricity by PV panels.

With respect to our synthetic fuel business and Green Energy products, we compete with large state-owned enterprises and well-established oil companies, which have offered a wider range of oil products and have greater name recognition. They may have greater customer loyalty bases and these competitors may be able to respond more quickly to new or changing opportunities. Our competitors have substantially greater resources, experience in product commercialization, and obtaining regulatory approvals for their products, operating experience, research and development, marketing capabilities, and manufacturing capabilities that we do. We will face competition from companies marketing existing products or developing new products in synthetic fuel industry. In addition, our competitors may be able to undertake more extensive promotional activities, and adopt more aggressive advertising campaigns than what we are able to provide to Green Energy products at the present. Further, the synthetic fuel industry also compete with other forms of energy available to customers, primarily based on price. These alternate forms of energy include electricity, coal, natural gas and bio-fuels.

Principal methods of competition in both hydraulic parts and electronic components are technology, innovation, price, geographic coverage, service and product performance. The Company participates in a number of highly competitive markets in this industry. The Company believes its hydraulic part and electronic component product have achieved unique positions in their markets; however, we encounter competition in varying degrees in all product groups and for each product line.

Environmental Matters

We have installed various types of anti-pollution equipment in our facilities to reduce, treat, and where feasible, recycle the wastes generated in our manufacturing process. We contain and treat waste water generated in our production process. The other major environmental contaminant we generate is gaseous waste. We treat such gas in our special facilities to reduce the contaminant level to below the applicable environmental protection standard before discharging the gas into the atmosphere. Our operations are subject to regulation and periodic monitoring by local environmental protection authorities. The Chinese national and local environmental laws and regulations impose fees for the discharge of waste substances above prescribed levels, impose fines for serious violations and provide that the Chinese national and local governments may at their own discretion close or suspend the operation of any facility that fails to comply with orders requiring it to cease or remedy operations causing environmental damage.

In May 2014, as required by PRC law, we obtained the Environmental Assessment Report on Construction Projects for the manufacturing space that we lease from Dong Yi Glass Machine Company Limited, which is used as our second factory and offices. This report was issued by an independent qualified evaluation company with a conclusion that the operations conducted by Sanhe Xiangtian comply with relevant environmental laws in China, which would not cause detrimental environmental impacts. However, since our primary manufacturing and office space leased from LuckSky Group in Sanhe City has a zoning restriction that only permits agricultural use, we moved the manufacturing factory to Xianning, Hubei and the Sanhe Xiangtian facility will be used for product sales.

Facilities in Jingshan Sanhe and Tianjin Jiabaili have passed the governmental testing and safety production license and hazardous chemicals registration certificate have been obtained.

No penalties have been imposed on us, our subsidiaries or controlled entities, and we are in the process of obtaining necessary environmental permits for our production facilities. We are not aware of any pending or threatened environmental investigation proceeding or action by any governmental agency or third party.

Insurance

We maintain property and casualty insurance, product liability insurance and equipment and operation line insurance.

PRC Governmental Regulations

This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China. Other regulations and requirements, such as those relating to foreign currency exchange, dividend distribution, regulation of foreign exchange in certain onshore and offshore transactions, and regulations of overseas listings, may affect our shareholders’ right to receive dividends and other distributions from us.

Renewable Energy Law and Other Government Directives

In February 2005, China enacted its Renewable Energy Law, which became effective on January 1, 2006 (the “2006 Renewable Energy Law”). The 2006 Renewable Energy Law sets forth the national policy to encourage and support the use of solar and other renewable energy and the use of on-grid generation. On December 26, 2009, the Standing Committee of the National People’s Congress adopted an amendment to the 2006 Renewable Energy Law (the “Amended Renewable Energy Law”), which became effective on April 1, 2010. While the 2006 Renewable Energy Law has laid the legal foundation for developing renewable energy in China, the Amended Renewable Energy Law has introduced practical implementing measures to enhance such development.

The Amended Renewable Energy Law details the principles, main content and key issues of the renewable energy development and utilization plans, further elaborates the requirements for grid companies to purchase the full amount of electricity generated from renewable energy by setting out the responsibilities and obligations of the government, the power companies and the grid companies, respectively, and also clarifies that the state will set up a special fund, referred to as the renewable energy development fund, to compensate the difference between the tariff for electricity generated from renewable energy and that generated from conventional energy sources. The proceeds of the renewable energy development fund may also be used to support renewable energy scientific research, finance rural clean energy projects, build independent power systems in remote areas and islands, and build information networks to exploit renewable energy. It is anticipated that China will publish more detailed implementing rules for the Amended Renewable Energy Law and make corresponding changes to those existing implementing rules relating to renewable energy.

China’s Ministry of Construction issued a directive in June of 2005, which seeks to expand the use of solar energy in residential and commercial buildings and encourages the increased application of solar energy in townships. In addition, China’s State Council promulgated a directive in June of 2005, which sets forth specific measures to conserve energy resources and encourage exploration, development and use of solar energy in China’s western areas, which are not fully connected to electricity transmission grids, and other rural areas. In July 2007, China’s State Electricity Regulatory Commission issued the Supervision Regulations on the Purchase of All Renewable Energy by Power Grid Enterprises which became effective on September 1, 2007. To promote the use of renewable energy for power generation, the regulations require that electricity grid enterprises must set up connections between the grids and renewable power generation systems and purchase all the electricity generated by renewable power generation systems in a timely manner. The regulations also provide that power dispatch institutions shall give priority to renewable power generation companies in respect of power dispatch services provision.

On August 31, 2007, the National Development and Reform Commission of China (“NDRC”) implemented the National Medium and Long-Term Programs for Renewable Energy, which highlights the government’s long-term commitment to the development of renewable energy.

On April 1, 2008, the PRC Energy Conservation Law came into effect. Among other objectives, this law encourages the utilization and installation of solar power facilities in buildings for energy-efficiency purposes.

In July 2010, the Ministry of Housing and Urban-Rural Development issued the City Illumination Administration Provisions (the “Illumination Provisions”). The Illumination Provisions encourage the installation and use of renewable energy system such as PV systems in the process of construction and re- construction of city illumination projects.

On July 24, 2011, the NDRC issued the Notice on Improving the On-grid Tariff Policy for Photovoltaic Generation. Under this notice, it is required that a uniform national benchmark on-grid tariff for solar energy photovoltaic generation be formulated. Furthermore, for PV projects that had been approved before July 1, 2011 and would be completed by December 31, 2011, the feed-in tariff would be RMB1.15/kWh, including value-added tax (“VAT”). Except for PV projects that are constructed in Tibet, for PV projects that are approved after July 1, 2011 and PV projects that had been approved before July 1, 2011 but would not be completed by December 31, 2011, the feed-in tariff including VAT would be RMB1/kWh.

On March 14, 2012, the Ministry of Finance (“MOF”), the NDRC and the National Energy Administration (the “NEA”) jointly issued interim measures for the management of additional subsidies for renewable-energy power prices, according to which relevant renewable-energy power generation enterprises are entitled to apply for subsidies for their renewable power generation projects that satisfy relevant requirements set forth in the measures.

On January 1, 2013, the State Council adopted a Circular on the Twelfth Five-Year Plan for the Energy Development, which sets out key development objectives for the industry during the 12th Five-Year Plan. In accordance with this plan, to optimize the structure of energy consumption, the proportion of non- fossil energy consumption shall be increased to 11.4 percent of total energy consumption by 2015. On December 26, 2016, the Thirteenth Five-Year Plan for the Energy Development was issued and according to the new plan, the proportion of non- fossil energy consumption shall be increased to 15 percent of total energy consumption by 2020.

On September 23, 2013, the MOF and the State Administration of Taxation jointly issued the notice that ordered a 50% refund of VAT on sales by PV manufacturers of their PV products. This VAT refund will be effective from October 1, 2013 through December 31, 2015. On July 25, 2016, the MOF and the State Administration of Taxation n issued Circular 81, Notice on the Implementation of the VAT Policy for Photovoltaic Power Generation from January 1, 2016 to December 31, 2018.

On November 26, 2013, the MOF announced Circular 103, which provides that the electricity generated by the distributed PV system for its own use is exempted from paying for governmental charges. On the same date, the NEA promulgated the “Interim Measures for the Administration of PV Power Generation,” which clarify that the state department in charge of energy and its local counterparts are responsible for the supervision of PV projects.

In February 2014, the Certification and Accreditation Administration of China and the NEA jointly issued the “Implementation Opinions on Strengthening the Testing and Certification of PV Products.” The implementation opinions provide that only certified PV products may be connected to the public grid or receive government subsidies. The institutions that certify PV products must be approved by the Certification and Accreditation Administration. According to the implementation opinions, PV products that are subject to certification include PV battery parts, inverters, control devices, confluence devices, energy storage devices and independent PV systems.

On April 2, 2015, the MOF issued the Interim Measures for the Administration of Special Funds for Renewable Energy Development, which is aimed to standardize and strengthen the management of special funds for renewable energy development, and improve the efficiency of capital use.

In 2016, the Chinese government enacted the “Helping the Poor” Project. The National Poverty Alleviation Office has set an objective for the provinces and cities to alleviate poverty in the next three years through government investment to construct household power stations for poor families and to subsidize electricity charges for poor families to alleviate poverty.

May 5, 2017, National Development and Reform Commission, National Energy Administration published Circular 870, New Energy Microgrid Demonstration Project List, and 28 new energy microgrid demonstration projects were approved. It might results the new PV installations brought by this batch of projects are 899MW, and the newly added electric energy storage capacity exceeds 150MW.

December 19, 2017, National Development and Reform Commission issued Circular 2196, Notice on the Price Policy of Photovoltaic Power Generation Projects in 2018, which regulated that, according to the current technological progress and cost reduction of the photovoltaic industry, the on-grid tariff of photovoltaic power plants put into operation after January 1, 2018 will be reduced. The on-grid tariffs of Class I, II and III resource zones will be adjusted to 0.55 yuan per kWh, 0.65 yuan, 0.75 yuan (including tax). Since 2019, the photovoltaic power generation projects that have been included in the annual scale management of financial subsidies have all executed the corresponding benchmark electricity prices according to the commissioning time.

January 1, 2018, Ministry of Industry and Information Technology issued the Circular 2, Photovoltaic Manufacturing Industry Specification Conditions, it sets the comprehensive regulation of the photovoltaic manufacturing industry. According to Circular 2, photovoltaic manufacturing enterprises shall meet the following conditions: shall be legally incorporated and established in the territory of the People’s Republic of China, with independent legal personality; have the independent production, supply and after-sales service capabilities of solar photovoltaic products; have independent research and development institutions, technical centers or high-tech enterprises above the provincial level. The annual cost for R&D and process improvement is not less than 3% of total sales and not less than RMB 10 million. When the declaration conforms to the list of specifications, the actual production in the previous year is not less than 50% of the actual capacity of the previous year. Besides, Photovoltaic manufacturing enterprises shall strictly follow the requirements of pollutant discharge permits and relevant technical specifications, and shall strictly implement the environmental impact assessment system. The exhaust gas and wastewater shall comply with national and local atmospheric and water pollutant discharge standards and total control requirements.

Environmental Regulations

We are subject to a variety of governmental regulations related to the storage, use and disposal of hazardous materials. The major environmental regulations applicable to us include the Environmental Protection Law of the PRC, the Law of the PRC on the Prevention and Control of Water Pollution and its implementation rules, the Law of the PRC on the Prevention and Control of Air Pollution and its implementation rules, the Law of PRC on the Prevention and Control of Solid Waste Pollution and the Law of the PRC on the Prevention and Control of Noise Pollution and the PRC Law on Appraising Environment Impacts.

In addition, under the Environmental Protection Law of the PRC, the Ministry of Environmental Protection sets national pollutant emission standards. However, provincial governments may set stricter local standards, which are required to be registered at the State Administration for Environmental Protection. Enterprises are required to comply with the stricter of the two standards.

The relevant laws and regulations generally impose discharge fees based on the level of emission of pollutants. These laws and regulations also impose fines for violations of laws, regulations or decrees and provide for possible closure by the central or local government of any enterprise which fails to comply with orders requiring it to rectify the activities causing environmental damage.

Foreign Investment Regulations

Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, or the Catalog, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. On June 28, 2018, Ministry of Commerce and the National Development and Reform Commission announced the amendment of the Catalog 2018.

Industries listed in the Catalogue are divided into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalogue are generally deemed as constituting a fourth “permitted” category. Establishment of wholly foreign-owned enterprises is generally allowed in the encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations.

On October 8, 2016, the Ministry of Commerce issued the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises, or FIE Record-filing Interim Measures, which became effective on the same day and was further amended in July 2017. Pursuant to FIE Record-filing Interim Measures, the establishment and change of FIEs are subject to record filing procedures, instead of prior approval requirements, provided that the establishment or change does not involve special entry administration measures. If the establishment or change of FIE matters is subject to the special entry administration measures, the approval of the Ministry of Commerce or its local counterparts is still required. Pursuant to the Announcement (2016) No. 22 of the National Development and Reform Commission and the Ministry of Commerce issued on October 8, 2016, the special entry administration measures for foreign investment apply to restricted and prohibited categories specified in the Catalog and the encouraged categories which are subject to certain requirements relating to equity ownership and senior management.

Licenses and Permits Required for Our Business

Safety Production License, according to Regulation on Work Safety Permits (2014), the state applies a work safety licensing system to enterprises engaged in mining, construction, and the production of dangerous chemicals, fireworks and crackers, and civil explosives.

Undertake (Repair, Test) Power Facility Permit, according to Measures for the Administration of Installation (Repair, Trial) Power Facilities License (2009), anyone engaged in the installation, repair or testing of power facilities activities within the territory of the People’s Republic of China shall obtain a permit in accordance with the provisions of these Measures. Except as otherwise stipulated by the SERC, no unit or individual may engage in the installation, maintenance or testing of power facilities without obtaining a permit.

Secrecy Qualification, according to Management Measures of Secrecy Qualification Examination and Certification for Weapons and Equipment Research and Production Units (“Circular 8”) issued by National Defense Science and Technology Bureau of PRC, for units engaged in the research and production of classified weapons and equipment, a confidentiality qualification examination and certification system shall be implemented. Units engaged in the research and production of classified weapons and equipment should obtain the corresponding confidentiality qualifications.

Product Quality

Pursuant to the Product Quality Law of China promulgated by the National People’s Congress Standing Committee in 1993 and amended in 2000 and 2009 respectively, a seller must establish and practice a check-for-acceptance system for replenishment of such seller’s inventory, and examine the quality certificates and other marks and must also adopt measures to keep the products for sale in good quality. Pursuant to the Product Quality Law of China, where a defective product causes physical injury to a person or damage to such person’s property, the victim may claim for damages against the manufacturer or the seller of the product. If the seller pays the damages and it is the manufacturer that should bear the liability, the seller has a right of recourse against the manufacturer. Similarly, if the manufacturer pays damages and it is the seller that should bear the liability, the manufacturer has a right of recourse against the seller. Violations of the Product Quality Law of China could result in various penalties, including the imposition of fines, suspension of business operations, revocation of business licenses and criminal liabilities.

Tort Liability Law

Pursuant to the Tort Liability Law of China, which was promulgated by the National People’s Congress Standing Committee on December 30, 2009 and became effective on July 1, 2010, producers are liable for damages caused by defects in their products and sellers are liable for damages attributable to their fault. If the defects are caused by the fault of third parties such as the transporter or storekeeper, producers and sellers have the right to claim for compensation from these third parties after paying the damages. The producers and sellers are obligated to take remedial measures such as issuing warnings or recalling the products in a timely manner if defects are found in products that are in circulation. If the products are manufactured and sold with defects that cause death or severe personal injury to others, the injured person has the right to claim punitive damages.

Regulations Relating to Taxation

The PRC Enterprise Income Tax Law imposes a uniform enterprise income tax rate of 25% on all PRC resident enterprises, including foreign invested enterprises, unless they qualify for certain exceptions. The enterprise income tax is calculated based on the PRC resident enterprise’s global income as determined under PRC tax laws and accounting standards. If a non-resident enterprise sets up an organization or establishment in the PRC, it will be subject to enterprise income tax for the income derived from such organization or establishment in the PRC and for the income derived from outside the PRC but with an actual connection with such organization or establishment in the PRC.

The PRC Enterprise Income Tax Law and its implementation rules permit certain “high and new technology enterprises strongly supported by the state” that independently own core intellectual property and meet statutory criteria, to enjoy a reduced 15% enterprise income tax rate. In January 2016, the SAT, the Ministry of Science and Technology and the Ministry of Finance jointly issued the Administrative Rules for the Certification of High and New Technology Enterprises specifying the criteria and procedures for the certification of High and New Technology Enterprises.

Pursuant to the PRC Provisional Regulations on Value-Added Tax and their implementation regulations, unless otherwise specified by relevant laws and regulations, any entity or individual engaged in the sale of goods, provision of processing, repairs and replacement services and importation of goods into China is generally required to pay a value-added tax, or VAT, at the rate of 17% on revenues generated from sales of goods, less any deductible VAT already paid or borne by such entity.

Pursuant to the PRC Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%.

Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise.

Pursuant to the Notice of the SAT on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving the dividends. Furthermore, the Administrative Measures for Tax Convention Treatment for Non-resident Taxpayers, which became effective in November 2015 and replaced Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation), provide that any non-resident enterprise meeting conditions for enjoying the convention treatment may be entitled to the convention treatment itself when filing a tax return or making a withholding declaration through a withholding agent, subject to the subsequent administration by the tax authorities.

Pursuant to the Law on the Administration of Tax Collection of the PRC which was enacted by the Standing Committee of the National People’s Congress on September 4, 1992 and most recently amended in April 2015, if a taxpayer fails to pay tax pursuant to applicable tax laws or regulations, the tax authorities may, subject to the specific circumstances in each case, impose penalties on such taxpayer, including without limitation, imposing surcharge or imposing a fine of not more than five times the amount of the underpaid tax.

Regulations Relating to Labor and Employment

Pursuant to the PRC Labor Law effective in 1995 and amended in 2009, and the PRC Labor Contract Law effective in 2008 and amended in 2012, a written labor contract is required when an employment relationship is established between an employer and an employee. Other labor-related regulations and rules of China stipulate the maximum number of working hours per day and per week as well as the minimum wages. An employer is required to set up occupational safety and sanitation systems, implement the national occupational safety and sanitation rules and standards, educate employees on occupational safety and sanitation, prevent accidents at work and reduce occupational hazards.

An employer is obligated to sign an indefinite term labor contract with an employee if the employer continues to employ the employee after two consecutive fixed-term labor contracts, with certain exceptions. The employer also has to pay compensation to the employee if the employer terminates an indefinite term labor contract, with certain exceptions. Except where the employer proposes to renew a labor contract by maintaining or raising the conditions of the labor contract and the employee is not agreeable to the renewal, an employer is required to compensate the employee when a definite term labor contract expires. Furthermore, under the Regulations on Paid Annual Leave for Employees issued by the State Council in December 2007and effective as of January 2008, an employee who has served an employer for more than one year and less than ten years is entitled to a 5-day paid vacation, those whose service period ranges from 10 to 20 years are entitled to a 10-day paid vacation, and those who have served for more than20 years are entitled to a 15-day paid vacation. An employee who does not use such vacation time at the request of the employer must be compensated at three times their normal salaries for each waived vacation day.

Pursuant to the Regulations on Occupational Injury Insurance effective in 2004, as amended in 2010, and the Interim Measures concerning the Maternity Insurance for Enterprise Employees effective in 1995, PRC companies must pay occupational injury insurance premiums and maternity insurance premiums for their employees.

Pursuant to the Interim Regulations on the Collection and Payment of Social Insurance Premiums effective in1999 and the Interim Measures concerning the Administration of the Registration of Social Insurance effective in 1999, basic pension insurance, medical insurance and unemployment insurance are collectively referred to as social insurance. Both PRC companies and their employees are required to contribute to the social insurance plans. The aforesaid measures are reiterated in the Social Insurance Law of China effective in July 2011, which stipulates the system of social insurance of China, including basic pension insurance, medical insurance, unemployment insurance, occupational injury insurance and maternity insurance. Pursuant to the Regulations on the Administration of Housing Fund effective in 1999, as amended in 2002, PRC companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank.

Regulations on Foreign Exchange

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans. In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the SAFE improves foreign exchange administration in direct investment by repealing or adjusting certain approval items for foreign exchange administration in direct investment. On March 30, 2015, SAFE promulgated Circular on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE Circular No. 19, which came into effect on June 1, 2015. According to SAFE Circular No. 19, the foreign currency capital contribution to a foreign invested enterprise, or an FIE, in its capital account may be converted into RMB on a discretional basis. Furthermore, on June 15, 2016, SAFE promulgated Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular No. 16. SAFE Circular No 16 provides, in addition to foreign currency capital, enterprises registered in the PRC may also convert their foreign debts, as well as repatriated funds raised through overseas listing, from foreign currency to RMB on a discretional basis. SAFE Circular No. 16 also reiterates that the use of capital so converted shall follow “the principle of authenticity and self-use” within the business scope of the enterprise. According to SAFE Circular No. 16, the RMB funds so converted shall not be used for the purposes of, whether directly or indirectly, (i) paying expenditures beyond the business scope of the enterprises or prohibited by laws and regulations; (ii) making securities investment or other investments (except for banks’ principal-secured products); (iii) granting loans to nonaffiliated enterprises, except as expressly permitted in the business license; and (iv) purchasing non-self-used real estate (except for the foreign invested real estate enterprises).

SAFE Regulations on Offshore Special Purpose Companies Held by PRC Residents

SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, issued by SAFE and effective in July 2014, regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing and conduct round trip investment in China. Under SAFE Circular No. 37, a SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate domestic or offshore assets or interests, while “round trip investment” refers to the direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular No. 37 requires that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with the SAFE or its local branch. SAFE Circular No. 37 further provides that option or share-based incentive tool holders of a non-listed SPV can exercise the options or share incentive tools to become a shareholder of such non-listed SPV, subject to registration with SAFE or its local branch. SAFE Circular No. 37 was issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular No. 75. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Circular No. 13, in February 2015, which took effect on June 1, 2015. SAFE Circular No. 13 has amended SAFE Circular No. 37 by requiring PRC residents or entities to register with qualified banks instead of SAFE or its local branch in connection with their establishment of an SPV. PRC residents who have contributed legitimate domestic or offshore interests or assets to SPVs but have yet to obtain SAFE registration before the implementation of SAFE Circular No. 37 shall register their ownership interests or control in such SPVs with SAFE or its local branch. An amendment to the registration is required if there is a material change involving the SPV registered, such as any change of basic information (including change of such PRC residents, change of name and operation term of the SPV), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. failure to disclose controllers of foreign-invested enterprise that is established through round-trip investment, may result in restrictions on the foreign exchange activities of the relevant foreign-invested enterprises, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent company or affiliates and the capital inflow from the offshore parent company, and may also subject the relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations.

Regulations on Dividend Distribution

Wholly foreign-owned companies in China, such as our PRC subsidiary, may pay dividends only out of their accumulated profits after tax as determined in accordance with PRC accounting standards. Remittance of dividends by a wholly foreign-owned enterprise out of China is subject to examination by commercial banks. Wholly foreign-owned companies are not permitted to pay dividends unless they set aside at least 10% of their respective accumulated profits after-tax each year, if any, to fund certain reserve funds, until such time as the accumulative amount of such fund reaches 50% of their registered capital. In addition, these companies also may allocate a portion of their after-tax profits based on PRC accounting standards to other funds at their discretion. These statutory reserve funds and other funds are not distributable as cash dividends. Our PRC subsidiary is a wholly foreign-owned enterprise subject to the described regulations.

Regulations on Overseas Listings

On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission (“CSRC”), jointly promulgated the 2006 M&A Rules: Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006 and were amended on June 22, 2009. Under the 2006 M& A Rules, the prior approval of the CSRC is required for the overseas listing of offshore special purpose vehicles that are directly or indirectly controlled by PRC companies or individuals and used for the purpose of listing PRC onshore interests on an overseas stock exchange. Although the application of the 2006 M&A Rules remains unclear to a certain extent, we believe, based on the advice of our PRC counsel, Beijing Docvit Law Firm, that we are not required to obtain CSRC approval for the listing and trading of our ordinary shares on the Nasdaq Capital Market. However, there remains some uncertainty as to how this regulation could be interpreted or implemented in the context of an overseas offering.

We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do. If the CSRC or other PRC regulatory agency subsequently determines that we need to obtain the CSRC’s approval for this offering or if the CSRC or any other PRC government authorities promulgate any interpretation or implementing rules that would require the CSRC or other governmental approvals for this offering, we could face sanctions by the CSRC or other PRC regulatory agencies.

The 2006 M&A Rules also establish procedures and requirements that could make certain acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of control transaction in which a foreign investor takes control of a Chinese domestic enterprise.

Regulations Relating to Intellectual Property Rights

The PRC has adopted comprehensive legislation governing intellectual property rights, including trademarks, patent and copyrights.

Patent. Patents in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years from the date of its application, depending on the type of patent right.

Trademark. Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the Trademark Office of the State Administration for Industry and Commerce. If a pending trademark that is identical or similar to a registered trademark or a trademark under preliminary examination and approval for use in the same or similar category of commodities or services, the application for such trademark could be rejected. Trademark registrations are effective for a renewable ten-year period, unless otherwise revoked.

Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.

Regulations Relating to Property Lease

In December 2010, the Ministry of Housing and Urban-Rural Development issued the Administrative Measures for Leasing of Commodity Housing, effective on February 1, 2011. According to the Administrative Measures for Leasing of Commodity Housing, the landlords and tenants are required to enter into lease with specific provisions, including but not limited to, the floor space per tenant cannot be less than the minimum living space stipulated by the local government, no kitchens, lavatories, balconies or basement storerooms can be rented out as residence, and the lease should be registered with the relevant construction or housing governmental authorities at municipal or county level within 30 days after its execution. If the lease is extended or terminated or if there is any change to the registered items, the landlord and the tenant are required to make an amended registration, an extension of registration or a deregistration with the relevant construction or housing authorities within 30 days after the occurrence of such amendment, extension or termination.