UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR
For the Fiscal year ended
OR
For the transition period from __________ to __________
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| People’s Republic of | ||
| (Jurisdiction of incorporation or organization) | (Address of principal executive offices) |
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| Large accelerated filer | ☐ | Accelerated filer | ☐ | ☒ | ||
| Emerging growth company |
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In this annual report:
| ● | References to the “Company”, “we”, “our” and “us” are to Luokung Technology Corp. and its consolidated subsidiaries; |
| ● | References to “China” or the “PRC” are to the People’s Republic of China; |
| ● | References to “Luokung Technology Corp.” are to our British Virgin Islands holding company; |
| ● | References to “RMB” and “Renminbi” refer to the legal currency of China; | |
| ● | “US$,” “U.S. dollars,” “$,” and “dollars” refer to the legal currency of the United States; | |
| ● | References to “variable interest entities” or “VIEs” refer to Beijing Zhong Chuan Shi Xun Technology Limited, Beijing BotBrain AI Technology Co., Ltd. and eMapgo Technologies (Beijing) Co., Ltd. |
Special Note Regarding Forward-looking Statements
This annual report contains forward-looking statements that involve risks and uncertainties. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigations Reform Act of 1995.
You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:
| ● | our future business development, results of operations and financial condition; |
| ● | expected changes in our net revenues and certain cost or expense items; |
| ● | our ability to attract and retain customers; and |
| ● | trends and competition in the spatial-temporal big-data processing and interactive location-based services market. |
You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect. Other sections of this annual report discuss factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.
TABLE OF CONTENTS
i
ii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY INFORMATION.
Our Holding Company Structure and Contractual Arrangements with the Consolidated VIEs and their Respective Individual Shareholders
Luokung Technology Corp. is not a Chinese operating company, but a British Virgin Islands holding company with operations conducted by our subsidiaries and through contractual arrangements with variable interest entities (“VIEs”) based in China. Investors in our company are purchasing an interest in our British Virgin Islands holding company, and not in a Chinese operating company or the VIEs. This structure involves unique risks to investors. The VIE structure enables investors to share economic interests in China-based companies in sectors where foreign direct investment is prohibited or restricted under laws and regulations in the Chinese mainland, and investors in our ordinary shares may never hold equity interests in the Chinese operating company. In addition, the legality and enforceability of the contractual agreements between our PRC subsidiaries, the VIEs, and their nominee shareholders, as a whole, have not been tested in court. Chinese regulatory authorities could disallow this structure, which would likely result in a material change in our operations and/or a material change in the value of the securities we have listed, which could cause the value of such securities to significantly decline or become worthless. See “Item 3. Key Information - D. Risk Factors – If the PRC government deems that our agreements with the VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries or other laws or regulations of the PRC, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations, which may materially reduce the value of our ordinary shares.” for a more detailed discussion of risks we face as a result of our VIE structure.
The contractual arrangements with the consolidated VIEs may not be as effective as ownership in ensuring receiving economic benefits from the business operations in the PRC and we may incur substantial costs to enforce the terms of the arrangements. See “Item 3. Key Information - D. Risk Factors - Risks Related to Our Corporate Structure – If the PRC government deems that our agreements with the VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries or other laws or regulations of the PRC, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations, which may materially reduce the value of our ordinary shares.”
Our corporate structure is subject to risks associated with our contractual arrangements with the VIEs. Investors may never directly hold equity interests in the VIEs. If the PRC government finds that the agreements that establish the structure for operating our business do not comply with the PRC laws and regulations, or if these regulations or their interpretations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, the VIEs, and our investors face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with the VIEs and, consequently, significantly affect the financial performance of the VIEs and our company as a whole.
1
The following diagram illustrates our corporate structure and the place of formation and affiliation of each of our subsidiaries and affiliates as of December 31, 2023.
VIE Arrangements with VIEs and Their Respective Shareholders
| (i) | Contracts that give the Company effective control of the VIEs |
Exclusive Option Agreement
Each VIE equity holder has granted the Wholly Foreign-Owned Enterprises (“WFOEs”) exclusive call options to purchase the nominal equity interest in the VIEs at an exercise price equal to (i) with regard to Zhong Chuan Shi Xun, the minimum price as permitted by applicable PRC laws, or (ii) with regard to Beijing BotBrain, RMB10 in aggregate, or if appraisal is required as requested by relevant PRC laws, the price as determined by the relevant parties, or (iii) with regard to eMapgo Technologies (Beijing) Co., Ltd (“EMG”), RMB 1 in aggregate or other price as determined by the relevant parties, provided that if required by relevant PRC laws, the minimum price as permitted by PRC laws shall apply. The WFOEs may designate another entity or individual to purchase the nominal equity interests, if applicable, under the call options. Each call option is exercisable subject to the condition that applicable PRC laws, rules and regulations do not prohibit completion of the transfer of the nominal equity interests pursuant to the call option. The VIEs shall not declare any dividend or other distribution to its equity holders without the approval of the WFOEs. With regard to Zhong Chuan Shi Xun and Beijing BotBrain, the exclusive call option agreements remain in effect for ten (10) years and may be renewed at the election of the WFOEs. With regard to EMG, the exclusive call option agreement shall remain in effect until all nominal equity interest under the call option has been transferred to the WFOE or its designated entity or individual.
2
Equity Pledge Agreements
As for Zhong Chuan Shi Xun and Beijing BotBrain, pursuant to the relevant equity pledge agreements, the relevant VIE equity holders have pledged all of their interests in the equity of the VIEs as a continuing security interest in favor of the corresponding WFOEs to secure the performance of obligations by the VIEs and/or the equity holders under the exclusive business cooperation agreements. Each WFOE is entitled to exercise its right to dispose of the VIE equity holders’ pledged interests in the equity of the VIE in accordance with applicable PRC laws in the event of any breach or default, and VIE equity holders shall cease to be entitled to any rights or interests associated with their nominal equity interests in the VIEs. These equity pledge agreements remain in force until and unless the obligations of the VIE equity holders to the WFOEs under the exclusive business cooperation agreements have been fulfilled.
As for EMG, pursuant to the relevant equity pledge agreement, the relevant VIE equity holder has pledged all of its nominal equity interest in the VIE as a continuing first priority security interest in favor of the corresponding WFOE to secure the performance of obligations by the VIE as set forth in the relevant exclusive option agreement, proxy agreement, the equity pledge agreement and the VIE’s obligation to repay the secured indebtedness. The VIE equity holder shall not be entitled to receive any dividend associated with its nominal equity interest without the approval of the WFOE, and the dividend received by the VIE equity holder shall be deposited in the account designated by the WFOE and subject to the supervision of the WFOE. In the event of any breach or default, the WFOE shall be entitled to all rights to relief, including but not limited to disposing the nominal equity interest held by the VIE equity holder. The equity pledge agreement shall remain in force until and unless the obligations of the VIE equity holder to the WFOE under the exclusive option agreement, proxy agreement, the equity pledge agreement have been fulfilled or all the secured indebtedness has been paid off.
Power of Attorney
As for Zhong Chuan Shi Xun and Beijing BotBrain, pursuant to the relevant power of attorney, each of the relevant VIE equity holders irrevocably appoints the corresponding WFOE as its attorney-in-fact to exercise on its behalf any and all rights that such equity holder has in respect of its nominal equity interests in the relevant VIE conferred by relevant laws and regulations and the articles of associate of such VIE. The power of attorney shall remain effective as long as such VIE equity holder remains as a shareholder of Zhong Chuan Shi Xun or Beijing BotBrain.
As for EMG, pursuant to the relevant power of attorney, the relevant VIE equity holder irrevocably appoints certain the person designated by the corresponding WFOE as its attorney-in-fact to exercise on its behalf any and all rights that such equity holder has in respect of its nominal equity interest in the relevant VIE conferred by relevant laws and regulations and the articles of associate of such VIE. The power of attorney of EMG shall remain effective until March 11, 2044, and will be renewed automatically for another ten (10) years unless the parties to the power of attorney agree otherwise.
| (ii) | Contracts that enable the Company to receive the certain benefits from the VIEs |
Exclusive business cooperation agreements
As for Zhong Chuan Shi Xun and Beijing BotBrain and EMG, each relevant VIE has entered into an exclusive business services agreement with the corresponding WFOE, pursuant to which the relevant WFOE provides exclusive business services to the VIE. In exchange, (i) Zhong Chuan Shi Xun pays a service fee to the corresponding WFOE which shall be no less than 80% of Zhong Chuan Shi Xun’s after-tax profits; (ii) Beijing BotBrain pays a service fee to the corresponding WFOE which shall be reasonably determined by such WFOE based on certain factors; (iii) EMG pays a service fee to the corresponding WFOE which shall be 20% of EMG’s annual income. Luokung exercises control over the VIEs through a Call Option Agreement, an Equity Pledge Agreement, an Exclusive Business Cooperation Agreement and a Proxy Agreement. The amount of service fees to be paid by EMG and BotBrain shall be determined solely by the WFOE or as mutually agreed by the WFOE and the VIEs. Based on the control Luokung exercises through these agreements and based on its ability to determine the fees paid by EMG and BotBrain, Luokung is considered the primary beneficiary of the VIEs.
Termination agreements
On January 5, 2023, Zhong Chuan Shi Xun and certain shareholder of Beijing Wave Function Culture Development Co., Ltd. (“Wave Function”) entered into certain termination of persons acting in concert agreement (“Wave Function Termination Agreement”). Pursuant to the Wave Function Termination Agreement, both parties agreed not to act in concert of the business strategic operation and management, and enjoyed the respective rights and obligation as shareholders.
Limitation of VIE Structure Derived from the PRC Legal Systems
There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of the rights of our British Virgin Islands holding company with respect to its contractual arrangements with the VIEs and their respective shareholders. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of the VIEs is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. See “Item 3. Key Information - D. Risk Factors - Risks Related to Doing Business in China – PRC laws and regulations govern our businesses. If we are found to be in violation of such PRC laws and regulations, we could be subject to sanctions. In addition, changes in and uncertainties with respect to such PRC laws and regulations may materially and adversely affect our business.”
3
On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law of the PRC, (the “Foreign Investment Law”), which came into effect on January 1, 2020. The Foreign Investment Law replaced the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Wholly Foreign-Owned Enterprises as the legal foundation for foreign investments in China. The Foreign Investment Law stipulates certain forms of foreign investment, which do not include the contractual arrangements as a form of foreign investment but stated that foreign investment includes “foreign investors invest through any other methods under laws, administrative regulations or provisions prescribed by the State Council”. There are uncertainties in determining whether our contractual arrangements constitute foreign investments and there is no guarantee that the VIE contractual arrangements and the business of the VIEs and their subsidiaries will not be materially and adversely affected in the future.
Rules and regulations in China can change quickly with little advance notice and the PRC government may intervene or influence a registrant’s operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers. It is uncertain whether any new PRC laws, rules or regulations affecting the VIE structure will be adopted or if adopted, what they would provide. See “Item 3. Key Information - D. Risk Factors - Risks Related to Doing Business in China - PRC laws and regulations govern our businesses. If we are found to be in violation of such PRC laws and regulations, we could be subject to sanctions. In addition, changes in and uncertainties with respect to such PRC laws and regulations may materially and adversely affect our business.” There can be no assurance that the VIE Arrangements will be deemed by the relevant governmental or judicial authorities to be in compliance with the existing or future applicable PRC laws and regulations, or the relevant governmental or judicial authorities may in the future interpret the existing laws or regulations with the result that the contractual arrangements will be deemed to be in compliance of the PRC laws and regulations.
Our subsidiaries and the VIEs face various legal and operational risks and uncertainties associated with being based in or having our operations primarily in China and under the complex and evolving PRC laws and regulations. For instance, PRC government has significant authority in regulations and we face risks and uncertainties associated with regulatory approvals on offerings conducted overseas by and foreign investment in China-based issuers, the use of the VIEs, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy. In recent years, PRC government has been exerting more oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers. Although we believe our operating structure is legal and permissible under the Chinese law and regulations currently in effect, Chinese regulatory authorities could take a different position on the interpretation and enforcement of laws and regulations and disallow our holding company structure. These legal and operational risks and uncertainties associated with being based in China may materially and adversely change our operations, affect the value of our ordinary shares, significantly limit or completely hinder our ability to offer or continue to offer securities to investors could cause the value of our securities to significantly decline or be worthless. For a detailed description of risks related to doing business in China, see “Item 3. Key Information - D. Risk Factors - Risks Related to Doing Business in China.”
As of the date of this annual report, neither we nor the VIEs have been involved in any investigations initiated by any PRC regulatory authority, nor has any of them received any inquiry, notice or sanction for the business operation, accepting foreign investment or listing on the Nasdaq Stock Market. However, since these statements and regulatory actions by China’s government are newly published, official guidance and related implementation rules have not been issued. It is highly uncertain what future impact such modified or new laws and regulations will have on our daily business operations, the ability to accept foreign investments and our continued listing on the Nasdaq Stock Market. See “Item 3. Key Information - D. Risk Factors - Risks Related to Doing Business in China - PRC laws and regulations govern our businesses. If we are found to be in violation of such PRC laws and regulations, we could be subject to sanctions. In addition, changes in and uncertainties with respect to such PRC laws and regulations may materially and adversely affect our business.” These risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ordinary shares.
4
Permissions Required from the PRC Authorities for Our Operations
We conduct our business primarily through our subsidiaries, and the VIEs, in China. Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, neither we nor the VIEs have been involved in any investigations initiated by any PRC regulatory authority, nor has any of them received any inquiry, notice or sanction for our operations or our issuance of securities to investors. Nevertheless, the Standing Committee of the National people’s Congress (the “SCNPC”) or PRC regulatory authorities may in the future promulgate laws, regulations or implementing rules that requires us, our subsidiaries, the VIEs or their subsidiaries to obtain permissions from PRC regulatory authorities to approve the VIE operations.
According to Article 7 of the Measures of Cybersecurity Review (“the New CAC Measures”) which was promulgated by the Cyber Administration of China, together with 12 other departments on December 28, 2021 and entered into force and effect on February 15, 2022, a network platform operator that holds personal information of more than one million users shall report to Cybersecurity Review Office for cybersecurity review when it seeks to list its securities overseas. During such reviews, the network platform operator may be required to take measures to prevent and mitigate risk, and such measures could cause disruptions to our operations. Cybersecurity review could also result in negative publicity with respect to the network platform operator and diversion of its managerial and financial resources, which could materially and adversely affect its business, financial conditions, and results of operations. The New CAC Measures do not apply to the Company or any of its subsidiaries or the VIEs as of the date of this annual report. The Company and any of its subsidiaries or the VIEs are not critical information infrastructure operators purchasing network products and services or online platform operators carrying out data processing activities that affect or may affect national security. We hold less than 1 million users’ personal information. We believe we are not subject to the cybersecurity review under the New CAC Measures. As of the date of this report, we have not been involved in any investigations on cybersecurity review initiated by the CAC, and we have not received any warning, sanction or penalty in such respect. We believe that we are compliant with the regulations or policies that have been issued by the CAC as of the date of this annual report. As of the date of this annual report, for entities that have been listed overseas before the implementation of the New CAC Measures and intend to issue additional shares rather than doing a public listing, the New CAC Measures do not clearly stipulate that such entities or their subsidiaries, as network platform operators, shall report to Cybersecurity Review Office for cybersecurity review. The New CAC Measures remain unclear on whether such requirements will be applicable to companies which are already listed in the United States, such as us. It also remains uncertain whether any future regulatory changes would impose additional restrictions on companies like us. The aforementioned policies and any related implementation rules to be enacted may subject us to additional compliance requirements in the future. As these opinions were recently issued, official guidance and interpretation of the opinions remain unclear in several respects at this time. Therefore, we cannot assure you that we will remain fully compliant with all new regulatory requirements of these opinions or any future implementation rules on a timely basis, or at all. Please see “Risk Factor - Recent greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact our business and our offering” for more detailed discussion.
5
On July 30, 2021, in response to the recent regulatory developments in China and actions adopted by the PRC government, the Chairman of the SEC issued a statement asking the SEC staff to seek additional disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective. On August 1, 2021, the China Securities Regulatory Commission (the “CSRC”) stated in a statement that it had taken note of the new disclosure requirements announced by the SEC regarding the listings of Chinese companies and the recent regulatory development in China, and that both countries should strengthen communications on regulating China-related issuers. To the best of our knowledge, as of the date of this annual report, current Chinese laws and regulations do not forbid us from issuing securities overseas. On December 24, 2021, the CSRC published the Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Draft Administrative Provisions”) and the Administration Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (the “Draft Filing Measures”). The Draft Administrative Provisions and the Draft Filing Measures lay out requirements for filing and include unified regulation management, strengthening regulatory coordination, and cross-border regulatory cooperation. On February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”), which took effect on March 31, 2023. On the same date, the CSRC circulated Supporting Guidance Rules No. 1 through No. 5, Notes on the Trial Measures, Notice on Administration Arrangements for the Filing of Overseas Listings by Domestic Enterprises and relevant CSRC Answers to Reporter Questions, or collectively, the Guidance Rules and Notice, on CSRC’s official website. The Trial Measures, together with the Guidance Rules and Notice reiterate the basic principles of the Draft Administrative Provisions and Draft Filing Measures, and clarified and emphasized several aspects, which include but are not limited to: (1) criteria to determine whether an issuer will be required to go through the filing procedures under the Trial Measures; (2) exemptions from immediate filing requirements for issuers including those that have already been listed in foreign securities markets, including U.S. markets, prior to the effective date of the Trial Measures, but these issuers shall still be subject to filing procedures if they conduct refinancing or are involved in other circumstances that require filing with the CSRC; (3) a negative list of types of issuers banned from listing or offering overseas, such as issuers whose affiliates have been recently convicted of bribery and corruption; (4) issuers’ compliance with web security, data security, and other national security laws and regulations; (5) issuers’ filing and reporting obligations, such as obligation to file with the CSRC after it submits an application for initial public offering to overseas regulators, and obligation after offering or listing overseas to file with the CSRC after it completes subsequent offerings and to report to the CSRC material events including change of control or voluntary or forced delisting of the issuer; and (6) the CSRC’s authority to fine both issuers and their relevant shareholders for failure to comply with the Trial Measures, including failure to comply with filing obligations or committing fraud and misrepresentation. Specifically, we are not subject to the filing requirements as regulated by the Trial Measures, however, pursuant to the Trial Measures, our future securities offerings in Nasdaq Capital Market where we currently list shall also be filed with the CSRC within 3 working days after the offering is completed. As the Trial Measures are newly issued, there remain uncertainties regarding its interpretation and implementation. Therefore, we cannot assure you that we will be able to complete the filings for our future offering and fully comply with the relevant new rules on a timely basis, if at all. In addition, we cannot guarantee that we will not be subject to tightened regulatory review and we could be exposed to government interference in China.
In addition, as of the date of this annual report, except for business license, foreign investment information report to the commerce administrative authority and foreign exchange registration or filing, our consolidated subsidiaries and the VIEs are not required to obtain any other licenses and permits from the PRC government authorities, and our holding company, our Chinese subsidiaries and the VIEs have obtained all the licenses and permits that are requisite for the business operations in China. However, given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by government authorities, we may be required to obtain certain licenses, permits, filings, permissions or approvals for the functions and services that we provided in the future, or to offer securities, in China.
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If we, our subsidiaries, or the VIEs (i) do not receive or maintain such permissions or approvals, should the approval be required in the future by the PRC government, (ii) inadvertently conclude that such permissions or approvals are not required, or (iii) applicable laws, regulations, or interpretations change and we are required to obtain such permissions or approvals in the future, our operations and financial conditions could be materially adversely affected, our ability to offer securities to investors could be significantly limited or completely hindered and our securities may substantially decline in value or be worthless. As of the date of this annual report, based on Company’s management’s understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval under the M&A Rules for our offshore offerings because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether our offshore offerings are subject to this regulation; and (ii) no provision in the M&A Rules classifies the contractual arrangements under the VIE agreements as a type of acquisition transaction falling under the M&A Rules. However, there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering, and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operations in China, delay or restrict the repatriation of the proceeds into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations, as well as the trading price of our securities. The CSRC, the Cyberspace Administration of China or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt any securities offering we may undertake in the future. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC, the Cyberspace Administration of China or other regulatory PRC agencies later promulgate new rules requiring that we obtain more approvals in the future, we may be unable to obtain such approvals or a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such an approval requirement could have a material adverse effect on the trading price of our securities. These legal and operational risks and uncertainties associated with being based in China may materially and adversely change our operations, affect the value of our ordinary shares, significantly limit or completely hinder our ability to offer or continue to offer securities to investors could cause the value of our securities to significantly decline or be worthless.
PCAOB and the Holding Foreign Companies Accountable Act
The Holding Foreign Companies Accountable Act (the “HFCAA”), recent regulatory actions taken by the SEC and PCAOB, and proposed rule changes submitted by U.S. stock exchanges calling for additional and more stringent criteria to be applied to China-based public companies could add uncertainties to our capital raising activities and compliance costs. The HFCAA requires a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB determines that it is unable to inspect our auditors for three consecutive years, our securities may be prohibited to trade on a national exchange. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCAA and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three, and thus, would reduce the time before our securities may be prohibited from trading or delisted. On December 20, 2021, the PCAOB issued a report on its determinations that the PCAOB is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China or Hong Kong because of positions taken by PRC authorities in those jurisdictions. Our independent registered public accounting firms that issued audit reports for our financial statements for 2023, 2022 and 2021, as auditors of companies that are traded publicly in the United States and firms registered with the PCAOB, are subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess our auditors’ compliance with the applicable professional standards, and thus our auditors are not subject to the determinations announced by the PCAOB on December 16, 2021. However, we cannot be certain whether SEC or other U.S. regulatory authorities would apply additional and more stringent criteria to Chinese issuers including us as related to the audit of our financial statements. Trading in our securities may be prohibited under the HFCAA if the PCAOB determines that it cannot inspect or investigate completely our auditors, and that as a result an exchange may determine to delist our securities.
7
On August 26, 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the PRC (the “Statement of Protocol”), which is intended to enable the PCAOB to inspect and investigate completely registered public accounting firms in mainland China and Hong Kong. According to a statement released by the PCAOB, the Statement of Protocol (i) provides the PCAOB with sole discretion to select the firms, audit engagements and potential violations it inspects and investigates without consultation with, nor input from, Chinese authorities, (ii) puts procedures in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed and (iii) provides the PCAOB with direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates. While the Chairs of both the PCAOB and the SEC made statements supporting the Statement of Protocol, both emphasized that this is only the first step in the process. On December 15, 2022, the PCAOB issued a new Determination Report which: (1) vacated the December 16, 2021 Determination Report; and (2) concluded that the PCAOB has been able to conduct inspections and investigations completely in the PRC in 2022. The December 15, 2022 Determination Report cautions, however, that authorities in the PRC might take positions at any time that would prevent the PCAOB from continuing to inspect or investigate completely. On December 29, 2022, the Accelerating Holding Foreign Companies Accountable Act was signed into law, which officially reduce the number of years auditor is not subject to PCAOB inspections to two consecutive years. As such, uncertainties remain regarding how it will impact China-based issuers and there is no assurance that the PCAOB will continue being able to execute, in a timely manner, its future inspections and investigations. As required by the HFCAA, if in the future the PCAOB determines it no longer can inspect or investigate completely because of a position taken by an authority in the PRC, the PCAOB will act expeditiously to consider whether it should issue a new determination, and upon that time the Company will only have two years to comply with PCAOB audits.
Selected Financial Data
(Unit: US$)
Consolidating Statements of Income Information
| Year ended December 31, 2023 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs and their subsidiaries | Consolidation Adjustments | Consolidated | |||||||||||||||||||
| Revenue | - | 23,174 | 10,121,605 | 849,506 | (758,050 | ) | 10,236,235 | |||||||||||||||||
| Cost of Revenue | - | - | 5,451,918 | 295,126 | (116,319 | ) | 5,630,725 | |||||||||||||||||
| Gross profit (loss) | - | 23,174 | 4,669,687 | 554,380 | (641,731 | ) | 4,605,510 | |||||||||||||||||
| Operating expenses | 10,644,763 | 5,751,034 | 12,779,770 | 2,806,880 | 153,917,318 | 185,899,765 | ||||||||||||||||||
| Loss from operations | (10,644,763 | ) | (5,727,860 | ) | (8,110,083 | ) | (2,252,500 | ) | (154,559,049 | ) | (181,294,255 | ) | ||||||||||||
| Other expenses, net | (74 | ) | 41,618 | 429,135 | (3,526,313 | ) | 5,383,633 | 2,327,999 | ||||||||||||||||
| Provision for income tax | - | - | - | - | (2,755,973 | ) | (2,755,973 | ) | ||||||||||||||||
| Loss before noncontrolling interest | (10,644,837 | ) | (5,686,242 | ) | (7,680,948 | ) | (5,778,813 | ) | (151,931,389 | ) | (181,722,229 | ) | ||||||||||||
| Less: loss attributable to noncontrolling interest | - | - | - | 394,627 | (3,722 | ) | (390,905 | ) | ||||||||||||||||
| Net loss | (10,644,837 | ) | (5,686,242 | ) | (7,680,948 | ) | (5,384,186 | ) | (151,935,111 | ) | (181,331,324 | ) | ||||||||||||
| Year ended December 31, 2022 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs and their subsidiaries | Consolidation Adjustments | Consolidated | |||||||||||||||||||
| Revenue | - | 5,464,332 | 6,432,597 | 86,199,653 | (4,503,396 | ) | 93,593,186 | |||||||||||||||||
| Cost of Revenue | - | 271,313 | 3,239,958 | 74,629,562 | (199,168 | ) | 77,941,665 | |||||||||||||||||
| Gross profit (loss) | - | 5,193,019 | 3,192,639 | 11,570,091 | (4,304,228 | ) | 15,651,521 | |||||||||||||||||
| Operating expenses | 20,968,387 | 13,229,967 | 18,163,688 | 10,582,141 | (13,249,307 | ) | 76,193,490 | |||||||||||||||||
| Loss from operations | (20,968,387 | ) | (8,036,948 | ) | (14,971,049 | ) | 987,950 | (17,553,535 | ) | (60,541,969 | ) | |||||||||||||
| Other expenses, net | 327 | 124,606 | 711 | (2,944,089 | ) | 9,207,349 | 6,388,904 | |||||||||||||||||
| Provision for income tax | - | - | - | (8,878 | ) | 3,950,202 | 3,941,324 | |||||||||||||||||
| Loss before noncontrolling interest | (20,968,060 | ) | (7,912,342 | ) | (14,970,338 | ) | (1,965,017 | ) | (4,395,984 | ) | (50,211,741 | ) | ||||||||||||
| Less: loss attributable to noncontrolling interest | - | - | - | (2,702,185 | ) | 374,244 | (2,327,941 | ) | ||||||||||||||||
| Net loss | (20,968,060 | ) | (7,912,342 | ) | (14,970,338 | ) | (4,667,202 | ) | (4,021,740 | ) | (52,539,682 | ) | ||||||||||||
8
| Year ended December 31, 2021 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs and their subsidiaries | Consolidation Adjustments | Consolidated | |||||||||||||||||||
| Revenue | - | (15,851 | ) | 2,636,562 | 171,503,642 | (29,056,388 | ) | 145,067,965 | ||||||||||||||||
| Cost of Revenue | 300,000 | - | 726,389 | 131,315,543 | (3,315,846 | ) | 129,026,086 | |||||||||||||||||
| Gross profit (loss) | (300,000 | ) | (15,851 | ) | 1,910,173 | 40,188,099 | (25,740,542 | ) | 16,041,879 | |||||||||||||||
| Operating expenses | 29,415,319 | 35,544,319 | 3,561,420 | 21,074,461 | (7,935,069 | ) | 81,660,450 | |||||||||||||||||
| Loss from operations | (29,715,319 | ) | (35,560,170 | ) | (1,651,247 | ) | 19,113,638 | (17,805,473 | ) | (65,618,571 | ) | |||||||||||||
| Other expenses, net | 3,139 | (146,447 | ) | 15,427 | (3,836,228 | ) | (14,642 | ) | (3,978,751 | ) | ||||||||||||||
| Provision for income tax | - | - | - | (9,665 | ) | 8,136,002 | 8,126,337 | |||||||||||||||||
| Loss before noncontrolling interest | (29,712,180 | ) | (35,706,617 | ) | (1,635,820 | ) | 15,267,745 | (9,684,113 | ) | (61,470,985 | ) | |||||||||||||
| Less: loss attributable to noncontrolling interest | - | - | - | (7,330,267 | ) | - | (7,330,267 | ) | ||||||||||||||||
| Net loss | (29,712,180 | ) | (35,706,617 | ) | (1,635,820 | ) | 7,937,478 | (9,684,113 | ) | (68,801,252 | ) | |||||||||||||
Consolidating Balance Sheets Information
| As of December 31, 2023 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs and their subsidiaries | Consolidation Adjustments | Consolidated | |||||||||||||||||||
| Cash | 5,662 | 50,690 | 18,579 | 9,055 | - | 83,986 | ||||||||||||||||||
| Accounts receivable | - | 755,621 | 3,613,413 | 15,794,476 | (16,814,006 | ) | 3,349,504 | |||||||||||||||||
| Intercompany receivables | 73,328,477 | 65,501,167 | 200,489 | 21,721,734 | (160,751,867 | ) | - | |||||||||||||||||
| Other current asset | 20,812,423 | 5,930,409 | 831,568 | 14,695,064 | (38,554,230 | ) | 3,715,234 | |||||||||||||||||
| Total current asset | 94,146,562 | 72,237,887 | 4,664,049 | 52,220,329 | (216,120,103 | ) | 7,148,724 | |||||||||||||||||
| Property and equipment, net | - | 235,588 | 865,341 | 43,874 | (62,803 | ) | 1,082,000 | |||||||||||||||||
| Investment in subsidiaries | 63,677,883 | 62,740,824 | - | 53,472,741 | (179,891,448 | ) | - | |||||||||||||||||
| Intangible asset, net | - | - | 29,685 | - | 43,299,459 | 43,329,144 | ||||||||||||||||||
| Right of use asset, net | - | 167,092 | 414,603 | 197,212 | (34,697 | ) | 744,210 | |||||||||||||||||
| Other-non-current asset | 2,344,250 | 2,560,573 | - | 2,936,301 | (6,507,460 | ) | 1,333,664 | |||||||||||||||||
| Total Non-current asset | 66,022,133 | 65,704,077 | 1,309,629 | 56,650,128 | (143,196,949 | ) | 6,489,018 | |||||||||||||||||
| Total Asset | 160,168,695 | 137,941,964 | 5,973,678 | 108,870,457 | (359,317,052 | ) | 53,637,742 | |||||||||||||||||
| Accounts payable | - | 19,906,803 | 8,104,691 | 13,843,617 | (33,620,220 | ) | 8,234,891 | |||||||||||||||||
| Lease liability | - | 170,962 | 357,564 | 201,778 | - | 730,304 | ||||||||||||||||||
| Other current liabilities | 3,469,583 | 123,048,670 | 13,967,687 | 117,160,119 | (165,870,787 | ) | 91,775,272 | |||||||||||||||||
| Total current liabilities | 3,469,583 | 143,126,435 | 22,429,942 | 131,205,514 | (199,491,007 | ) | 100,740,467 | |||||||||||||||||
| Lease liability-NC | - | - | 62,528 | - | - | 62,528 | ||||||||||||||||||
| Other non-current liabilities | - | - | 847,135 | - | 5,011,566 | 5,858,701 | ||||||||||||||||||
| Total non-current liabilities | - | - | 909,663 | - | 5,011,566 | 5,921,229 | ||||||||||||||||||
| Total liabilities | 3,469,583 | 143,126,435 | 23,339,605 | 131,205,514 | (194,479,441 | ) | 106,661,696 | |||||||||||||||||
| Accumulated deficit | (61,548,167 | ) | (123,851,265 | ) | (63,594,248 | ) | (47,028,999 | ) | (120,558,603 | ) | (416,581,282 | ) | ||||||||||||
| Other equity | 218,247,279 | 118,666,794 | 46,228,321 | 24,693,942 | (54,483,334 | ) | 353,353,002 | |||||||||||||||||
| Total equity | 156,699,112 | (5,184,471 | ) | (17,365,927 | ) | (22,335,057 | ) | (175,041,937 | ) | (633,228,280 | ) | |||||||||||||
| Total Liability and stockholders’ equity | 160,168,695 | 137,941,964 | 5,973,678 | 108,870,457 | (359,317,052 | ) | 53,637,742 | |||||||||||||||||
9
| As of December 31, 2022 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs and their subsidiaries | Consolidation Adjustments | Consolidated | |||||||||||||||||||
| Cash | 12,874 | 336,846 | 59,293 | 531,534 | 324,334 | 1,264,881 | ||||||||||||||||||
| Accounts receivable | - | 1,161,641 | 4,399,643 | 18,646,214 | (16,923,932 | ) | 7,283,566 | |||||||||||||||||
| Intercompany receivables | 74,369,714 | 68,346,860 | 526,951 | 42,042,009 | (185,285,534 | ) | - | |||||||||||||||||
| Other current asset | 19,478,423 | 4,693,908 | 1,058,799 | 41,506,852 | (30,460,759 | ) | 36,277,223 | |||||||||||||||||
| Total current asset | 93,861,011 | 74,539,255 | 6,044,686 | 102,726,609 | (232,345,891 | ) | 44,825,670 | |||||||||||||||||
| Property and equipment, net | - | 630,565 | 2,678,272 | 214,973 | - | 3,523,810 | ||||||||||||||||||
| Investment in subsidiaries | 63,677,883 | 62,440,824 | - | 57,438,383 | (183,557,090 | ) | - | |||||||||||||||||
| Intangible asset, net | - | - | 50,926 | 158,833 | 87,449,960 | 87,659,719 | ||||||||||||||||||
| Right of use asset, net | - | 692,919 | 1,002,496 | 1,030,362 | - | 2,725,777 | ||||||||||||||||||
| Other-non-current asset | 2,366,978 | 2,567,396 | - | 3,005,359 | 86,962,466 | 94,902,199 | ||||||||||||||||||
| Total Non-current asset | 66,044,861 | 66,331,704 | 3,731,694 | 61,847,910 | (9,144,664 | ) | 188,811,505 | |||||||||||||||||
| Total Asset | 159,905,872 | 140,870,959 | 9,776,380 | 164,574,519 | (241,490,555 | ) | 233,637,175 | |||||||||||||||||
| Accounts payable | - | 20,189,728 | 6,133,610 | 16,758,506 | (34,990,085 | ) | 8,091,759 | |||||||||||||||||
| Lease liability | - | 358,612 | 614,077 | 692,721 | - | 1,665,410 | ||||||||||||||||||
| Other current liabilities | 1,062,668 | 111,980,444 | 19,730,024 | 143,844,642 | (191,543,335 | ) | 85,074,443 | |||||||||||||||||
| Total current liabilities | 1,062,668 | 132,528,784 | 26,477,711 | 161,295,869 | (226,533,420 | ) | 94,831,612 | |||||||||||||||||
| Lease liability-NC | - | 324,255 | 427,499 | 396,772 | - | 1,148,526 | ||||||||||||||||||
| Other non-current liabilities | - | - | 861,500 | - | 2,486,040 | 3,347,540 | ||||||||||||||||||
| Total non-current liabilities | - | 324,255 | 1,288,999 | 396,772 | 2,486,040 | 4,496,066 | ||||||||||||||||||
| Total liabilities | 1,062,668 | 132,853,039 | 27,766,710 | 161,692,641 | (224,047,380 | ) | 99,327,678 | |||||||||||||||||
| Accumulated deficit | (52,484,550 | ) | (121,844,611 | ) | (55,952,193 | ) | (40,940,607 | ) | 35,972,003 | (235,249,958 | ) | |||||||||||||
| Other equity | 211,327,754 | 129,862,531 | 37,961,863 | 43,822,485 | (63,619,504 | ) | 359,355,129 | |||||||||||||||||
| Total equity | 158,843,204 | 8,017,920 | (17,990,330 | ) | 2,881,878 | (27,647,501 | ) | 124,105,171 | ||||||||||||||||
| Total Liability and stockholders’ equity | 159,905,872 | 140,870,959 | 9,776,380 | 164,574,519 | (241,490,555 | ) | 233,637,175 | |||||||||||||||||
Consolidating Cash Flows Information
| Year ended December 31, 2023 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs | Elimination | Consolidated | |||||||||||||||||||
| Net cash (used in)/provided by operation activities | (305,859 | ) | 1,261,061 | (26,106 | ) | (1,522,303 | ) | 172,366 | (420,841 | ) | ||||||||||||||
| Net cash (used in)/provided by investing activities | - | (260,903 | ) | - | (505,398 | ) | 329,720 | (436,581 | ) | |||||||||||||||
| Net cash (used in)/provided by financing activities | 290,000 | 844,163 | - | (209,421 | ) | (300,000 | ) | 624,742 | ||||||||||||||||
| Effect of exchange rate changes on cash | 8,647 | 68,241 | (366 | ) | (318,559 | ) | (243,878 | ) | (485,915 | ) | ||||||||||||||
| Net increase in cash and cash equivalents | (7,212 | ) | 1,912,562 | (26,472 | ) | (2,555,681 | ) | (41,792 | ) | (718,595 | ) | |||||||||||||
| Year ended December 31, 2022 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs | Elimination | Consolidated | |||||||||||||||||||
| Net cash (used in)/provided by operation activities | (13,187,296 | ) | (4,363,034 | ) | (2,753,716 | ) | (3,599,661 | ) | (31,058,507 | ) | (17,870,525 | ) | ||||||||||||
| Net cash (used in)/provided by investing activities | - | (5,190,871 | ) | (88,618 | ) | (2,488,567 | ) | 6,594,214 | (934,197 | ) | ||||||||||||||
| Net cash (used in)/provided by financing activities | 7,420,000 | 3,838,243 | 2,342,047 | 2,257,470 | 28,620,214 | 7,093,542 | ||||||||||||||||||
| Effect of exchange rate changes on cash | 124,445 | (86,144 | ) | (30,256 | ) | (324,086 | ) | (3,526,830 | ) | (3,819,202 | ) | |||||||||||||
| Net increase in cash and cash equivalents | (5,642,851 | ) | (5,801,806 | ) | (530,543 | ) | (4,154,844 | ) | 629,091 | (15,530,382 | ) | |||||||||||||
10
| Year ended December 31, 2021 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs | Elimination | Consolidated | |||||||||||||||||||
| Net cash (used in)/provided by operation activities | (86,208,510 | ) | (15,968,254 | ) | 34,337,973 | 15,949,957 | (1,812,380 | ) | (53,787,959 | ) | ||||||||||||||
| Net cash (used in)/provided by investing activities | (72,449,477 | ) | (52,884,803 | ) | 151,027 | (13,979,925 | ) | 60,766,693 | (78,396,485 | ) | ||||||||||||||
| Net cash (used in)/provided by financing activities | 164,103,934 | 75,546,992 | (35,042,385 | ) | 4,318,722 | (60,363,735 | ) | 148,910,734 | ||||||||||||||||
| Effect of exchange rate changes on cash | 209,778 | 109,208 | (6,586 | ) | (1,595,463 | ) | 1,540,705 | (2,820 | ) | |||||||||||||||
| Net increase in cash and cash equivalents | 5,655,725 | 6,803,143 | (559,971 | ) | 4,693,291 | 131,283 | 16,723,470 | |||||||||||||||||
Enforceability of Civil Liabilities
We are incorporated in the British Virgin Islands to take advantage of certain benefits associated with being a British Virgin Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions and the availability of professional and support services. However, certain disadvantages accompany incorporation in the British Virgin Islands. These disadvantages include that the British Virgin Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors. In addition, British Virgin Islands companies do not have standing to sue before the federal courts of the United States.
Our memorandum and articles of association do not contain provisions requiring that disputes be submitted to arbitration, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders. An important part of our operations is conducted and a significant portion of our assets is located outside the United States. Some of our directors and officers are nationals or residents of jurisdictions other than the United States, and some or all of their assets are located outside the United States. As a result, it may be difficult or impossible for a shareholder to bring an original action against us or such persons in a British Virgin Islands or China court in the event that a shareholder believes that his or her rights have been infringed under the U.S. federal securities laws or otherwise. It may also be difficult for a shareholder to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, some of whom are not residents of the United States and whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the British Virgin Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. It is uncertain whether British Virgin Islands or PRC courts would be competent to hear original actions brought in the British Virgin Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state.
Our corporate affairs are governed by our memorandum and articles of association, or Articles, and by the BVI Business Companies Act, 2004 and common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the British Virgin Islands has no securities laws as compared to the United States, and provides significantly less protection to investors. In addition, British Virgin Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.
11
We conduct all of our operations in China and all of our assets are located in China. In addition, except for our two independent directors, Mr. David Wei Tang, who is a U.S. citizen, and Mr. Meng Bryan Yap, who is a Singapore citizen, all of our other officers and directors are PRC nationals. Most of our officers and directors reside within China. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult to effect service of process within the United States upon these persons.
Based on the management’s understanding to the PRC law, there is uncertainty as to whether the courts of the PRC would:
| ● | recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or |
| ● | entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. |
In addition, the management believes that there is uncertainty as to whether the courts of the British Virgin Islands would (i) recognize or enforce judgments of U.S. courts obtained against the Company or its directors, officers, predicated upon civil liability provisions of the securities laws of the United States or any state in the United states, or (ii) entertain original actions brought in the British Virgin Islands against the Company or its directors, officers, predicated upon civil liability provisions of the securities laws of the United States or any state in the United States.
Although there is no statutory enforcement in the British Virgin Islands of final and conclusive monetary judgments obtained in a competent federal or state court of the United States for a definite sum (and the British Virgin Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments with the United States), the courts of the British Virgin Islands would recognise as a valid judgment, a final and conclusive judgment in personam obtained in a competent federal or state court of the United States of America against the Company under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules of natural justice of the British Virgin Islands; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the British Virgin Islands; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the British Virgin Islands; and (f) there is due compliance with the correct procedures under the laws of the British Virgin Islands. However, the British Virgin Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the British Virgin Islands to give rise to obligations to make payments that are penal or punitive in nature.
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made or in reciprocity between jurisdictions. China does not have any treaties or other agreements with the British Virgin Islands or the United States that provide for the reciprocal recognition and enforcement of foreign judgments as of the date of this annual report. In addition, according to the PRC Civil Procedures Law, PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security, or public interest. As a result, it is uncertain whether a Chinese court would enforce a judgment rendered by a court in either of these two jurisdictions.
12
A. [Reserved.]
B. CAPITALIZATION AND INDEBTEDNESS.
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
Not applicable.
D. RISK FACTORS.
An investment in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all other information contained in this annual report, including the matters discussed under “Special Note Regarding Forward-Looking Statements,” before you decide to invest in our ordinary shares. You should pay particular attention to the fact that we are a holding company with substantial operations in China and are subject to legal and regulatory environments that in many respects differ from those of the United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects would be materially and adversely affected. You should also consider all other information contained in this annual report before deciding to invest in our ordinary shares.
Risk Factors Summary
Our business is subject to a number of risks and uncertainties from business operations, having business in China, and being incorporated in British Virgin Islands, including the following highlighted risks:
| ● | Our strategy includes plans to grow both organically and through acquisitions, participation in joint ventures or other strategic alliances. However, such acquisitions may adversely affect our business and the acquisition may not be successful, please see “risk factor - We may undertake acquisitions, investments, joint ventures or other strategic alliances, which could have a material adverse effect on our ability to manage our business. In addition, such undertakings may not be successful” for more details. |
| ● | The industry the Company participates in is competitive in recruiting highly-skilled personnel, we cannot assure we are able to cost-efficiently find qualified employees, please see “risk factor - Due to intense competition for highly-skilled personnel, we may fail to attract and retain enough sufficiently trained employees to support our operations; our ability to bid for and obtain new projects may be negatively affected and our revenues could decline as a result” for more details. |
| ● | China’s spatial-temporal big-data processing and interactive location-based services industry, in which we operate, is characterized by rapidly changing technology, if the Company cannot keep pace with the development, we may lose our competitiveness. Please see “Risk Factor - Changes in technology could adversely affect our business by increasing our costs, reducing our profit margins and causing a decline in our competitiveness” for more details. |
| ● | Intellectual property owned by the Company is important to our products and our business operations, if we cannot protect our intellectual property rights, our competitiveness may be negatively influence. Please see “Risk Factor - Our failure to protect our intellectual property rights may undermine our competitive position, and subject us to costly litigation to protect our intellectual property rights” for more details. |
| ● | It is determined that the Company has material weakness in the ineffective disclosure controls and procedures and our internal controls over financial reporting, which may harm our operating results. Please see “Risk Factor - Weaknesses in our internal controls over financial reporting or disclosure controls and procedures may have a material adverse effect on our business, the price of our ordinary shares, operating results and financial condition” for more details. |
| ● | The Company is a foreign private issuer incorporated in British Virgin Islands, which is different from the U.S. Laws and you may receive less protections. Please see “Risk Factor - As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder”, “Risk Factor - British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests” and “Risk Factor - The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs” for more details. |
| ● | The Company has been notified an incompliance to the continued listing requirement of Nasdaq Capital Market, which may pose additional difficulties in future financing. Please see “Risk Factor - If the trading price of our ordinary shares fails to comply with the continued listing requirements of the NASDAQ Capital Market, we would face possible delisting, which would result in a limited public market for our ordinary shares and make obtaining future debt or equity financing more difficult for us” for more details. |
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Risk Factors Summary – Risks Related to Doing Business in China
| ● | The Company is using variable interest entities in corporate structure to conduct business operations in China, this structure may be disallowed by the unpredictable changes in PRC legal system, which may materially influence the business operation of the Company. Please see Risk Factor - If the PRC government deems that our agreements with the VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries or other laws or regulations of the PRC, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations, which may materially reduce the value of our ordinary shares” for more details. |
| ● | The Company has substantially all of the business conducted in China, therefore, as the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies, the Company’s business operations may be adversely affected by the changes in political and economic policies of the PRC. Please see “Risk Factor - Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position” for more details. |
| ● | We are a company incorporated under the laws of the British Virgin Islands, we conduct all of our operations in China and all of our assets and most of our directors are located in China, therefore, you may experience difficulties in service of legal process. Please see “Risk Factor - You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in this annual report based on foreign laws” for more details. |
| ● | As the PRC legal system is drastically developing, the Company may be subject to additional regulatory review and additional compliance requirements to do business, which may bear more cost on the Company. Please see “Risk Factor - Adverse regulatory developments in China may subject us to additional regulatory review, and additional disclosure requirements and regulatory scrutiny to be adopted by the SEC in response to risks related to recent regulatory developments in China may impose additional compliance requirements for companies like us with significant China-based operations, all of which could increase our compliance costs, subject us to additional disclosure requirements. In addition, uncertainties with respect to the PRC legal system could adversely affect us” for more details. |
| ● | As of the date of this annual report, the Company is not subject to the Cybersecurity Review imposed by the PRC government, however, the Company cannot foresee the changes in interpretation of the laws, and the Company may in the future be required to timely complete such review. Please see “Risk Factor - Compliance with China’s new Data Security Law, Measures on Cybersecurity Review (revised draft for public consultation), Personal Information Protection Law (second draft for consultation), regulations and guidelines relating to the multi-level protection scheme and any other future laws and regulations may entail significant expenses and could materially affect our business” and “Risk Factor - Recent greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact our business and our offering” for more details. |
| ● | Since almost all of the business operations of the Company are in China, through our subsidiaries and the VIEs, the currency for business is RMB, while our reporting currency is USD, therefore, the fluctuation of which may affect the value of your investment. Please see “Risk Factor - Governmental control of currency conversion may affect the value of your investment” and “Risk Factor - Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment” for more details. |
| ● | PCAOB may issue reports or determinations analyzing their accessibility to the auditors who have branches in China or Hong Kong, as of the date of this annual report, our auditors are subject to full inspections, but if it changes, it may adversely affect the Company’s business. Please see “Risk Factor - Our previous auditor is headquartered in the United States, and our current auditor is headquartered in Singapore, both are subject to inspection by the PCAOB on a regular basis. To the extent that our independent registered public accounting firms’ audit documentation related to their audit reports for our company become located in China, the PCAOB may not be able inspect such audit documentation and, as such, you may be deprived of the benefits of such inspection and our ordinary shares could be delisted from the stock exchange pursuant to the Holding Foreign Companies Accountable Act” for more details. |
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We may undertake acquisitions, investments, joint ventures or other strategic alliances, which could have a material adverse effect on our ability to manage our business. In addition, such undertakings may not be successful.
Our strategy includes plans to grow both organically and through acquisitions, participation in joint ventures or other strategic alliances. Joint ventures and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated with additional capital requirements. We may not be able, however, to identify suitable future acquisition candidates or alliance partners. Even if we identify suitable candidates or partners, we may be unable to complete an acquisition or alliance on terms commercially acceptable to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, we may not be able to implement our strategies effectively or efficiently.
In addition, our ability to successfully integrate acquired companies and their operations may be adversely affected by several factors. These factors include:
| 1. | diversion of management’s attention; | |
| 2. | difficulties in retaining customers of the acquired companies; | |
| 3. | difficulties in retaining personnel of the acquired companies; | |
| 4. | entry into unfamiliar markets; | |
| 5. | unanticipated problems or legal liabilities; and | |
| 6. | tax and accounting issues. |
If we fail to integrate acquired companies efficiently, our earnings, revenue growth and business could be negatively affected.
Due to intense competition for highly-skilled personnel, we may fail to attract and retain enough sufficiently trained employees to support our operations; our ability to bid for and obtain new projects may be negatively affected and our revenues could decline as a result.
The IT industry relies on skilled employees, and our success depends to a significant extent on our ability to attract, hire, train and retain qualified employees. There is significant competition in China for professionals with the skills necessary to develop the products and perform the services we offer to our customers. Increased competition for these professionals, in the mobile application design area or otherwise, could have an adverse effect on us if we experience significant increase in the attrition rate among employees with specialized skills, which could decrease our operating efficiency and productivity and could lead to a decline in demand for our services.
In addition, our ability to serve existing customers and business partners and obtain new business will depend, in large part, on our ability to attract, train and retain skilled personnel that enable us to keep pace with growing demands for spatial-temporal big-data processing and interactive location-based services, evolving industry standards and changing customer preferences. Our failure to attract, train and retain personnel with the qualifications necessary to fulfill the needs of our existing and future customers or to assimilate new employees successfully could have a material adverse effect on our business, financial condition and results of operations. Our failure to retain our key personnel on business development or find suitable replacements of the key personnel upon their departure may lead to shrinking new implementation projects, which could materially adversely affect our business.
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Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.
Our future success heavily depends upon the continued services of our senior executives and other key employees, particularly since we recently appointed a new Chairman. We are reliant on the services of Mr. Xuesong Song, our Chairman, Chief Executive Officer and member of our board of directors. If one or more of our senior executives or key employees is unable or unwilling to continue in his or her present position, we may not be able to replace such employee easily, or at all, we may incur additional expenses to recruit, train and retain replacement personnel, our business may be severely disrupted, and our financial condition and results of operations may be materially adversely affected.
Our business could suffer if our executives and directors compete against us and our non-competition agreements with them cannot be enforced.
If any of our senior executives or key employees joins a competitor or forms a competing company, we may lose customers, know-how and key professionals and staff members to them. Also, if any of our business development managers who keep a close relationship with our customers and business partners joins a competitor or forms a competing company, we may lose customers, and our revenues may be materially adversely affected. Most of our executives have entered, or will soon enter, into employment agreements with us that contain or will contain non-competition provisions. However, if any dispute arises between our executive officers and us, such non-competition provisions may not be enforceable, especially in China, where all of these executive officers and key employees reside, in light of the uncertainties with China’s legal system. See “Risk Factors — Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could adversely affect us.”
Our computer networks may be vulnerable to security risks that could disrupt our services and adversely affect our results of operations.
Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems caused by unauthorized access to, or improper use of, systems by third parties or employees. We have been the target of attempted cyber-security breaches in the past and expect that we will continue to be subject to such attempts in the future. A hacker who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. Computer attacks or disruptions may jeopardize the security of information stored in and transmitted through computer systems and mobile devices of our customers. Actual or perceived concerns that our systems may be vulnerable to such attacks or disruptions may deter customers from using our services. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches, which could adversely affect our results of operations.
If we do not continually enhance our solutions and service offerings, we may have difficulty in retaining existing customers and attracting new customers.
We believe that our future success will depend, to a significant extent, upon our ability to enhance our existing technologies, applications and platform, and to introduce new features to meet the preferences and requirements of our customers in a rapidly developing and evolving market. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction of one or more of these products or services, or any products or services that we may plan to introduce in the future. Our present or future products may not satisfy the evolving preferences and tastes of our customers, and these solutions and services may not achieve anticipated market acceptance or generate incremental revenue. If we are unable to anticipate or respond adequately to the need for service or product enhancements due to resource, technological or other constraints, our business, financial condition and results of operations could be materially and adversely affected.
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If we are unable to develop competitive new products and service offerings our future results of operations could be adversely affected.
Our future revenue stream depends to a large degree on our ability to utilize our technology in a way that will allow us to offer new types of products in relation to maps and geospatial data processing, mobile applications and services to a broader customer base. We will be required to make investments in research and development in order to continually develop new products, software applications and related service offerings, enhance our existing products, platform, mobile applications and related service offerings and achieve market acceptance of our mobile applications and service offerings. We may incur problems in the future in innovating and introducing new products, mobile applications and service offerings. Our development-stage products, mobile applications may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we are unable to successfully define, develop and introduce competitive new mobile applications, and enhance existing mobile applications, our future results of operations would be adversely affected. The timely availability of new applications and their acceptance by customers are important to our future success. A delay in the development of new applications could have a significant impact on its results of operations.
Changes in technology could adversely affect our business by increasing our costs, reducing our profit margins and causing a decline in our competitiveness.
China’s spatial-temporal big-data processing and interactive location-based services industry, in which we operate, is characterized by rapidly changing technology, evolving industry standards, frequent introductions of new services and solutions and enhancements as well as changing customer demands. New solutions and new technologies often render existing solutions and services obsolete, excessively costly or otherwise unmarketable. As a result, our success depends on our ability to adapt to the latest technological progress, such as the 5G standard and technologies, and to develop or acquire and integrate new technologies into our products, mobile applications and related services. Advances in technology also require us to commit substantial resources to developing or acquiring and then deploying new technologies for use in our operations. We must continuously train personnel in new technologies and in how to integrate existing systems with these new technologies. We may not be able to adapt quickly to new technologies or commit sufficient resources to compete successfully against existing or new competitors in bringing to market solutions and services that incorporate these new technologies. We may incur problems in the future in innovating and introducing new mobile applications and service offerings. Our development of new mobile applications and platform enhancements may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we fail to adapt to changes in technologies and compete successfully against established or new competitors, our business, financial condition and results of operations could be adversely affected.
Problems with the quality or performance of our software or other systems may cause delays in the introduction of new solutions or result in the loss of customers and revenues, which could have a material and adverse effect on our business, financial condition and results of operations.
Our products are complex and may contain defects, errors or bugs when first introduced to the market or to a particular customer, or as new versions are released. Because we cannot test for all possible scenarios, our systems may contain errors that are not discovered until after they have been installed or implemented, and we may not be able to timely correct these problems. These defects, errors or bugs could interrupt or delay the completion of projects or sales to our customers. In addition, our reputation may be damaged and we may fail to acquire new projects from existing customers or new customers. Errors may occur when we provide systems integration and maintenance services. Even in cases where we have agreements with our customers that contain provisions designed to limit our exposure to potential claims and liabilities arising from customer problems, these provisions may not effectively protect us against such claims in all cases and in all jurisdictions. In addition, as a result of business and other considerations, we may undertake to compensate our customers for damages arising from the use of our solutions, even if our liability is limited by these provisions. Moreover, claims and liabilities arising from customer problems could also result in adverse publicity and materially and adversely affect our business, results of operations and financial condition. We currently do not carry any product or service liability insurance and any imposition of liability on us may materially and adversely affect our business and increase our costs, resulting in reduced revenues and profitability.
Our products may contain undetected software defects, which could negatively affect our revenues.
Our software products are complex and may contain undetected defects. Although we test our products, it is possible that errors may be found or occur in our new or existing products after we have delivered those products to the customers. Defects, whether actual or perceived, could result in adverse publicity, loss of revenues, product returns, a delay in market acceptance of our products, loss of competitive position or claims against us by customers. Any such problems could be costly to remedy and could cause interruptions, delays, or cessation of our product sales, which could cause us to lose existing or prospective customers and could negatively affect our results of operations.
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We may be subject to infringement, misappropriation and indemnity claims in the future, which may cause us to incur significant expenses, pay substantial damages and be prevented from providing our services or technologies.
Our success depends, in part, on our ability to carry out our business without infringing the intellectual property rights of third parties. Patent and copyright law covering software-related technologies is evolving rapidly and is subject to a great deal of uncertainty. Our self-developed or licensed technologies, processes or methods may be covered by third-party patents or copyrights, either now existing or to be issued in the future. Any potential litigation may cause us to incur significant expenses. Third-party claims, if successfully asserted against us may cause us to pay substantial damages, seek licenses from third parties, pay ongoing royalties, redesign our services or technologies, or prevent us from providing services or technologies subject to these claims. Even if we were to prevail, any litigation would likely be costly and time-consuming and divert the attention of our management and key personnel from our business operations.
Our failure to protect our intellectual property rights may undermine our competitive position, and subject us to costly litigation to protect our intellectual property rights.
Any misappropriation of our technology or the development of competitive technology could seriously harm our business. We regard a substantial portion of our hardware and software systems as proprietary and rely on statutory copyright, trademark, patent, trade secret laws, customer license agreements, employee and third-party non-disclosure agreements and other methods to protect our proprietary rights. Nevertheless, these resources afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate. In particular, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition and results of operations. In addition, intellectual property rights and confidentiality protection in China may not be as effective as in the United States, and policing unauthorized use of proprietary technology can be difficult and expensive. Further, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The outcome of any such litigation may not be in our favor. Any such litigation may be costly and may divert management attention, as well as our other resources, away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation costs and would have to bear all litigation costs in excess of the amount recoverable from other parties. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Our solutions incorporate a portion of, and work in conjunction with, third-party hardware and software solutions. If these third-party hardware or software solutions are not available to us at reasonable costs, or at all, our results of operations could be adversely impacted.
Although our hardware and software systems and mobile applications primarily rely on our own core technologies, some elements of our systems incorporate a small portion of third-party hardware and software solutions. If any third party were to discontinue making their intellectual property available to us or our customers on a timely basis, or increase materially the cost of their licensing such intellectual property, or if our systems or applications failed to properly function or interoperate with replacement intellectual property, we may need to incur costs in finding replacement third-party solutions and/or redesigning our systems or applications to replace or function with or on replacement third-party proprietary technology. Replacement technology may not be available on terms acceptable to us or at all, and we may be unable to develop alternative solutions or redesign our systems or applications on a timely basis or at a reasonable cost. If any of these were to occur, our results of operations could be adversely impacted.
Our ability to sell our products is highly dependent on the quality of our service and support offerings, and our failure to offer high quality service could have a material adverse effect on our ability to market and sell our products.
Our customers depend upon our customer service and support staff to resolve issues relating to our products. High-quality support services are critical for the successful marketing and sale of our products. If we fail to provide high-quality support on an ongoing basis, our customers may react negatively and we may be materially and adversely affected in our ability to sell additional products to these customers. This could also damage our reputation and prospects with potential customers. Our failure to maintain high-quality support services could have a material and adverse effect on our business, results of operations and financial condition.
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Weaknesses in our internal controls over financial reporting or disclosure controls and procedures may have a material adverse effect on our business, the price of our ordinary shares, operating results and financial condition.
We are required to establish and maintain appropriate internal controls over financial reporting and disclosure controls and procedures. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission (the “SEC”), every public company is required to include a management report on its internal controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over financial reporting. This requirement first applied to our annual report on Form 20-F for the fiscal year ended on September 30, 2011. In connection with our assessments of our disclosure controls and procedures and internal controls over financial reporting, management concluded that as of December 31, 2023, our disclosure controls and procedures and our internal controls over financial reporting were not effective due to lack of U.S. generally accepted accounting principles (“U.S. GAAP”) expertise in our current accounting team. Please refer to the discussion under Item 15, “Controls and Procedures” for further discussion of our material weakness as of December 31, 2023. Should we be unable to remediate the material weakness promptly and effectively, such weakness could harm our operating results, result in a material misstatement of our financial statements, cause us to fail to meet our financial reporting obligations or prevent us from providing reliable and accurate financial reports or avoiding or detecting fraud. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the trading price of our ordinary shares. Any litigation or other proceeding or adverse publicity relating to the material weaknesses could have a material adverse effect on our business and operating results.
We have very limited insurance coverage which could expose us to significant costs and business disruption.
We do not maintain any insurance coverage for our leased properties. Should any natural catastrophes such as earthquakes, floods, typhoons or any acts of terrorism occur in Beijing, China, where our head office is located and most of our employees are based, or elsewhere in China, we might suffer not only significant property damages, but also loss of revenues due to interruptions in our business operations, which could have a material adverse effect on our business, operating results or financial condition.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources, particularly if it affects our technology platforms which we depend on for delivery of our software and services, and could have a material adverse effect on our financial condition and results of operations.
We may be liable to our customers for damages caused by unauthorized disclosure of sensitive and confidential information, whether through our employees or otherwise.
We are typically required to manage, utilize and store sensitive or confidential customer data in connection with the products and services we provide. Under the terms of our customer contracts, we are required to keep such information strictly confidential. We seek to implement specific measures to protect sensitive and confidential customer data. We require our employees to enter into non-disclosure agreements to limit such employees’ access to, and distribution of, our customers’ sensitive and confidential information and our own trade secrets. We can give no assurance that the steps taken by us in this regard will be adequate to protect our customers’ confidential information. If our customers’ proprietary rights are misappropriated by our employees, in violation of any applicable confidentiality agreements or otherwise, our customers may consider us liable for that act and seek damages and compensation from us. However, we currently do not have any insurance coverage for mismanagement or misappropriation of such information by our employees. Any litigation with respect to unauthorized disclosure of sensitive and confidential information might result in substantial costs and diversion of resources and management attention.
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We may face intellectual property infringement claims that could be time-consuming and costly to defend. If we fail to defend ourselves against such claims, we may lose significant intellectual property rights and may be unable to continue providing our existing products and services.
It is critical that we use and develop our technology and products without infringing upon the intellectual property rights of third parties, including patents, copyrights, trade secrets and trademarks. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. A successful infringement claim against us, whether with or without merit, could, among others things, require us to pay substantial damages, develop non-infringing technology, or re-brand our name or enter into royalty or license agreements that may not be available on acceptable terms, if at all, and cease making, licensing or using products that have infringed a third party’s intellectual property rights. Protracted litigation could also result in existing or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation, or could require us to indemnify our customers against infringement claims in certain instances. Also, we may be unaware of intellectual property registrations or applications relating to our services that may give rise to potential infringement claims against us. Parties making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology containing the allegedly infringing intellectual property. Any intellectual property litigation could have a material adverse effect on our business, results of operations or financial condition.
Seasonality and fluctuations in our customers’ spending cycles and other factors can cause our revenues and operating results to vary significantly from quarter to quarter and from year to year.
Our revenues and operating results will vary from quarter to quarter and from year to year due to a number of factors, many of which are outside of our control. Our new lines of business acquired upon the consummation of the asset exchange transaction discussed below see higher customer use and activity during the Chinese New Year holiday than other times during the year, which lead to higher revenue during this period as more customers would like to place more advertising. Historically, the products of our subsidiary Superengine Graphics Software Technology Development (Suzhou) Co., Ltd (“Superengine”) have a pattern of decreased sales in the first fiscal quarter as a result of industry buying patterns. Due to these and other factors, our operating results may fluctuate from quarter to quarter and from year to year. These fluctuations are likely to continue in the future, and operating results for any period may not be indicative of our future performance in any future period.
Our corporate actions are substantially controlled by Mr. Xuesong Song, our Chairman and Chief Executive Officer, who can cause us to take actions in ways you may not agree with.
Mr. Xuesong Song, our Chairman and Chief Executive Officer, beneficially owns 4.81% of our outstanding ordinary shares and 83,333 preferred shares, and each preferred share has the right to 399 votes at a meeting of the shareholders of the Company. As a result, Mr. Song has approximately 64.79% of the voting rights of the shareholders of the Company. Mr. Song can exert control and substantial influence over matters such as electing directors, amending our constitutional documents, and approving acquisitions, mergers or other business combination transactions. This concentration of ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our shares. Alternatively, our controlling shareholders may cause a merger, consolidation or change of control transaction even if it is opposed by our other shareholders, including those who purchase shares in this offering
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We depend on a small number of customers to derive a significant portion of our revenues. If we were to continue being dependent upon a few customers, such dependency could negatively impact our business, operating results and financial condition.
We derived a material portion of our revenues from a small number of customers. In the years ended December 31, 2023, 2022 and 2021, our five largest customers collectively accounted for 72.0%, 61.9% and 43.6% of our total sales, respectively. As our customer base may change from year-to-year, during such years that the customer base is highly concentrated, the fluctuation of our sales to any of such major customers could have a material adverse effect on our business, operating results and financial condition. Moreover, our high customer base concentration may also adversely affect our ability to negotiate contract prices with these customers, which may in turn materially and adversely affect our results of operations.
Our historical outstanding accounts receivable have been relatively high. Inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.
Historically, our outstanding accounts receivable have been relatively high. As of December 31, 2023, 2022 and 2021, our outstanding accounts receivable before impairment were $25.2 million, $28.4 million and $38.1 million, respectively. Although we conduct credit evaluations of our customers, we generally do not require collateral or other security from our customers. In addition, we have had a relatively high customer concentration. The largest outstanding accounts receivable balance accounted for 46.0%, 25.0% and 18.5% of our total accounts receivable balance as of December 31, 2023, 2022 and 2021, respectively. As a result, an extended delay or default in payment relating to a significant account would likely have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. Our inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.
Risks Related to Doing Business in China
If the PRC government deems that our agreements with the VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries or other laws or regulations of the PRC, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations, which may materially reduce the value of our ordinary shares.
We are a holding company incorporated in the British Virgin Islands. As a holding company with no material operations of our own, we conduct the majority of our business through our wholly-owned or majority-owned subsidiaries and certain business through operating entities established in the People’s Republic of China, or the PRC, primarily the VIEs. Due to PRC legal restrictions on foreign ownership of certain internet-related businesses we may explore and operate, we operate this business through the VIEs and their subsidiaries and rely on contractual arrangements. As a result of the contractual arrangements, we (i) have the power to direct activities of the VIEs that most significantly affect their economic performance, and (ii) receive the economic benefits from the VIEs that could be significant to them. Accordingly, the Company is considered the primary beneficiary of the VIEs and their subsidiaries and has consolidated the financial results of these companies in its consolidated financial statements under the U.S. GAAP for accounting purposes. Neither the Company nor its investors has an equity ownership (including foreign direct investment) in, or control through such equity ownership of, the VIEs, and the contractual arrangements are not equivalent to an equity ownership in the business of the VIEs. The ordinary shares that currently listed on the Nasdaq Capital Markets are shares of our British Virgin Islands holding company that maintains service agreements with the associated operating companies. The Chinese regulatory authorities could disallow our structure, which could result in a material change in our operations and the value of our securities could decline or become worthless. For a description of our corporate structure and contractual arrangements, see “Organizational Structure” on page 41 and “VIE Agreements with VIEs and Their Respective Shareholders” on page 46.
We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. We also believe that each of the contracts among our wholly-owned PRC subsidiary, the VIEs and its shareholders is valid, binding and enforceable in accordance with its terms. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Thus, the PRC governmental authorities may take a view contrary to the opinion of us. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structure will be adopted or if adopted, what they would provide. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations. In addition, the legality and enforceability of the contractual agreements between our PRC subsidiaries, the VIEs, and their nominee shareholders, as a whole, have not been tested in court.
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If these regulations change or are interpreted differently in the future and our corporate structure and contractual arrangements are deemed by the relevant regulators that have competent authority, to be illegal, either in whole or in part, we may be unable to direct the operations of the consolidated VIEs in the future, which conducts our manufacturing operations, holds significant assets and accounts for significant revenue, and may need to modify such structure to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material disruption to our business. Further, if our corporate structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:
| ● | revoking our business and operating licenses; |
| ● | levying fines on us; |
| ● | confiscating any of our income that they deem to be obtained through illegal operations; |
| ● | shutting down our services; |
| ● | discontinuing or restricting our operations in China; |
| ● | imposing conditions or requirements with which we may not be able to comply; |
| ● | requiring us to change our corporate structure and contractual arrangements; |
| ● | restricting or prohibiting our use of the proceeds from overseas offering to finance the consolidated VIEs’ business and operations; and |
| ● | taking other regulatory or enforcement actions that could be harmful to our business. |
Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and contractual arrangements. Occurrence of any of these events could materially and adversely affect our business, financial condition and results of operations and the market price of our ordinary shares. In addition, if the imposition of any of these penalties or requirement to restructure our corporate structure causes us to lose the rights to direct the activities of the consolidated VIEs, we would no longer be able to consolidate the financial results of such VIEs in our consolidated financial statements, which may cause the value of our securities to significantly decline or even become worthless.
In addition, while we will take every precaution available to effectively enforce the contractual and corporate relationship of the VIE agreements, these contractual arrangements are less effective than direct ownership and we may incur substantial costs to enforce the terms of the arrangements. For example, the VIEs and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. If we had direct ownership of the VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of the VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under VIE Agreements, we will rely on the performance by the VIEs and its shareholders of their obligations under the contracts to direct the operation of the VIEs. As such, the shareholders of VIEs may not act in the best interests of our company or may not perform their obligations under these contracts. In addition, failure of the VIE shareholders to perform certain obligations could compel us to rely on legal remedies available under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which may not be effective.
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position.
Substantially all of our business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. Although the Chinese economy is no longer a planned economy, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant growth in the past 30 years. The reorganization of the telecommunications industry encouraged by the PRC government has directly affected our industry and our growth prospect.
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Growth of China’s economy has been uneven, both geographically and among various sectors of the economy, and the growth of the Chinese economy has slowed down in recent years. Some of the government measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. Any stimulus measures designed to boost the Chinese economy may contribute to higher inflation, which could adversely affect our results of operations and financial condition. For example, certain operating costs and expenses, such as employee compensation and office operating expenses, may increase as a result of higher inflation.
Our business benefits from certain government tax incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase our tax burden and reduce our net income.
Under the PRC Enterprise Income Tax Law passed in 2007 and the implementing rules, both of which became effective on January 1, 2008, or the New Electronic Information and Transactions (“EIT”) Law, a unified enterprise income tax rate of 25% and unified tax deduction standard is applied equally to both domestic-invested enterprises and foreign-invested enterprises, or FIEs. Enterprises established prior to March 16, 2007 eligible for preferential tax treatment in accordance with the then tax laws and administrative regulations shall gradually become subject to the New EIT Law rate over a five-year transition period starting from the date of effectiveness of the New EIT Law. However, certain qualifying high-technology enterprises may still benefit from a preferential tax rate of 15% if they own their core intellectual properties and they are enterprises in certain high-tech industries to be later specified by the government. As a result, if our PRC subsidiaries qualify as “high-technology enterprises,” they will continue to benefit from the preferential tax rate of 15%, subject to transitional rules implemented from January 1, 2008. Our subsidiaries, Beijing Zhong Chuan Shi Xun Technology Limited, and eMapgo Technologies (Beijing) Co., Ltd., are each qualified as a “high-technology enterprise” until December 17, 2024, and November 2, 2025, respectively and Beijing BotBrain AI Technology Co., Ltd., was qualified as a “high-technology enterprise” until December 2, 2023. Therefore they have benefited from the preferential tax rate of 15%, subject to transitional rules implemented on January 1, 2008. Although we intend to apply for a renewal of this qualification, if these subsidiaries cease to qualify as a “high-technology enterprise”, or the tax authorities change their position on our preferential tax treatments in the future, our future tax liabilities may materially increase, which could materially and adversely affect our financial condition and results of operations.
If we were deemed a “resident enterprise” by PRC tax authorities, we could be subject to tax on our global income at the rate of 25% under the New EIT Law and our non-PRC shareholders could be subject to certain PRC taxes.
Under the New EIT Law and the implementing rules, both of which became effective January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC may be considered a PRC “resident enterprise” and will be subject to the enterprise income tax at the rate of 25% on its global income as well as PRC enterprise income tax reporting obligations. The implementing rules of the New EIT Law define “de facto management” as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. However, as of the date of this annual report, no final interpretations on the implementation of the “resident enterprise” designation are available. Moreover, any such designation, when made by PRC tax authorities, will be determined based on the facts and circumstances of individual cases. Therefore, if we were to be considered a “resident enterprise” by the PRC tax authorities, our global income would be taxable under the New EIT Law at the rate of 25% and, to the extent we were to generate a substantial amount of income outside of PRC in the future, we would be subject to additional taxes. In addition, the dividends we pay to our non-PRC enterprise shareholders and gains derived by such shareholders from the transfer of our shares may also be subject to PRC withholding tax at the rate up to 10%, if such income were regarded as China-sourced income.
Our holding company structure may limit the payment of dividends.
We have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. As a result, there may be limitations on the ability of our PRC subsidiaries to pay dividends or make other investments or acquisitions that could be beneficial to our business or otherwise fund and conduct our business.
In addition, under the New EIT Law and the implementing rules that became effective on January 1, 2008, dividends generated from the business of our PRC subsidiaries after January 1, 2008 and payable to us may be subject to a withholding tax rate of 10% if the PRC tax authorities subsequently determine that we are a non-resident enterprise, unless there is a tax treaty with China that provides for a different withholding arrangement.
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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in this annual report based on foreign laws.
We are a company incorporated under the laws of the British Virgin Islands, we conduct all of our operations in China and all of our assets are located in China. In addition, except for our two independent directors, Mr. David Wei Tang, who is a U.S. citizen, and Mr. Meng Bryan Yap, who is a Singapore citizen, all of our other officers and directors are PRC nationals. Most of our officers and directors reside within China. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult to effect service of process within the United States upon these persons.
In addition, there is uncertainty as to whether the courts of the British Virgin Islands, the courts of China and other jurisdictions would recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or would entertain original actions brought in the British Virgin Islands or other jurisdictions against us or such persons predicated upon the securities laws of the United States or any of our state. In particular, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the British Virgin Islands and many other countries and regions. Therefore, recognition and enforcement in China regarding the judgments of a court in any of these non-PRC jurisdictions in relation to any matters not subject to a binding arbitration provision may be difficult or even impossible.
Adverse regulatory developments in China may subject us to additional regulatory review, and additional disclosure requirements and regulatory scrutiny to be adopted by the SEC in response to risks related to recent regulatory developments in China may impose additional compliance requirements for companies like us with significant China-based operations, all of which could increase our compliance costs, subject us to additional disclosure requirements. In addition, uncertainties with respect to the PRC legal system could adversely affect us.
We conduct all of our business through our subsidiaries or the VIEs in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.
The recent regulatory developments in China, in particular with respect to restrictions on China-based companies raising capital offshore, may lead to additional regulatory review in China over our financing and capital raising activities in the United States. In addition, we may be subject to industry-wide regulations that may be adopted by the relevant PRC authorities, which may have the effect of limiting our service offerings, restricting the scope of our operations in China, or causing the suspension or termination of our business operations in China entirely, all of which will materially and adversely affect our business, financial condition and results of operations. We may have to adjust, modify, or completely change our business operations in response to adverse regulatory changes or policy developments, and we cannot assure you that any remedial action adopted by us can be completed in a timely, cost-efficient, or liability-free manner or at all.
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On July 30, 2021, in response to the recent regulatory developments in China and actions adopted by the PRC government, the Chairman of the SEC issued a statement asking the SEC staff to seek additional disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective. On August 1, 2021, the China Securities Regulatory Commission (the “CSRC”) stated in a statement that it had taken note of the new disclosure requirements announced by the SEC regarding the listings of Chinese companies and the recent regulatory development in China, and that both countries should strengthen communications on regulating China-related issuers. To the best knowledge of this Company, as of the date of this annual report, current Chinese laws and regulations do not forbid us from issuing securities overseas. On December 24, 2021, the CSRC published the Administration of Overseas Securities Offering and Listing by Domestic Companies (the “Draft Administrative Provisions”) and the Administration Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (the “Draft Filing Measures”). The Draft Administrative Provisions and the Draft Filing Measures lay out requirements for filing and include unified regulation management, strengthening regulatory coordination, and cross-border regulatory cooperation. On February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial Measures”), which took effect on March 31, 2023. On the same date, the CSRC circulated Supporting Guidance Rules No. 1 through No. 5, Notes on the Trial Measures, Notice on Administration Arrangements for the Filing of Overseas Listings by Domestic Enterprises and relevant CSRC Answers to Reporter Questions, or collectively, the Guidance Rules and Notice, on CSRC’s official website. The Trial Measures, together with the Guidance Rules and Notice reiterate the basic principles of the Draft Administrative Provisions and Draft Filing Measures and impose substantially the same requirements for the overseas securities offering and listing by domestic enterprises, and clarified and emphasized several aspects, which include but are not limited to: (1) criteria to determine whether an issuer will be required to go through the filing procedures under the Trial Measures; (2) exemptions from immediate filing requirements for issuers including those that have already been listed in foreign securities markets, including U.S. markets, prior to the effective date of the Trial Measures, but these issuers shall still be subject to filing procedures if they conduct refinancing or are involved in other circumstances that require filing with the CSRC; (3) a negative list of types of issuers banned from listing or offering overseas, such as issuers whose affiliates have been recently convicted of bribery and corruption; (4) issuers’ compliance with web security, data security, and other national security laws and regulations; (5) issuers’ filing and reporting obligations, such as obligation to file with the CSRC after it submits an application for initial public offering to overseas regulators, and obligation after offering or listing overseas to file with the CSRC after it completes subsequent offerings and to report to the CSRC material events including change of control or voluntary or forced delisting of the issuer; and (6) the CSRC’s authority to fine both issuers and their relevant shareholders for failure to comply with the Trial Measures, including failure to comply with filing obligations or committing fraud and misrepresentation. Specifically, pursuant to the Trial Measures, our future securities offerings in the Nasdaq Capital Market where we currently list shall also be filed with the CSRC within 3 working days after the offering is completed. As the Trial Measures are newly issued, there remain uncertainties regarding its interpretation and implementation. Therefore, we cannot assure you that we will be able to complete the filings for our future offering and fully comply with the relevant new rules on a timely basis, if at all. In addition, we cannot guarantee that we will not be subject to tightened regulatory review and we could be exposed to government interference in China.
Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
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Compliance with China’s new Data Security Law, Measures on Cybersecurity Review (revised draft for public consultation), Personal Information Protection Law (second draft for consultation), regulations and guidelines relating to the multi-level protection scheme and any other future laws and regulations may entail significant expenses and could materially affect our business.
China has implemented or will implement rules and is considering a number of additional proposals relating to data protection. China’s new Data Security Law promulgated by the Standing Committee of the National People’s Congress of China in June 2021, or the Data Security Law, took effect in September 2021. The Data Security Law provides that the data processing activities must be conducted based on “data classification and hierarchical protection system” for the purpose of data protection and prohibits entities in China from transferring data stored in China to foreign law enforcement agencies or judicial authorities without prior approval by the Chinese government. As the Data Security Law has not yet come into effect, we may need to make adjustments to our data processing practices to comply with this law.
Additionally, China’s Cyber Security Law, requires companies to take certain organizational, technical and administrative measures and other necessary measures to ensure the security of their networks and data stored on their networks. Specifically, the Cyber Security Law provides that China adopt a multi-level protection scheme (MLPS), under which network operators are required to perform obligations of security protection to ensure that the network is free from interference, disruption or unauthorized access, and prevent network data from being disclosed, stolen or tampered. Under the MLPS, entities operating information systems must have a thorough assessment of the risks and the conditions of their information and network systems to determine the level to which the entity’s information and network systems belong-from the lowest Level 1 to the highest Level 5 pursuant to the Measures for the Graded Protection and the Guidelines for Grading of Classified Protection of Cyber Security. The grading result will determine the set of security protection obligations that entities must comply with. Entities classified as Level 2 or above should report the grade to the relevant government authority for examination and approval.
Recently, the Cyberspace Administration of China (the “CAC”) has taken action against several Chinese internet companies in connection with their initial public offerings on U.S. securities exchanges, for alleged national security risks and improper collection and use of the personal information of Chinese data subjects. According to the official announcement, the action was initiated based on the National Security Law, the Cyber Security Law and the Measures on Cybersecurity Review, which are aimed at “preventing national data security risks, maintaining national security and safeguarding public interests.” On July 10, 2021, the CAC published a revised draft of the Measures on Cybersecurity Review, expanding the cybersecurity review to data processing operators in possession of personal information of over 1 million users if the operators intend to list their securities in a foreign country.
It is unclear at the present time how widespread the cybersecurity review requirement and the enforcement action will be and what effect they will have on the life sciences sector generally and the Company in particular. China’s regulators may impose penalties for non-compliance ranging from fines or suspension of operations, and this could lead to us delisting from the U.S. stock market.
Also, on August 20, 2021, the National People’s Congress passed the Personal Information Protection Law, which was implemented on November 1, 2021. The law creates a comprehensive set of data privacy and protection requirements that apply to the processing of personal information and expands data protection compliance obligations to cover the processing of personal information of persons by organizations and individuals in China, and the processing of personal information of persons in China outside of China if such processing is for purposes of providing products and services to, or analyzing and evaluating the behavior of, persons in China. The law also proposes that critical information infrastructure operators and personal information processing entities who process personal information meeting a volume threshold to-be-set by Chinese cyberspace regulators are also required to store in China personal information generated or collected in China, and to pass a security assessment administered by Chinese cyberspace regulators for any export of such personal information. Lastly, the draft contains proposals for significant fines for serious violations of up to RMB 50 million or 5% of annual revenues from the prior year.
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Interpretation, application and enforcement of these laws, rules and regulations evolve from time to time and their scope may continually change, through new legislation, amendments to existing legislation and changes in enforcement. Compliance with the Cyber Security Law and the Data Security Law could significantly increase the cost to us of providing our service offerings, require significant changes to our operations or even prevent us from providing certain service offerings in jurisdictions in which we currently operate or in which we may operate in the future. Despite our efforts to comply with applicable laws, regulations and other obligations relating to privacy, data protection and information security, and our belief that we are currently in compliance therewith, it is possible that our practices, offerings or platform could fail to meet all of the requirements imposed on us by the Cyber Security Law, the Data Security Law and/or related implementing regulations. Any failure on our part to comply with such law or regulations or any other obligations relating to privacy, data protection or information security, or any compromise of security that results in unauthorized access, use or release of personally identifiable information or other data, or the perception or allegation that any of the foregoing types of failure or compromise has occurred, could damage our reputation, discourage new and existing counterparties from contracting with us or result in investigations, fines, suspension or other penalties by Chinese government authorities and private claims or litigation, any of which could materially adversely affect our business, financial condition and results of operations. Even if our practices are not subject to legal challenge, the perception of privacy concerns, whether or not valid, may harm our reputation and brand and adversely affect our business, financial condition and results of operations. Moreover, the legal uncertainty created by the Data Security Law and the recent Chinese government actions could materially adversely affect our ability, on favorable terms, to raise capital, including engaging in follow-on offerings of our securities in the U.S. market. While we believe that our current operations are in compliance with the laws and regulations of the Cyberspace Administration of China, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to its business or industry.
Recent greater oversight by the CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact our business and our offering.
On December 28, 2021, the CAC and other relevant PRC governmental authorities jointly promulgated the Cybersecurity Review Measures, which will take effect on February 15, 2022. The Cybersecurity Review Measures provide that, in addition to critical information infrastructure operators (“CIIOs”) that intend to purchase Internet products and services, net platform operators engaging in data processing activities that affect or may affect national security must be subject to cybersecurity review by the Cybersecurity Review Office of the PRC. According to the Cybersecurity Review Measures, a cybersecurity review assesses potential national security risks that may be brought about by any procurement, data processing, or overseas listing. The Cybersecurity Review Measures require that an online platform operator which possesses the personal information of at least one million users must apply for a cybersecurity review by the CAC if it intends to be listed in foreign countries.
On November 14, 2021, the CAC published the Security Administration Draft, which provides that data processing operators engaging in data processing activities that affect or may affect national security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. According to the Security Administration Draft, data processing operators who possess personal data of at least one million users or collect data that affects or may affect national security must be subject to network data security review by the relevant Cyberspace Administration of the PRC. The deadline for public comments on the Security Administration Draft was December 13, 2021.
As of the date of this annual report, we have not received any notice from any authorities identifying our PRC subsidiaries or the VIEs as CIIOs or requiring us to go through cybersecurity review or network data security review by the CAC. The Cybersecurity Review Measures became effective on February 15, 2022. The standard scope of review under the Cybersecurity Review Measures extends to critical information infrastructure operators that intend to purchase internet products and services and network platform operators engaging in data processing activities, which affect or may affect national security. Further, pursuant to Cybersecurity Review Measures, network platform operators possessing over one million users’ personal information must apply with the Cybersecurity Review Office for a cybersecurity review before any listing at a foreign stock exchange. Besides, the Cybersecurity Review Measures also provide that if the relevant authorities consider that certain network products and services and data processing activities affect or may affect national security, the authorities may conduct a cybersecurity review on its own initiative. Therefore, the Company understands that currently the operations of our PRC subsidiaries and the VIEs and our listing will not be affected and that we will not be subject to cybersecurity review by the CAC for this offering, given that our PRC subsidiary and the VIE possess personal data of fewer than one million individual clients and do not collect data that affects or may affect national security in their business operations as of the date of this annual report and do not anticipate that they will be collecting over one million users’ personal information or data that affects or may affect national security in the near future. Given the Cybersecurity Review Measures were recently promulgated, there remains uncertainty as to how the Cybersecurity Review Measures will be interpreted or implemented. , In addition, the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Cybersecurity Review Measures and the Security Administration Draft. If any such new laws, regulations, rules, or implementation and interpretation come into effect, we will take all reasonable measures and actions to comply and to minimize the adverse effect of such laws on us. We cannot guarantee, however, that we will not be subject to cybersecurity review in the future. During such reviews, we may be required to suspend our operation or experience other disruptions to our operations. Cybersecurity review could also result in negative publicity with respect to our Company and diversion of our managerial and financial resources, which could materially and adversely affect our business, financial conditions, and results of operations.
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Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from 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 loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximate 26.8% appreciation of the RMB against the U.S. dollar between July 21, 2005 and September 30, 2015. Provisions on Administration of Foreign Exchange, as amended in August 2008, further changed China’s exchange regime to a managed floating exchange rate regime based on market supply and demand. Since reaching a high against the U.S. dollar in July 2008, however, the RMB has traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high but never exceeding it. As a consequence, the RMB has fluctuated sharply since July 2008 against other freely-traded currencies, in tandem with the U.S. dollar. In August 2015, the PRC Government devalued its currency by approximately 3%, representing the largest yuan depreciation for 20 years. Concerns remain that China’s slowing economy, and in particular its exports, will need a stimulus that can only come from further cuts in the exchange rate.
It is difficult to predict how long the current situation may continue and when and how it may change again as the People’s Bank of China may regularly intervene in the foreign exchange market to achieve economic policy goals. Substantially all of our revenues and costs are denominated in the RMB, and a significant portion of our financial assets are also denominated in RMB. We principally rely on dividends and other distributions paid to us by our subsidiaries in China. Any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs or ordinary shares in U.S. dollars. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.
PRC laws and regulations govern our businesses. If we are found to be in violation of such PRC laws and regulations, we could be subject to sanctions. In addition, changes in and uncertainties with respect to such PRC laws and regulations may materially and adversely affect our business.
The PRC legal system is based on written statutes. Unlike under common law systems, decided legal cases have little value as precedents in subsequent legal proceedings. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general and forms of foreign investment (including in respect of wholly foreign owned enterprises) in particular. These laws, regulations and legal requirements are relatively new and are often changing, and their interpretation and enforcement depend to a large extent on relevant government policy and involve significant uncertainties that could limit the reliability of the legal protections available to us.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business. These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
The PRC government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance. We cannot predict the effect of the interpretation of existing or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.
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The Chinese government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and foreign investment in China-based issuers. In addition, the enforcement of laws and regulations in China can change quickly with little advance notice. In 2021, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. Since these statements and regulatory actions are new, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and list on an U.S. or other foreign exchange. In the future, we and the VIEs may pursue potential strategic acquisitions that are complementary to our and the VIEs’ business and operations. Complying with the requirements of the above-mentioned regulations and other rules to complete such transactions could be time-consuming, and any required approval processes may delay or inhibit our and the VIEs’ ability to complete such transactions, which could affect our and the VIEs’ ability to expand business or maintain market share. There is a possibility that the Chinese authorities may promulgate new rules or explanations requiring that we and the VIEs obtain the approval of Chinese authorities for our and the VIEs’ completed or ongoing mergers and acquisitions. Any action by the Chinese government to exert more oversight and control over foreign investment in China-based companies could result in a material change in our operation, cause the value of our ordinary shares to significantly decline or become worthless, and significantly limit, or completely hinder our ability to offer or continue to offer our ordinary shares to investors.
We cannot predict the effects of future developments in government policy or the PRC legal system in general. We may be required in the future to procure additional permits, authorizations and approvals for our existing and future operations, which may not be obtainable in a timely fashion or at all, or may involve substantial costs and unforeseen risks. An inability to obtain, or the incurrence of substantial costs in obtaining, such permits, authorizations and approvals may have a material adverse effect on our business, financial condition and results of operations.
Recent statements by the Chinese government indicate an intent to exert more oversight and more control over offerings conducted overseas and/or foreign investment in China-based issuers. Any such actions by the Chinese government could significantly limit or completely hinder our ability to conduct our business, accept foreign investments, or list on a U.S. or other foreign exchange, including our ability to offer or continue to offer its securities to investors and cause the value of the securities being registered hereby to significantly decline or become worthless.
The Chinese government recently has published new policies that significantly affected certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding our industry that could require us to seek permission from Chinese authorities to continue to operate our business, which may adversely affect our business, financial condition and results of operations. Furthermore, recent statements made by the Chinese government have indicated an intent to increase the government’s oversight and control over offerings of companies with significant operations in China that are to be conducted in foreign markets, as well as foreign investment in China-based issuers like us. Any such action, once taken by the Chinese government, could significantly limit or completely hinder our ability to offer or continue to offer its securities to investors, and could cause the value of such securities to significantly decline or become worthless.
In July 2021, the Chinese government provided new guidance on China-based companies raising capital outside of China, including through arrangements via VIEs. In light of such developments, the SEC has imposed enhanced disclosure requirements on China-based companies seeking to register securities with the SEC. As substantially all of our operations are based in jurisdictions under the Chinese government, any future Chinese, U.S. or other rules and regulations that place restrictions on capital raising or other activities by companies with extensive operations in China could adversely affect our business and results of operations. If the business environment in China deteriorates from the perspective of domestic or international investment, or if relations between China and the United States or other governments deteriorate, the Chinese government may intervene with our operations and our business in China, as well as the value of the securities being offered, may also be adversely affected.
Our previous auditor is headquartered in the United States, and our current auditor is headquartered in Singapore, both are subject to inspection by the PCAOB on a regular basis. To the extent that our independent registered public accounting firms’ audit documentation related to their audit reports for our company become located in China, the PCAOB may not be able inspect such audit documentation and, as such, you may be deprived of the benefits of such inspection and our ordinary shares could be delisted from the stock exchange pursuant to the Holding Foreign Companies Accountable Act.
The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares from being traded on a national securities exchange or in the over-the-counter trading market in the United States.
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As auditors of companies that are traded publicly in the United States and a firm registered with the PCAOB, our auditors are required by the laws of the United States to undergo regular inspections by the PCAOB, as required by the HFCAA. Our previous auditors are all located in the United States and the PCAOB is able to conduct inspections regularly. While our present auditor is located in the United States and the PCAOB is able to conduct inspections on such auditor, to the extent this status changes in the future and our auditor’s audit documentation related to their audit reports for our company becomes outside of the inspection by the PCAOB or if the PCAOB is unable to inspect or investigate completely our auditor because of a position taken by an authority in a foreign jurisdiction, trading in our ordinary shares could be prohibited under the HFCAA, and as a result our ordinary shares could be delisted from Nasdaq.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA, which became effective on May 5, 2021. We will be required to comply with these rules if the SEC identifies our auditors as having a “non-inspection” year under a process to be subsequently established by the SEC.
On May 13, 2021, the PCAOB proposed a new rule for implementing the HFCAA. Among other things, the proposed rule provides a framework for the PCAOB to use when determining, under the HFCAA, whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. The proposed rule would also establish the manner of the PCAOB’s determinations; the factors the PCAOB will evaluate and the documents and information it will consider when assessing whether a determination is warranted; the form, public availability, effective date, and duration of such determinations; and the process by which the board of the PCAOB can modify or vacate its determinations. The proposed rule was adopted by the PCAOB on September 22, 2021 and approved by the SEC on November 5, 2021.
On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two, thus reducing the time period before the securities of such foreign companies may be prohibited from trading or delisted. On December 29, 2022, the Accelerating Holding Foreign Companies Accountable Act was signed into law, which officially reduce the number of years that the auditor is not subject to inspection to two consecutive years.
The SEC is assessing how to implement other requirements of the HFCAA, including the listing and trading prohibition requirements described above. The SEC may propose additional rules or guidance that could impact the listed companies like us if the auditor is not subject to the PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCAA. However, some of the recommendations were more stringent than the HFCAA. For example, if a company was not subject to the PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.
On December 2, 2021, the SEC issued amendments to finalize the interim final rules previously adopted in March 2021, and established procedures to identify issuers and prohibit the trading of the securities of certain registrants as required by the HFCAA.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the PRC (the “Statement of Protocol”), which is intended to enable the PCAOB to inspect and investigate completely registered public accounting firms in mainland China and Hong Kong. According to a statement released by the PCAOB, the Statement of Protocol (i) provides the PCAOB with sole discretion to select the firms, audit engagements and potential violations it inspects and investigates without consultation with, nor input from, Chinese authorities, (ii) puts procedures in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed and (iii) provides the PCAOB with direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates. While the Chairs of both the PCAOB and the SEC made statements supporting the Statement of Protocol, both emphasized that this is only the first step in the process. As such, uncertainties remain regarding how the Statement of Protocol will be implemented and how it will impact China-based issuers and there is no assurance that the PCAOB will be able to execute, in a timely manner, its future inspections and investigations in a manner that satisfies the Statement of Protocol. While the Statement of Protocol may lead to resolution of the previously identified issues, there can be no assurance that this will be the case.
On December 15, 2022, the PCAOB issued a new Determination Report which: (1) vacated the December 16, 2021 Determination Report; and (2) concluded that the PCAOB has been able to conduct inspections and investigations completely in the PRC in 2022. The December 15, 2022 Determination Report cautions, however, that authorities in the PRC might take positions at any time that would prevent the PCAOB from continuing to inspect or investigate completely. As required by the HFCAA, if in the future the PCAOB determines it no longer can inspect or investigate completely because of a position taken by an authority in the PRC, the PCAOB will act expeditiously to consider whether it should issue a new determination.
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While the HFCAA is not currently applicable to the Company because the Company’s current auditor and previous auditor are subject to PCAOB review, if this changes in the future for any reason, the Company may be subject to the HFCAA. The implications of this regulation if the Company were to become subject to it are uncertain. Such uncertainty could cause the market price of our ordinary shares to be materially and adversely affected, and our securities could be delisted or prohibited from being traded on Nasdaq earlier than would be required by the HFCAA. If our ordinary shares is unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase the ordinary shares when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ordinary shares.
It may be difficult for U.S. regulators, such as the Department of Justice, the SEC, and other authorities, to conduct investigation or collect evidence within China.
Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with regulatory authorities in the Unities States—including the SEC and the Department of Justice—may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the PRC territory. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase the difficulties you face in protecting your interests.
Risks Associated with our Ordinary Shares
The market price of our Ordinary Shares has historically been highly volatile, and you may not be able to resell our ordinary shares at or above your initial purchase price.
There is a limited public market for our ordinary shares. We cannot assure you that there will be an active trading market for our ordinary shares. You may not be able to sell your ordinary shares quickly or at the market price if trading in our ordinary shares is not active.
The trading price of our ordinary shares may be volatile. The price of our ordinary shares could be subject to wide fluctuations in response to a variety of factors, including the following:
| 1. | Introduction of new products, services or technologies offered by us or our competitors; | |
| 2. | Failure to meet or exceed revenue and financial projections we provide to the public; | |
| 3. | Actual or anticipated variations in quarterly operating results; | |
| 4. | Failure to meet or exceed the estimates and projections of the investment community; | |
| 5. | General market conditions and overall fluctuations in United States equity markets; | |
| 6. | Announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; | |
| 7. | Disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; |
| 8. | Additions or departures of key management personnel; | |
| 9. | Issuances of debt or equity securities; | |
| 10. | Significant lawsuits, including patent or shareholder litigation; | |
| 11. | Changes in the market valuations of similar companies; | |
| 12. | Sales of additional ordinary shares or other securities by us or our shareholders in the future; | |
| 13. | Trading volume of our ordinary shares; |
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| 14. | Fluctuations in the exchange rate between the U.S. dollar and Renminbi; | |
| 15. | Negative market perception and media coverage of our company or other companies in the same or similar industry with us; and | |
| 16. | Other events or factors, many of which are beyond our control. |
In addition, the stock market in general, and the NASDAQ Capital Market and software products and services companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our ordinary shares, regardless of our actual operating performance.
Our ordinary shares may be subject to the SEC’s penny stock rules which may make it difficult for broker-dealers to complete customer transactions and trading activity in our securities.
Our ordinary shares may be deemed to be “penny stock” as that term is defined under the Securities Exchange Act of 1934, as amended. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse in each of the prior two years.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. Moreover, broker-dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. A broker-dealer must receive a written agreement to the transaction from the investor setting forth the identity and quantity of the penny stock to be purchased. These requirements may make it more difficult for broker-dealers to effectuate customer transactions and trading activity in our securities. As a result, the market price of our ordinary shares may be depressed, and you may find it more difficult to sell our ordinary shares.
Sales of a substantial number of ordinary shares in the public market by our existing shareholders could cause the price of our ordinary shares to fall.
Sales of a substantial number of our ordinary shares in the public market or the perception that these sales might occur, could depress the market price of our ordinary shares and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our ordinary shares.
Subject to certain limitations all of our total outstanding shares are now eligible for sale. Sales of ordinary shares by these shareholders could have a material adverse effect on the trading price of our ordinary shares.
Future sales and issuances of our ordinary shares, or rights to purchase our ordinary shares, including pursuant to our 2018 Omnibus Incentive Plan, could result in additional dilution of the percentage ownership of our shareholders and could cause the price of our ordinary shares to fall.
We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our shareholders may experience substantial dilution. We may sell ordinary shares, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell ordinary shares, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing shareholders, and new investors could gain rights superior to our existing shareholders.
We do not intend to pay dividends on our ordinary shares, so any returns will be limited to the value of our ordinary shares.
We have never declared or paid any cash dividend on our ordinary shares. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return shareholders will therefore be limited to the value of their ordinary shares.
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As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.
Our corporate affairs will be governed by our memorandum of association and articles of association, the BVI Business Companies Act, 2004, or the BVI Act, of the British Virgin Islands and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the BVI Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law.
As a result of all of the above, holders of our ordinary shares may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a U.S. company.
British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.
British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
The laws of the British Virgin Islands provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders are dissatisfied with the conduct of our affairs.
Under the laws of the British Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the Company, our memorandum of association and articles of association. Shareholders are entitled to have the affairs of the Company conducted in accordance with the general law and its memorandum of association and articles of association.
There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the company’s constituent documents. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company’s memorandum of association and articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where the company has not complied with provisions requiring approval of a majority of shareholders, which are more limited than the rights afforded minority shareholders under the laws of many states in the United States.
Anti-takeover provisions in our memorandum of association and articles of association and our right to issue preference shares could make a third-party acquisition of us difficult.
Some provisions of our memorandum of association and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares.
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You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we may not offer those rights to ordinary shareholders unless both the rights and the underlying securities to be distributed to ordinary shareholders are registered under the Securities Act, or the distribution of them to ordinary shareholders is exempted from registration under the Securities Act with respect to all ordinary shareholders. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to rely on an exemption from registration under the Securities Act to distribute such rights and securities. Accordingly, our ordinary shareholders may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.
We may be a passive foreign investment company, or PFIC, which could lead to additional taxes for U.S. holders of our ordinary shares.
We do not expect to be, for U.S. federal income tax purposes, a passive foreign investment company, or a PFIC, which is a foreign company for which, in any given taxable year, either at least 75% of its gross income is passive income, or investment income in general, or at least 50% of its assets produce or are held to produce passive income, for the current taxable year, and we expect to operate in such a manner so as not to become a PFIC for any future taxable year. However, because the determination of PFIC status for any taxable year cannot be made until after the close of such year and requires extensive factual investigation, including ascertaining the fair market value of our assets on a quarterly basis and determining whether each item of gross income that we earn is passive income, we cannot assure you that we will not become a PFIC for the current taxable year or any future taxable year. If we are or become a PFIC, a U.S. holder’s ordinary shares could be subject to additional U.S. federal income taxes on gain recognized with respect to the ordinary shares and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC rules. Non-corporate U.S. holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.
If the trading price of our ordinary shares fails to comply with the continued listing requirements of the NASDAQ Capital Market, we would face possible delisting, which would result in a limited public market for our ordinary shares and make obtaining future debt or equity financing more difficult for us.
Companies listed on NASDAQ are subject to delisting for, among other things, failure to maintain a minimum closing bid price of $1.00 per share for 30 consecutive business days. On November 2023, we received a letter from NASDAQ indicating that for the last 30 consecutive business days, the closing bid price of our ordinary shares fell below the minimum $1.00 per share requirement pursuant to NASDAQ Listing Rule 5550(a)(2) and 5810(c)(3)(A) (the “Nasdaq Listing Rules”), and on May 2, 2024, the Company received an additional 180 calendar day extension. On September 17, 2024, the Company effected an 8-to-1 reverse stock split to the securities of the Company, to cure its minimum price deficiency since September 20, 2023. On October 1, 2024, the Company was notified by Nasdaq that it has regained compliance with the Nasdaq Capital Market’s minimum bid price requirement, as the Company evidenced a closing bid price of its ordinary shares at or greater than the $1.00 per share minimum requirement for 10 consecutive business days as of September 30, 2024.
However, even though we have regained the compliance of Nasdaq’s minimum bid price requirement, we cannot guarantee that the price of our ordinary shares will comply with the Nasdaq Listing Rules for continued listing, or if we can comply with other continued listing requirements on the Nasdaq Capital Market in the future. If we cannot comply with the any of such requirements, our ordinary shares would be subject to delisting and would likely trade on the over-the-counter market. If our ordinary shares were to trade on the over-the-counter market, selling our ordinary shares could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our ordinary shares, further limiting the liquidity of our ordinary shares. As a result, the market price of our ordinary shares may be depressed, and you may find it more difficult to sell our ordinary shares. Such delisting from the NASDAQ Capital Market and continued or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing.
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ITEM 4. INFORMATION ON THE COMPANY.
A. HISTORY AND DEVELOPMENT OF THE COMPANY.
Overview
We are a holding company and conduct our operations through our wholly-owned subsidiary named LK Technology Ltd., a British Virgin Islands limited liability company (“LK Technology”), and its wholly-owned subsidiaries, MMB Limited and its respective subsidiaries, which possess two core brands “Luokuang” and “SuperEngine”. “Luokuang” is a mobile application to provide Business to Customer (B2C) location-based services and “SuperEngine” provides Business to Business (B2B) and Business to Government (B2G) services in connection with spatial-temporal big data processing. In May 2010, we consummated an initial public offering of our American Depository Shares, or ADSs, for gross proceeds of $16 million, and our ADSs were listed on the NASDAQ Capital Market under the ticker symbol “KONE”. On August 17, 2018, we completed the transactions contemplated by the Asset Exchange Agreement (“AEA”) with C Media Limited (“C Media”) entered into on January 25, 2018. On August 20, 2018, we changed our name to Luokung Technology Corp., our American Depository Shares (“ADSs”) were voluntarily delisted from the NASDAQ Capital Market on September 19, 2018 and on January 3, 2019 our ordinary shares started trading on NASDAQ under the ticker symbol “LKCO”.
On August 17, 2018, we consummated an asset exchange transaction, pursuant to which we exchanged all issued and outstanding capital stock in Topsky Info-Tech Holdings Pte Ltd., the parent of Softech, for the issued and outstanding capital stock of LK Technology (the “Asset Exchange”). In connection with the Asset Exchange, we changed our name on August 20, 2018, and on September 20, 2018, issued to the shareholders of C Media Limited, the former parent of LK Technology, (i) 185,412,599 of our ordinary shares, par value $0.01 per share and (ii) 1,000,000 of our preferred shares. Upon the consummation of the Asset Exchange, we ceased our previous business operations and became a company focused on the provision of location-based service and mobile application products for long distance rail travelers in China.
On August 25, 2018, LK Technology entered into a Stock Purchase Agreement (the “Agreement”) with the shareholders (“Shareholders”) of Superengine Holding Limited, a limited liability company incorporated under the laws of the British Virgin Islands (the “Superengine”), pursuant to which LK Technology acquired all of the issued and outstanding shares of Superengine for an aggregate purchase price of US$60 million (the “Purchase Price”), which was paid by the issuance of our Ordinary Shares in an amount equal to the quotient of (x) the Purchase Price divided by (y) the average of the closing prices of the Ordinary Shares on the NASDAQ Capital Market over the 12 months period preceding July 31, 2018. We are a party to the Agreement in connection with the issuance of the Ordinary Shares and certain other limited purposes.
On August 28, 2019, the Company entered into a Share Purchase Agreement, pursuant to which the Company will acquire 100% of the equity interests of Saleya Holdings Limited (“Saleya”) from Saleya’s shareholders for an aggregate purchase price of approximately $120 million. On March 17, 2021, the Company completed the acquisition of 100% equity interest in Saleya for a consideration of (i) a cash amount of $102 million (RMB666 million), (ii) 9,819,926 LKCO ordinary shares and (iii) 1,500,310 LKCO preferred shares pursuant to a supplemental agreement dated February 24, 2021. The main operating subsidiary, eMapgo Technologies (Beijing) Co., Ltd. is a provider of navigation and electronic map services in China, as well as a provider of Internet map services and geographic information system engineering. The acquisition enables us to develop our smart transportation business, including autonomous driving and vehicle-road collaboration (V2X). From April 2021 to December 2021, Saleya contributed $9.1 million to smart transportation revenue and incurred a net loss of $4.5 million.
On May 10, 2019 and November 6, 2020, the Company entered into a Stock Purchase Agreement and The Supplementary Agreement to Stock Purchase Agreement with the shareholders of BotBrain AI Limited (“Botbrain”), a limited liability company incorporated under the laws of the British Virgin Islands, pursuant to which the Company acquired 67.36% of the issued and outstanding shares of BotBrain for an aggregate purchase price of $2.5 million (RMB 16.4 million), of which $1.5 million (RMB 9.6 million) was to be paid in cash to obtain 20% of BotBrain and the Company issued 1,789,618 ordinary shares to acquire the remaining 47.36% of BotBrain. The closing of the acquisition was completed on December 4, 2020.
On November 13, 2019, the Company entered into a Share Subscription Agreement with Geely Technology Group Co., Ltd. (“Geely Technology”) to issue 21,794,872 series A preferred shares at a purchase price of $1.95 per share for an aggregate purchase price of $42,500,000. Per the terms of the agreement, the Company recognized $32,910,257 as a loan. The Company received $21,743,857 as of December 31, 2019 and the remaining amount was received in January 2020. Geely Technology may request the repayment after November 2020, under such circumstance, the Company shall pay it back in January of 2021. On December 24, 2020, Geely Technology sent a notice of redemption. The Company is in negotiation for an extension with Geely Technology.
On November 13, 2019, the Company entered into a Securities Purchase Agreement with Acuitas Capital, LLC. and a Warrant to purchase the Company’s ordinary shares pursuant to which the Purchaser subscribed to purchase up to $100,000,000 of units with up to a $10,000,000 subscription at each closing, with each Unit consisting of one ordinary share and one warrant, where each whole warrant entitles the holder to purchase one ordinary share. The Securities Purchase Agreement contemplates periodic closings of $10,000,000. On July 16, 2020, the Company held the first closing pursuant to the Purchase Agreement and received $10,000,000. The Purchaser had received 7,763,975 ordinary shares on November 13, 2019 in consideration for such $10,000,000. The Purchaser also exercised the Warrant and received 15,897,663 ordinary shares upon the exercise of the Warrant. On December 31, 2020, the Purchase Agreement has been terminated.
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On August 10, 2020, the Company entered into a cooperation framework agreement with Nanjing Antong Meteorological Data Limited (“Nanjing Antong”) and Nanjing Weida Electronic Technology Co., Ltd. (“Nanjing Weida”), pursuant to which the Company would invest $153,000 (RMB 1 million) each to Nanjing Antong and Nanjing Weida in order to establish a joint venture with Nanjing Antong. On August 27, 2020, the joint venture was established, SuperEngine, eMapgo Technologies (Beijing) Co., Ltd. (“EMG”) and Nanjing Antong hold 50%, 20% and 30% of equity of interest, respectively. The joint venture engages in real-time traffic information services for China’s high-class highways, urban roads, urban and rural roads, as well as expressway data and travel value-added services.
Corporate Information
Our principal executive offices are located at B9-8, Block B, SOHO Phase II, No. 9, Guanghua Road, Chaoyang District, Beijing, People’s Republic of China 100020. Our website is www.luokung.com. We routinely post important information on our website. The information contained on our website is not a part of this annual report.
Our agent for service of process in the United States is ClearTrust, LLC, the current transfer agent of the Company, with a mailing address of 16540 Pointe Village Drive Suite 210, Lutz, Florida 33558.
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company’s website is www.luokung.com.
B. BUSINESS OVERVIEW.
We are a spatial-temporal intelligent big data services company, as well as a provider of interactive location-based services (“LBS”) and High Definition (“HD”) Maps for various industries in China. Backed by our proprietary technologies and expertise in HD Maps and multi-sourced intelligent spatial-temporal big data, we established city-level and industry-level holographic spatial-temporal digital twin systems and actively serves industries including smart transportation with applications in autonomous driving, smart highway and vehicle-road collaboration, natural resource asset management, covering carbon neutral and environmental protection remote sensing data service, and LBS smart industry applications, including mobile Internet LBS, smart travel, smart logistics, new infrastructure, smart cities, emergency rescue, etc.
We believe that road-to-vehicle coordination is the keystone for smart travel and autonomous driving in the future. Therefore, smart cars require smart roads. We are actively deploying smart solutions for both vehicles and roads.
For vehicles, we are supporting eMapgo’s position as an HD Map provider with continued investment in its technical R&D in the fields of autonomous driving data services, simulation services, and full-cognition Artificial Intelligence (“AI”) services with a goal of continuing to optimize, deepen and expand services for automakers and top-tier autonomous driving firms. We believe we have led the development of the industry standard for “Autonomous Driving HD Map Collection Element Model and Interaction Format”, and we expect that eMapgo will continue to play an active role in setting industry standards in the near future.
For roads, we are actively promoting smart road services based on its spatial-temporal digital base, including but not limited to HD Map-based smart road AI digital base, 24/7 road hazard awareness, severe weather perception and other road information data perception service systems and smart management platforms through one of our subsidiaries, EMG. With these efforts, Luokung aims to assist expressway operators in managing their digitized assets more securely and efficiently and to achieve vehicle-to-road data communication where vehicles can digitally receive roadside information that affects safety, convenience and comfort in real time. We are providing similar smart digital services for China’s new generation smart transportation demonstration project-Changjiu Expressway, a project that showcases our respected position in the field of smart highways.
Although Luokung’s AI spatial-temporal big data services do not directly solve the issue of carbon emissions, we believe that our data service helps policymakers, industry regulators and market service participants monitor real situation and data changes, in their efforts to reduce carbon emissions and to serve as an important digital base for carbon emission trading. We believe that Luokung has established China’s most powerful remote sensing data engine that integrates high-resolution remote sensing, HD maps and various IoT sensor data, enabling us to launch the most efficient remote sensing data processing service. This offering addresses a broader market focus on industrial applications in carbon emission, carbon neutrality, geographical resources, forestry resources, water resources, crops and others, a marketplace we define as a carbon neutrality natural resource asset service business.
As an LBS data services provider of information flow management and market services, the growth of the business is powered by its unified platform capabilities to manage the whole life cycle market services from planning, ordering, fulfilling, conversion monitoring and reporting. It can optimize the delivery effectiveness through account unification for different platforms and intelligent distribution among different marketing channels, formats and creatives to achieve higher efficiency, lower cost and better performance, based on real time feedback loop integrating delivery and result tracking.
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Key Technologies
We believe our investments in our products and key technologies provide significant competitive differentiation and our technologies are disruptive innovations in computer graphics systems, spatial-temporal data analysis and processing. Our proprietary algorithms can eliminate certain time-consuming steps in data preprocessing, and maintain same level of high system performance with the amount of data increasing by orders of magnitude. It enables a new wave of technological upgrades in related industries to do more with less time and less power consumption.
Spatial temporal indexing technology.
This technology provides an effective indexing technique, covering both spatial dimension and temporal dimension. It separates the data and indexes, and solves the technological difficulties in spatial temporal big data processing, including storage, updating, management, indexing, reading, spatial relationship computation and analysis. This technology allows the users to efficiently and accurately obtain the data they need, and minimizes the transmission of unnecessary data, which achieves application efficiency not being affected even with explosive growth of data volume.
Adaptive reduction and compression technology
This technology allows full vector spatial data to be processed directly through the adaptive reduction and compression to meet the requirements of transmission performance for internet application. Our competing technologies require preprocessing full vector data into tiles in a rasterized format or in a vector format.
| 1. | Spatial relationship could still be strictly maintained and correctly displayed after the reduction and compression |
| 2. | The adaptive reduction and compression are lossless so that the display effect remains the same |
| 3. | The reduction and compression allow rapid display of map in any network speed, adaptive to the network speed with dynamic adjustment of the display effect. |
Progressive transmission technology
Progressive transmission technology is one of the key technologies to realize fast response in spatial data application. It supports lossless adaptive progressive transmission of spatial data, and the display and operation of map can be conducted with any network speed, for instance, by scaling, rotating, or translating. The display of map could be adjusted automatically in accordance with the network speed and users’ operation.
Progressive transmission technology makes system response time independent from the growth of spatial data, and also solves the performance problem in dealing with spatial temporal big data. The data integrity between users’ end and server is not compromised as the spatial relationship remains unchanged.
Full vector non-tiled technology
On the strength of our technologies, we support real-time release and real-time update of spatial vector data without the preprocessing step to rasterize the vector data, and we also support personalized display and analysis for the application of spatial data in real-time dynamic environment. Our indexing technology enables clients to establish a fast transmission channel between user and server, for both the large scope analysis and accurately pinning down details. Because the client can access the complete vector data, it solves the problem that only partial analysis could be performed on tiles. This will greatly expand the data computing capability of the client. In most scenarios, indexing can fulfill most of analysis requirements and application functions.
Luokung Smart Digital Base
Luokung Smart Digital Base supports a wide spectrum of data sources and achieves superior data management and processing capabilities in spatio-temporal big data, leveraging our unique technologies in SuperEngine indexing, geo optimized extensions in relational databases and super low latency implementation in handling massive scaled data volume by distributed databases. It solves availability, scalability, efficiency and extensibility in supporting various application scenarios. With ultimate data security and isolation designed in, it supports different deployment options, including on-premise, private cloud, public cloud, and hybrid cloud. Its rich mid-tier services and open architecture which allows third party plug-ins enable quick and efficient development and deployment of applications.
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Our Services
Luokung SDKs and APIs. Our location based products, Luokung SDKs and APIs, provide spatial-temporal big data analysis and customized map to software and mobile application developers, and allow location-based contents and information to be integrated and presented on the map, which enables software and mobile application developers to create more diversified business models and service functions. Our proprietary full vector map presents refreshingly new and customizable location-based services to our business partners.
Spatial temporal indexing cloud. The spatial temporal indexing cloud service is a data-level virtualization technology we offer to our clients with high availability, extensibility and granular permission control. Our indexing cloud data centers offer highly integrated, dependable, efficient and secure services to meet the needs of varied spatial temporal requirements covering all types of clients, while shielding the details of data from disclosure to honor requested data protection.
Information SuperEngine. Our information SuperEngine includes the server engine and web graphics image engine. The server engine enables our clients to improve their ability and functions to store, manage and index the spatial temporal big data on the server side, and by establishing spatial temporal index on the server, our clients can rapidly and more efficiently obtain their requested data. Web graphics image engine, supports the rapid transmission of graphics image, and rapid display and edge computing ability for multi-terminal and cross-platform.
Spatial temporal cloud platform. Spatial temporal cloud platform supports deployment on public and private clouds to provide services for both industry users and public users. It provides comprehensive online cloud services including data storage, data resource and platform support, and it supports users to aggregate multi-source spatial data, map services, and Internet of things streaming data. By leveraging variety of industry templates, simple and easy-to-use tools for data editing, analysis and searching, users will be able to generate application systems for specific application scenarios. Various application operations can be performed through the mobile devices and Web browsers.
HD Map. HD Map is a core infrastructural component in smart transportation, autonomous driving and smart cities. Our professional map making fleets incorporate the latest technologies in AI and big data processing for data gathering, data processing, vectorization, map production and quality control, which resulted in improved efficiency and quality of HD Map making process. Our crowd sourcing map making technologies help our maps up to date with low cost and high efficiency. Our server side technology delivers least amount of map data to fulfill the needs of our clients in order to achieve faster response and reduce data transmission cost.
Autonomous driving enabling services. Our services cover a wide spectrum of functionalities, including vehicle side, road side and road-vehicle collaboration. Our capabilities on the vehicle side, in crowdsourcing map making and real-time map updating, in accurate and reliable positioning through multi-sensored intelligent fusion, and in vehicle surrounding awareness, help our partners to build smart cars. Our capabilities on the road side, in highway driving condition monitoring, in hazard condition detection, in intelligent road maintenance, help highway operators realize the benefits of smart roads. Our capabilities on the road-vehicle collaboration make autonomous driving more comfortable and most importantly safer.
Our Strategy
We put more effort on continually improving the quality of our products and services, and the user’s experience of our products, as we believe satisfied users and customers are more likely to recommend our products and services to others. Through these efforts and with the increased use of internet in China, we will build our brand with modest marketing expenditures. We have implemented a number of marketing initiatives to promote our brand awareness among potential users, customers. In addition to our brand positioning in the market, we have also initiated a series of marketing activities to promote our products and technologies among existing and potential users and customers.
We intend to invest heavily in product development to deliver additional features and performance enhancements, deployment models and solutions that can address new end markets. Our investments may involve hiring and associated development, acquisitions and licensing of third-party technology.
We will continue to increase investments in our sales and marketing organizations to expand our current customer base. Our investments will be spread across geographies, customer tiers and industries. We will continue to invest in and foster the growth of our channel relationships in China.
We will continue to drive customer satisfaction and renewals by offering community, standard, enterprise and global support to ensure our customers’ success with our offerings.
We intend to continue our investments in SDKs and APIs that help software developers leverage our platform. Our SDKs enable developers to build solutions that deeply integrate the analytics functionality of our offerings across the enterprise. Through our investments in SDKs and APIs, we intend to promote and extend the capabilities of our offerings to customers who wish to build sophisticated applications and interfaces that leverage our software and services.
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Intellectual Property
We have registered the following software copyrights, patents and trademarks for our business operations. We believe this intellectual property forms an integral part of our competitive strength.
Patents:
We have been granted some inventions by the State Intellectual Property Office of PRC. We have patent protections for spatial-temporal big data processing technology and HD map. As of the date of this Report, we have been granted 15 patents, and 166 copyrights from, and registered 142 trademarks with the relevant intellectual property authorities:
Business Certificates and Qualifications
We have obtained all necessary regulatory certifications to conduct our business in the PRC, including without limitation, the following: Software Enterprise Recognition Certificate, Computer Information System Integration Qualification Certificate, Construction Enterprise Qualification Certificate, and Security Technology & Protection Enterprise Certificate. We have also been properly certified as a high-tech enterprise and have met the ISO 9001:2000 qualification management system.
Legal Proceedings
Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we do not believe that we are a party to any litigation that will have a material adverse impact on our financial condition or results of operations. To our knowledge, other than as described below there are no material legal proceedings threatened against us. From time to time, we may be subject to various claims and legal actions arising in the ordinary course of business. Following the consummation of the AEA, we became successor in interest to the legal proceedings described below.
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Enforceability of Civil Liabilities
We are incorporated in the British Virgin Islands to take advantage of certain benefits associated with being a British Virgin Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions and the availability of professional and support services. However, certain disadvantages accompany incorporation in the British Virgin Islands. These disadvantages include that the British Virgin Islands has a less developed body of securities laws as compared to the United States and provides significantly less protection to investors. In addition, British Virgin Islands companies do not have standing to sue before the federal courts of the United States.
Our memorandum and articles of association do not contain provisions requiring that disputes be submitted to arbitration, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders. An important part of our operations is conducted and a significant portion of our assets is located outside the United States. Some of our directors and officers are nationals or residents of jurisdictions other than the United States, and some or all of their assets are located outside the United States. As a result, it may be difficult or impossible for a shareholder to bring an original action against us or such persons in a British Virgin Islands or China court in the event that a shareholder believes that his or her rights have been infringed under the U.S. federal securities laws or otherwise. It may also be difficult for a shareholder to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, some of whom are not residents of the United States and whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the British Virgin Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. It is uncertain whether British Virgin Islands or PRC courts would be competent to hear original actions brought in the British Virgin Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state.
Our corporate affairs are governed by our memorandum and articles of association, or Articles, and by the BVI Business Companies Act, 2004 and common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the British Virgin Islands has no securities laws as compared to the United States, and provides significantly less protection to investors. In addition, British Virgin Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.
We conduct all of our operations in China and all of our assets are located in China. In addition, except for our two independent directors, Mr. David Wei Tang, who is a U.S. citizen, and Mr. Meng Bryan Yap, who is a Singapore citizen, all of our other officers and directors are PRC nationals. Most of our officers and directors reside within China. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult to effect service of process within the United States upon these persons.
Based on the understanding of the Company’s management to PRC law, there is uncertainty as to whether the courts of the PRC would:
| ● | recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or |
| ● | entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States. |
The management understands that there is uncertainty as to whether the courts of the British Virgin Islands would (i) recognize or enforce judgments of U.S. courts obtained against the Company or its directors, officers, predicated upon civil liability provisions of the securities laws of the United States or any state in the United states, or (ii) entertain original actions brought in the British Virgin Islands against the Company or its directors, officers, predicated upon civil liability provisions of the securities laws of the United States or any state in the United States.
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Although there is no statutory enforcement in the British Virgin Islands of final and conclusive monetary judgments obtained in a competent federal or state court of the United States for a definite sum (and the British Virgin Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments with the United States), the courts of the British Virgin Islands would recognise as a valid judgment, a final and conclusive judgment in personam obtained in a competent federal or state court of the United States of America against the Company under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment; (b) such courts did not contravene the rules of natural justice of the British Virgin Islands; (c) such judgment was not obtained by fraud; (d) the enforcement of the judgment would not be contrary to the public policy of the British Virgin Islands; (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the British Virgin Islands; and (f) there is due compliance with the correct procedures under the laws of the British Virgin Islands. However, the British Virgin Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the British Virgin Islands to give rise to obligations to make payments that are penal or punitive in nature.
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. Chinese courts may recognize and enforce foreign judgments in accordance with the requirements of the Chinese Civil Procedure Law based either on treaties between China and the country where the judgment is made or in reciprocity between jurisdictions. China does not have any treaties or other agreements with the British Virgin Islands or the United States that provide for the reciprocal recognition and enforcement of foreign judgments as of the date of this annual report. In addition, according to the PRC Civil Procedures Law, PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security, or public interest. As a result, it is uncertain whether a Chinese court would enforce a judgment rendered by a court in either of these two jurisdictions.
C. ORGANIZATIONAL STRUCTURE
The following diagram illustrates our corporate structure and the place of formation and affiliation of each of our subsidiaries and affiliates as of December 31, 2023.
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The persons or entities that own the equity in each VIE are as follows:
Beijing Zhong Chuan Shi Xun Technology Co., Ltd.
| Name | Shareholding Percentage | |||
| Xuesong Song | 61.82453 | % | ||
| Ping Wang | 19.9872 | % | ||
| Weili Chen | 14.0848 | % | ||
| Donglai Liu | 4.10347 | % | ||
eMapgo Technologies (Beijing) Co., Ltd.
| Name | Shareholding Percentage | |||
| Beijing Zhong Chuan Shi Xun Technology Co., Ltd. | 100 | % | ||
Beijing BotBrain AI Technology Co., Ltd.
| Name | Shareholding Percentage | |||
| Xueyu Lu | 37.84003 | % | ||
| Jiangbo Qin | 20.00006 | % | ||
| Beijing Huojuzhiguang Information Technology Center (L.P.) | 17.52002 | % | ||
| Changxing Qifu Honglian Equity Investment Partnership (L.P.) | 8.33332 | % | ||
| Guangzhou Baoji Erhao Equity Investment Management Partnership (L.P.) | 4.99999 | % | ||
| Guangzhou Suiyong Original Capital Co., Ltd. | 3.66662 | % | ||
| Lianjie (Beijing) Investment Co., Ltd. | 3.19997 | % | ||
| Zhuhai Qiyi Investment Center (L.P.) | 3.00003 | % | ||
| Shenzhen Yiling Venture Capital Center (L.P.) | 1.43996 | % | ||
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The following is the tabular form condensed consolidating schedule depicting the financial position, cash flows and results of operations for the parent, the consolidated variable interest entities, and any consolidation adjustments separately - as of and for the years ending December 31, 2023, 2022 and 2021.
Consolidating Statements of Income Information
| Year ended December 31, 2023 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs and their subsidiaries | Consolidation Adjustments | Consolidated | |||||||||||||||||||
| Revenue | - | 23,174 | 10,121,605 | 849,506 | (758,050 | ) | 10,236,235 | |||||||||||||||||
| Cost of Revenue | - | - | 5,451,918 | 295,126 | (116,319 | ) | 5,630,725 | |||||||||||||||||
| Gross profit (loss) | - | 23,174 | 4,669,687 | 554,380 | (641,731 | ) | 4,605,510 | |||||||||||||||||
| Operating expenses | 10,644,763 | 5,751,034 | 12,779,770 | 2,806,880 | 153,917,318 | 185,899,765 | ||||||||||||||||||
| Loss from operations | (10,644,763 | ) | (5,727,860 | ) | (8,110,083 | ) | (2,252,500 | ) | (154,559,049 | ) | (181,294,255 | ) | ||||||||||||
| Other expenses, net | (74 | ) | 41,618 | 429,135 | (3,526,313 | ) | 5,383,633 | 2,327,999 | ||||||||||||||||
| Provision for income tax | - | - | - | - | (2,755,973 | ) | (2,755,973 | ) | ||||||||||||||||
| Loss before noncontrolling interest | (10,644,837 | ) | (5,686,242 | ) | (7,680,948 | ) | (5,778,813 | ) | (151,931,389 | ) | (181,722,229 | ) | ||||||||||||
| Less: loss attributable to noncontrolling interest | - | - | - | 394,627 | (3,722 | ) | (390,905 | ) | ||||||||||||||||
| Net loss | (10,644,837 | ) | (5,686,242 | ) | (7,680,948 | ) | (5,384,186 | ) | (151,935,111 | ) | (181,331,324 | ) | ||||||||||||
| Year ended December 31, 2022 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs and their subsidiaries | Consolidation Adjustments | Consolidated | |||||||||||||||||||
| Revenue | - | 5,464,332 | 6,432,597 | 86,199,653 | (4,503,396 | ) | 93,593,186 | |||||||||||||||||
| Cost of Revenue | - | 271,313 | 3,239,958 | 74,629,562 | (199,168 | ) | 77,941,665 | |||||||||||||||||
| Gross profit (loss) | - | 5,193,019 | 3,192,639 | 11,570,091 | (4,304,228 | ) | 15,651,521 | |||||||||||||||||
| Operating expenses | 20,968,387 | 13,229,967 | 18,163,688 | 10,582,141 | (13,249,307 | ) | 76,193,490 | |||||||||||||||||
| Loss from operations | (20,968,387 | ) | (8,036,948 | ) | (14,971,049 | ) | 987,950 | (17,553,535 | ) | (60,541,969 | ) | |||||||||||||
| Other expenses, net | 327 | 124,606 | 711 | (2,944,089 | ) | 9,207,349 | 6,388,904 | |||||||||||||||||
| Provision for income tax | - | - | - | (8,878 | ) | 3,950,202 | 3,941,324 | |||||||||||||||||
| Loss before noncontrolling interest | (20,968,060 | ) | (7,912,342 | ) | (14,970,338 | ) | (1,965,017 | ) | (4,395,984 | ) | (50,211,741 | ) | ||||||||||||
| Less: loss attributable to noncontrolling interest | - | - | - | (2,702,185 | ) | 374,244 | (2,327,941 | ) | ||||||||||||||||
| Net loss | (20,968,060 | ) | (7,912,342 | ) | (14,970,338 | ) | (4,667,202 | ) | (4,021,740 | ) | (52,539,682 | ) | ||||||||||||
| Year ended December 31, 2021 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs and their subsidiaries |
Consolidation Adjustments |
Consolidated | |||||||||||||||||||
| Revenue | - | (15,851 | ) | 2,636,562 | 171,503,642 | (29,056,388 | ) | 145,067,965 | ||||||||||||||||
| Cost of Revenue | 300,000 | - | 726,389 | 131,315,543 | (3,315,846 | ) | 129,026,086 | |||||||||||||||||
| Gross profit (loss) | (300,000 | ) | (15,851 | ) | 1,910,173 | 40,188,099 | (25,740,542 | ) | 16,041,879 | |||||||||||||||
| Operating expenses | 29,415,319 | 35,544,319 | 3,561,420 | 21,074,461 | (7,935,069 | ) | 81,660,450 | |||||||||||||||||
| Loss from operations | (29,715,319 | ) | (35,560,170 | ) | (1,651,247 | ) | 19,113,638 | (17,805,473 | ) | (65,618,571 | ) | |||||||||||||
| Other expenses, net | 3,139 | (146,447 | ) | 15,427 | (3,836,228 | ) | (14,642 | ) | (3,978,751 | ) | ||||||||||||||
| Provision for income tax | - | - | - | (9,665 | ) | 8,136,002 | 8,126,337 | |||||||||||||||||
| Loss before noncontrolling interest | (29,712,180 | ) | (35,706,617 | ) | (1,635,820 | ) | 15,267,745 | (9,684,113 | ) | (61,470,985 | ) | |||||||||||||
| Less: loss attributable to noncontrolling interest | - | - | - | (7,330,267 | ) | - | (7,330,267 | ) | ||||||||||||||||
| Net loss | (29,712,180 | ) | (35,706,617 | ) | (1,635,820 | ) | 7,937,478 | (9,684,113 | ) | (68,801,252 | ) | |||||||||||||
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Consolidating Balance Sheets Information
| As of December 31, 2023 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs and their subsidiaries | Consolidation Adjustments | Consolidated | |||||||||||||||||||
| Cash | 5,662 | 50,690 | 18,579 | 9,055 | - | 83,986 | ||||||||||||||||||
| Accounts receivable | - | 755,621 | 3,613,413 | 15,794,476 | (16,814,006 | ) | 3,349,504 | |||||||||||||||||
| Intercompany receivables | 73,328,477 | 65,501,167 | 200,489 | 21,721,734 | (160,751,867 | ) | - | |||||||||||||||||
| Other current asset | 20,812,423 | 5,930,409 | 831,568 | 14,695,064 | (38,554,230 | ) | 3,715,234 | |||||||||||||||||
| Total current asset | 94,146,562 | 72,237,887 | 4,664,049 | 52,220,329 | (216,120,103 | ) | 7,148,724 | |||||||||||||||||
| Property and equipment, net | - | 235,588 | 865,341 | 43,874 | (62,803 | ) | 1,082,000 | |||||||||||||||||
| Investment in subsidiaries | 63,677,883 | 62,740,824 | - | 53,472,741 | (179,891,448 | ) | - | |||||||||||||||||
| Intangible asset, net | - | - | 29,685 | - | 43,299,459 | 43,329,144 | ||||||||||||||||||
| Right of use asset, net | - | 167,092 | 414,603 | 197,212 | (34,697 | ) | 744,210 | |||||||||||||||||
| Other-non-current asset | 2,344,250 | 2,560,573 | - | 2,936,301 | (6,507,460 | ) | 1,333,664 | |||||||||||||||||
| Total Non-current asset | 66,022,133 | 65,704,077 | 1,309,629 | 56,650,128 | (143,196,949 | ) | 46,489,018 | |||||||||||||||||
| Total Asset | 160,168,695 | 137,941,964 | 5,973,678 | 108,870,457 | (359,317,052 | ) | 53,637,742 | |||||||||||||||||
| Accounts payable | - | 19,906,803 | 8,104,691 | 13,843,617 | (33,620,220 | ) | 8,234,891 | |||||||||||||||||
| Lease liability | - | 170,962 | 357,564 | 201,778 | - | 730,304 | ||||||||||||||||||
| Other current liabilities | 3,469,583 | 123,048,670 | 13,967,687 | 117,160,119 | (165,870,787 | ) | 91,775,272 | |||||||||||||||||
| Total current liabilities | 3,469,583 | 143,126,435 | 22,429,942 | 131,205,514 | (199,491,007 | ) | 100,740,467 | |||||||||||||||||
| Lease liability-NC | - | - | 62,528 | - | - | 62,528 | ||||||||||||||||||
| Other non-current liabilities | - | - | 847,135 | - | 5,011,566 | 5,858,701 | ||||||||||||||||||
| Total non-current liabilities | - | - | 909,663 | - | 5,011,566 | 5,921,229 | ||||||||||||||||||
| Total liabilities | 3,469,583 | 143,126,435 | 23,339,605 | 131,205,514 | (194,479,441 | ) | 106,661,696 | |||||||||||||||||
| Accumulated deficit | (61,548,167 | ) | (123,851,265 | ) | (63,594,248 | ) | (47,028,999 | ) | (120,558,603 | ) | (416,581,282 | ) | ||||||||||||
| Other equity | 218,247,279 | 118,666,794 | 46,228,321 | 24,693,942 | (54,483,334 | ) | 353,353,002 | |||||||||||||||||
| Total equity | 156,699,112 | (5,184,471 | ) | (17,365,927 | ) | (22,335,057 | ) | (175,041,937 | ) | (63,228,280 | ) | |||||||||||||
| Total Liability and stockholders’ equity | 160,168,695 | 137,941,964 | 5,973,678 | 108,870,457 | (59,317,052 | ) | 53,637,742 | |||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs and their subsidiaries | Consolidation Adjustments | Consolidated | |||||||||||||||||||
| Cash | 12,874 | 336,846 | 59,293 | 531,534 | 324,334 | 1,264,881 | ||||||||||||||||||
| Accounts receivable | - | 1,161,641 | 4,399,643 | 18,646,214 | (16,923,932 | ) | 7,283,566 | |||||||||||||||||
| Intercompany receivables | 74,369,714 | 68,346,860 | 526,951 | 42,042,009 | (185,285,534 | ) | - | |||||||||||||||||
| Other current asset | 19,478,423 | 4,693,908 | 1,058,799 | 41,506,852 | (30,460,759 | ) | 36,277,223 | |||||||||||||||||
| Total current asset | 93,861,011 | 74,539,255 | 6,044,686 | 102,726,609 | (232,345,891 | ) | 44,825,670 | |||||||||||||||||
| Property and equipment, net | - | 630,565 | 2,678,272 | 214,973 | - | 3,523,810 | ||||||||||||||||||
| Investment in subsidiaries | 63,677,883 | 62,440,824 | - | 57,438,383 | (183,557,090 | ) | - | |||||||||||||||||
| Intangible asset, net | - | - | 50,926 | 158,833 | 87,449,960 | 87,659,719 | ||||||||||||||||||
| Right of use asset, net | - | 692,919 | 1,002,496 | 1,030,362 | - | 2,725,777 | ||||||||||||||||||
| Other-non-current asset | 2,366,978 | 2,567,396 | - | 3,005,359 | 86,962,466 | 94,902,199 | ||||||||||||||||||
| Total Non-current asset | 66,044,861 | 66,331,704 | 3,731,694 | 61,847,910 | (9,144,664 | ) | 188,811,505 | |||||||||||||||||
| Total Asset | 159,905,872 | 140,870,959 | 9,776,380 | 164,574,519 | (241,490,555 | ) | 233,637,175 | |||||||||||||||||
| Accounts payable | - | 20,189,728 | 6,133,610 | 16,758,506 | (34,990,085 | ) | 8,091,759 | |||||||||||||||||
| Lease liability | - | 358,612 | 614,077 | 692,721 | - | 1,665,410 | ||||||||||||||||||
| Other current liabilities | 1,062,668 | 111,980,444 | 19,730,024 | 143,844,642 | (191,543,335 | ) | 85,074,443 | |||||||||||||||||
| Total current liabilities | 1,062,668 | 132,528,784 | 26,477,711 | 161,295,869 | (226,533,420 | ) | 94,831,612 | |||||||||||||||||
| Lease liability-NC | - | 324,255 | 427,499 | 396,772 | - | 1,148,526 | ||||||||||||||||||
| Other non-current liabilities | - | - | 861,500 | - | 2,486,040 | 3,347,540 | ||||||||||||||||||
| Total non-current liabilities | - | 324,255 | 1,288,999 | 396,772 | 2,486,040 | 4,496,066 | ||||||||||||||||||
| Total liabilities | 1,062,668 | 132,853,039 | 27,766,710 | 161,692,641 | (224,047,380 | ) | 99,327,678 | |||||||||||||||||
| Accumulated deficit | (52,484,550 | ) | (121,844,611 | ) | (55,952,193 | ) | (40,940,607 | ) | 35,972,003 | (235,249,958 | ) | |||||||||||||
| Other equity | 211,327,754 | 129,862,531 | 37,961,863 | 43,822,485 | (63,619,504 | ) | 359,355,129 | |||||||||||||||||
| Total equity | 158,843,204 | 8,017,920 | (17,990,330 | ) | 2,881,878 | (27,647,501 | ) | 124,105,171 | ||||||||||||||||
| Total Liability and stockholders’ equity | 159,905,872 | 140,870,959 | 9,776,380 | 164,574,519 | (241,490,555 | ) | 233,637,175 | |||||||||||||||||
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Consolidating Cash Flows Information
| Year ended December 31, 2023 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs | Elimination | Consolidated | |||||||||||||||||||
| Net cash (used in)/provided by operation activities | (305,859 | ) | 1,261,061 | (26,106 | ) | (1,522,303 | ) | 172,366 | (420,841 | ) | ||||||||||||||
| Net cash (used in)/provided by investing activities | - | (260,903 | ) | - | (505,398 | ) | 329,720 | (436,581 | ) | |||||||||||||||
| Net cash (used in)/provided by financing activities | 290,000 | 844,163 | - | (209,421 | ) | (300,000 | ) | 624,742 | ||||||||||||||||
| Effect of exchange rate changes on cash | 8,647 | 68,241 | (366 | ) | (318,559 | ) | (243,878 | ) | (485,915 | ) | ||||||||||||||
| Net increase in cash and cash equivalents | (7,212 | ) | 1,912,562 | (26,472 | ) | (2,555,681 | ) | (41,792 | ) | (718,595 | ) | |||||||||||||
| Year ended December 31, 2022 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs | Elimination | Consolidated | |||||||||||||||||||
| Net cash (used in)/provided by operation activities | (13,187,296 | ) | (4,363,034 | ) | (2,753,716 | ) | (3,599,661 | ) | (31,058,507 | ) | (17,870,525 | ) | ||||||||||||
| Net cash (used in)/provided by investing activities | - | (5,190,871 | ) | (88,618 | ) | (2,488,567 | ) | 6,594,214 | (934,197 | ) | ||||||||||||||
| Net cash (used in)/provided by financing activities | 7,420,000 | 3,838,243 | 2,342,047 | 2,257,470 | 28,620,214 | 7,093,542 | ||||||||||||||||||
| Effect of exchange rate changes on cash | 124,445 | (86,144 | ) | (30,256 | ) | (324,086 | ) | (3,526,830 | ) | (3,819,202 | ) | |||||||||||||
| Net increase in cash and cash equivalents | (5,642,851 | ) | (5,801,806 | ) | (530,543 | ) | (4,154,844 | ) | 629,091 | (15,530,382 | ) | |||||||||||||
| Year ended December 31, 2021 | ||||||||||||||||||||||||
| Parent | Subsidiaries | WFOEs | VIEs | Elimination | Consolidated | |||||||||||||||||||
| Net cash (used in)/provided by operation activities | (86,208,510 | ) | (15,968,254 | ) | 34,337,973 | 15,949,957 | (1,812,380 | ) | (53,787,959 | ) | ||||||||||||||
| Net cash (used in)/provided by investing activities | (72,449,477 | ) | (52,884,803 | ) | 151,027 | (13,979,925 | ) | 60,766,693 | (78,396,485 | ) | ||||||||||||||
| Net cash (used in)/provided by financing activities | 164,103,934 | 75,546,992 | (35,042,385 | ) | 4,318,722 | (60,363,735 | ) | 148,910,734 | ||||||||||||||||
| Effect of exchange rate changes on cash | 209,778 | 109,208 | (6,586 | ) | (1,595,463 | ) | 1,540,705 | (2,820 | ) | |||||||||||||||
| Net increase in cash and cash equivalents | 5,655,725 | 6,803,143 | (559,971 | ) | 4,693,291 | 131,283 | 16,723,470 | |||||||||||||||||
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VIE Arrangements with VIEs and Their Respective Shareholders
To comply with the PRC legal restrictions on foreign investments, the Company operates such restricted services in the PRC through certain PRC domestic companies, whose nominal equity interests are held by certain management members or founders of the Company or certain other third parties. Part of the registered capital of these PRC domestic companies was funded by certain management members, or founders of the Company or certain other third parties. The Company has entered into certain exclusive business services agreements with these PRC domestic companies, which entitle it to receive a majority of their residual returns and make it obligatory for the Company to absorb a majority of the risk of losses from their activities. In addition, the Company has entered into certain agreements with those management members, founders, or certain other third parties, including equity interest pledge agreements of the nominal equity interests held by those management members, founders or certain other third parties in these PRC domestic companies, and exclusive option agreements to acquire such nominal equity interests in these PRC domestic companies when permitted by the PRC laws, rules and regulations.
Details of the typical VIE structure of the Company’s significant consolidated VIEs, namely Zhong Chuan Shi Xun, Beijing BotBrain and EMG are set forth below:
| (i) | Contracts that give the Company effective control of VIEs |
Exclusive Option Agreement
Each VIE equity holders has granted the WFOEs exclusive call options to purchase the nominal equity interest in the VIEs at an exercise price equal to (i) with regard to Zhong Chuan Shi Xun, the minimum price as permitted by applicable PRC laws, or (ii) with regard to Beijing BotBrain, RMB10 in aggregate, or if appraisal is required as requested by relevant PRC laws, the price as determined by the relevant parties, or (iii) with regard to EMG, RMB 1 in aggregate or other price as determined by the relevant parties, provided that if required by relevant PRC laws, the minimum price as permitted by PRC laws shall apply. The WFOEs may designate another entity or individual to purchase the nominal equity interests, if applicable, under the call options. Each call option is exercisable subject to the condition that applicable PRC laws, rules and regulations do not prohibit completion of the transfer of the nominal equity interests pursuant to the call option. The VIEs shall not declare any dividend or other distribution to its equity holders without the approval of the WFOEs. With regard to Zhong Chuan Shi Xun and Beijing BotBrain, the exclusive call option agreements remain in effect for ten (10) years and may be renewed at the election of the WFOEs. With regard to EMG, the exclusive call option agreement shall remain in effect until all nominal equity interest under the call option has been transferred to the WFOE or its designated entity or individual.
Equity Pledge Agreements
As for Zhong Chuan Shi Xun and Beijing BotBrain, pursuant to the relevant equity pledge agreements, the relevant VIE equity holders have pledged all of their interests in the equity of the VIEs as a continuing security interest in favor of the corresponding WFOEs to secure the performance of obligations by the VIEs and/or the equity holders under the exclusive business cooperation agreements. Each WFOE is entitled to exercise its right to dispose of the VIE equity holders’ pledged interests in the equity of the VIE in accordance with applicable PRC laws in the event of any breach or default, and VIE equity holders shall cease to be entitled to any rights or interests associated with their nominal equity interests in the VIEs. These equity pledge agreements remain in force until and unless the obligations of the VIE equity holders to the WFOEs under the exclusive business cooperation agreements have been fulfilled.
As for EMG, pursuant to the relevant equity pledge agreement, the relevant VIE equity holder has pledged all of its nominal equity interest in the VIE as a continuing first priority security interest in favor of the corresponding WFOE to secure the performance of obligations by the VIE as set forth in the relevant exclusive option agreement, proxy agreement, the equity pledge agreement and the VIE’s obligation to repay the secured indebtedness. The VIE equity holder shall not be entitled to receive any dividend associated with its nominal equity interest without of the WFOE, and the dividend received by the VIE equity holder shall be deposited in the account designated by the WFOE and subject to the supervision of the WFOE. In the event of any breach or default, the WFOE shall be entitled to all rights to relief, including but not limited to disposing the nominal equity interest held by the VIE equity holder. The equity pledge agreement shall remain in force until and unless the obligations of the VIE equity holder to the WFOE under the exclusive option agreement, proxy agreement, the equity pledge agreement have been fulfilled or all the secured indebtedness has been paid off.
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Power of Attorney
As for Zhong Chuan Shi Xun and Beijing BotBrain, pursuant to the relevant power of attorney, each of the relevant VIE equity holders irrevocably appoints the corresponding WFOE as its attorney-in-fact to exercise on its behalf any and all rights that such equity holder has in respect of its nominal equity interests in the relevant VIE conferred by relevant laws and regulations and the articles of associate of such VIE. The power of attorney shall remain effective as long as such VIE equity holder remains as a shareholder of Zhong Chuan Shi Xun or Beijing BotBrain.
As for EMG, pursuant to the relevant power of attorney, the relevant VIE equity holder irrevocably appoints certain the person designated by the corresponding WFOE as its attorney-in-fact to exercise on its behalf any and all rights that such equity holder has in respect of its nominal equity interest in the relevant VIE conferred by relevant laws and regulations and the articles of associate of such VIE. The power of attorney of EMG shall remain effective until March 11, 2044, and will be renewed automatically for another ten (10) years unless the parties to the power of attorney agree otherwise.
| (ii) | Contracts that enable the Company to receive the certain benefits from the VIEs |
Exclusive business cooperation agreements
As for Zhong Chuan Shi Xun, Beijing BotBrain and EMG, each relevant VIE has entered into an exclusive business services agreement with the corresponding WFOE, pursuant to which the relevant WFOE provides exclusive business services to the VIE. In exchange, (i) Zhong Chuan Shi Xun pays a service fee to the corresponding WFOE which shall be no less than 80% of Zhong Chuan Shi Xun’s after-tax profits; (ii) Beijing BotBrain pays a service fee to the corresponding WFOE which shall be reasonably determined by such WFOE based on certain factors; (iii) EMG pays a service fee to the corresponding WFOE which shall be 20% of EMG’s annual income. Luokung exercises control over the VIEs through a Call Option Agreement, an Equity Pledge Agreement, an Exclusive Business Cooperation Agreement and a Proxy Agreement. The amount of service fees to be paid by EMG and BotBrain shall be determined solely by the WFOE or as mutually agreed by the WFOE and the VIEs. Based on the control Luokung exercises through these agreements and based on its ability to determine the fees paid by EMG and BotBrain, Luokung is considered the primary beneficiary of the VIEs.
Cash Flows through Our Organization
Luokung Technology Corp. is a holding company with no operations of its own. We conduct our operations in China primarily through our subsidiaries and the VIEs in China. As a result, although other means are available for us to obtain financing at the holding company level, the Company’s ability to pay dividends to the shareholders and to service any debt it may incur may depend upon dividends paid by our PRC subsidiaries and service fees paid by the VIEs. If any of our subsidiaries incurs debt on its own behalf, the instruments governing such debt may restrict its ability to pay dividends to the Company. In addition, our PRC subsidiaries are permitted to pay dividends to the Company. only out of their retained earnings, if any, as determined in accordance with applicable accounting standards and regulations. Further, our PRC subsidiaries and consolidated affiliated entities are required to make appropriations to certain statutory reserve funds or may make appropriations to certain discretionary funds, which are not distributable as cash dividends except in the event of a solvent liquidation of the companies.
Under PRC law, the Company may provide funding to its PRC subsidiaries only through capital contributions or loans, and to its affiliated entities in China only through loans, subject to satisfaction of applicable government registration that we are not able to make direct capital contribution.
Under PRC laws and regulations, our PRC subsidiaries and the VIEs are subject to certain restrictions with respect to paying dividends or otherwise transferring any of their net assets to us. Remittance of dividends by a wholly foreign-owned enterprise out of China is also subject to review by the banks designated by State Administration of Foreign Exchange, or SAFE. The amounts restricted include the paid-up capital and the statutory reserve funds of our PRC subsidiaries and the net assets of our consolidated affiliated entities in which we have no legal ownership. Other than a dividend paid to certain of our preferred shareholders in 2021, our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds. There is no fixed payment schedule in settling the amounts due from the VIEs. Payments are made based on the cash position of the VIEs.
D. PROPERTY, PLANTS AND EQUIPMENT
We lease offices as headquarter located at 8F & 9F, Block B, SOHO Phase II, No. 9 Guanghua Road, Chaoyang District, Beijing, which covers a floor space of 3498 square meters. These leases expire on August 15, 2024 and are renewable upon negotiation.
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ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. This discussion and analysis contain forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as our anticipated growth strategy, our plans to recruit more employees, our plans to invest in research and development to enhance our product or service lines, our future business development, results of operations and financial condition, expected changes in our net revenues and certain cost or expense items, our ability to attract and retain customers, trends and competition in the enterprise mobile software application market, and the factors set forth elsewhere in this report, our actual results may differ materially from those anticipated in these forward-looking statements. In light of those risks and uncertainties, there can be no assurance that the forward-looking statements contained in this report will in fact occur. You should not place undue reliance on the forward-looking statements contained in this report.
The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by U.S. federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.
Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the PRC or China.
Overview
Luokung Technology Corp. was incorporated on October 27, 2009 under the laws of the British Virgin Islands. We are a holding company and conduct our operations through our wholly-owned subsidiary named LK Technology Ltd., a British Virgin Islands limited liability company (“LK Technology”), and its wholly-owned subsidiaries, MMB Limited and its respective subsidiaries, which possess two core brands “Luokuang” and “SuperEngine”. “Luokuang” is a mobile application to provide Business to Customer (B2C) location-based services and “SuperEngine” provides Business to Business (B2B) and Business to Government (B2G) services in connection with spatial-temporal big data processing. In May 2010, we consummated an initial public offering of our American Depository Shares, or ADSs, for gross proceeds of $16 million, and our ADSs were listed on the NASDAQ Capital Market under the ticker symbol “KONE”. On August 17, 2018, we completed the transactions contemplated by the Asset Exchange Agreement (“AEA”) with C Media Limited (“C Media”) entered into on January 25, 2018. On August 20, 2018, we changed our name to Luokung Technology Corp., our American Depository Shares (“ADSs”) were voluntarily delisted from the NASDAQ Capital Market on September 19, 2018 and on January 3, 2019 our ordinary shares started trading on NASDAQ under the ticker symbol “LKCO”.
On August 17, 2018, we consummated an asset exchange transaction, pursuant to which we exchanged all issued and outstanding capital stock in Topsky Info-Tech Holdings Pte Ltd., the parent of Softech, for the issued and outstanding capital stock of LK Technology (the “Asset Exchange”). In connection with the Asset Exchange, we changed our name on August 20, 2018, and on September 20, 2018, completed the issuance to the shareholders of C Media Limited, the former parent of LK Technology, of (i) 185,412,599 of our ordinary shares, par value $0.01 per share and (ii) 1,000,000 of our preferred shares. Upon the consummation of the Asset Exchange, we ceased our previous business operations and became a company focused on the provision of location-based service in China.
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On August 25, 2018, LK Technology entered into a Stock Purchase Agreement with the shareholders of Superengine Holding Limited, a limited liability company incorporated under the laws of the British Virgin Islands (the “Superengine”), pursuant to which LK Technology acquired all of the issued and outstanding shares of Superengine for an aggregate purchase price of US$60 million, which was paid by the issuance of our Ordinary Shares in an amount equal to the quotient of (x) the Purchase Price divided by (y) the average of the closing prices of the Ordinary Shares on the NASDAQ Capital Market over the 12 months period preceding July 31, 2018. We are a party to the Agreement in connection with the issuance of the Ordinary Shares and certain other limited purposes.
On May 10, 2019 and November 6, 2020, the Company entered into a Stock Purchase Agreement and The Supplementary Agreement to Stock Purchase Agreement with the shareholders of BotBrain AI Limited (“Botbrain”), a limited liability company incorporated under the laws of the British Virgin Islands, pursuant to which the Company acquired 67.36% of the issued and outstanding shares of BotBrain for an aggregate purchase price of $2.5 million (RMB 16.4 million), of which $1.5 million (RMB 9.6 million) was to be paid in cash to obtain 20% of BotBrain and the Company issued 1,789,618 ordinary shares to acquire the remaining 47.36% of BotBrain. The closing of the acquisition was completed on December 4, 2020.
On August 28, 2019, the Company entered into a Share Purchase Agreement to acquire 100% of the equity interests of Saleya Holdings Limited (“Saleya”) from Saleya’s shareholders for an aggregate purchase price of approximately $120 million. On March 17, 2021, the Company completed the acquisition of 100% equity interest in Saleya for a consideration of (i) a cash amount of $102 million (RMB666 million), (ii) 9,819,926 LKCO ordinary shares and (iii) 1,500,310 LKCO preferred shares pursuant to a supplemental agreement dated February 24, 2021. The main operating subsidiary, eMapgo Technologies (Beijing) Co., Ltd. is a provider of navigation and electronic map services in China, as well as a provider of Internet map services and geographic information system engineering. The acquisition enables us to develop our smart transportation business, including autonomous driving and vehicle-road collaboration (V2X). From April 2021 to December 2021, Saleya contributed $9.1 million to smart transportation revenue and incurred a net loss of $4.5 million.
Results of operations for the fiscal year ended December 31, 2023 compared to the fiscal year ended December 31, 2022.
Revenue
For the fiscal year ended December 31, 2023, our revenues primarily consist of smart transportation services from eMapgo Technologies (Beijing) Co., Ltd. (“EMG”), for the fiscal year ended December 31, 2022, our revenues primarily consist of advertising services, software and services and smart transportation service from our subsidiaries and the VIEs, Jiangsu Zhong Chuan Rui You Information and Technology Limited (“Zhong Chuan Rui You”), Wave Function, SuperEngine Graphics Software Technology Development (Suzhou) Co., Ltd (“SuperEngine”) and EMG.
Advertising services
Zhong Chuan Rui You and Wave Function derive revenue from the provision of user acquisition services to their advertisers on the strength of the LBS services they offer; customers pay them based on performance, as measured by CPI (Cost Per Install), CPM (Cost Per Mile), and CPC (Cost Per Click). They recognize revenue over time because customers receive and consume the benefit of their advertising services throughout the contract period. There was no such revenue generated in 2023 due to Zhong Chuan Rui You suspended its business and Wave Function was deconsolidated as a result of termination of persons acting in concert agreement, which was entered into by Zhong Chuan Rui You and certain shareholder as of January 5, 2023.
Software and services
SuperEngine generates revenues primarily in the form of sale of a software license and provision of technology services. License fees include perpetual license fees, term license fees and royalties. Technology services primarily consist of fees for providing technology support services and technology solution services that enable customers to gain real-time operational intelligence by harnessing the value of their data.
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Revenue for the sale of software licenses is recognized at the point in time when the right to use the software is provided to its customers. Term license fees and royalties are recognized over time throughout the contract period.
Technology support service revenue is recognized over time as the services are performed because the customer receives and consumes the benefit of its performance throughout the contract period. Technology solution service revenue is recognized at the point in time when the service is completed. SuperEngine bills for the services it has performed in accordance with the terms of the contract. It recognizes the revenues associated with these professional services as it delivers the services to the customers. There was no such revenue generated as Superengine was liquidated in 2023.
Smart transportation
Map data licensing
EMG provides perpetual map data licenses to customers and collects one time license fees from customers. Revenue is recognized at the point in time when customers obtain the right to use the map data.
Autonomous driving simulation and verification test
EMG provides data collection and desensitization for compliance with legal requirements to system manufacturers and automobile manufacturers for autonomous driving simulation and verification testing. Revenues are derived from the provision of data collection and desensitization service for compliance with legal requirements. Revenues are recognized over time as the services are performed because the customer receives and consumes the benefit of its performance throughout the contract period.
Map service platform local deployment
Through local deployment, EMG provides a one-time map service platform license or a map service platform license for a certain period with updates to the map service platform during such contract period to certain public sectors and enterprises to support its location-based application. The map service platform includes map data and software that support certain map applications such as display, search, routing and others. Revenues from a map data license for a certain period are recognized ratably over time because the customer receives and consumes the benefit of the map services throughout the contract period.
| Fiscal Year Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Revenues | ||||||||||||
| Advertising | $ | 161 | $ | 81,008 | $ | 131,423 | ||||||
| Software and services | - | 508 | 4,545 | |||||||||
| Smart transportation | 10,075 | 12,077 | 9,100 | |||||||||
| Total revenues | $ | 10,236 | $ | 93,593 | $ | 145,068 | ||||||
| Advertising | 1.6 | % | 86.6 | % | 90.6 | % | ||||||
| Software and services | - | 0.5 | % | 3.1 | % | |||||||
| Smart transportation | 98.4 | % | 12.9 | % | 6.3 | |||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
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For the year ended December 31, 2023, we had revenue of $10,236,235, as compared to revenue of $93,593,186 for the year ended December 31, 2022, a decrease of $83,356,951, or 89.1%, historically, the primary contribution to this revenue mainly came from Zhong Chuan Rui You and Wave Function. The decrease was primarily due to the suspension of business of Zhong Chuan Rui You from 2023 and deconsolidation of Wave Function as a result of termination of persons acting in concert agreement as a result of its own change of capital structure plan.
Cost of revenue
Cost of revenue primarily consists of traffic acquisition costs and salary and benefit expenses. Our traffic acquisition costs may vary due to a number of factors, including scale, targeted audience and the geography of traffic.
Salary and benefit expenses consist of costs for employees directly involved in data collection and processing and data collection costs, which are primarily comprised of field survey-related costs and hard disk materials costs, and depreciation of facilities and equipment used in data collection and processing.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Amount | % of cost of revenue | % of revenue | Amount | % of cost of revenue | % of revenue | |||||||||||||||||||
| Traffic acquisition costs | $ | - | - | % | - | % | $ | 73,802 | 94.7 | % | 78.9 | % | ||||||||||||
| Others | 5,631 | 100.0 | % | 55.0 | % | 4,140 | 5.3 | % | 4.4 | % | ||||||||||||||
| Total cost of revenue | $ | 5,631 | 100.0 | % | 55.0 | % | $ | 77,942 | 100.0 | % | 83.3 | % | ||||||||||||
Cost of revenue for the year ended December 31, 2023 was $5,630,725, representing a decrease of $72,310,940 or 92.8% as compared to $77,941,665 for the year ended December 31, 2022. The decrease was primarily attributable to the decrease of traffic acquisition costs as a result of the suspension of the advertising business.
Gross profit margin increased to 45.0% for the year ended December 31, 2023 from 16.7% for the year ended December 31, 2022. The increase in gross profit margin was primarily attributable to most of the revenue was generated from smart transportation business with higher gross profit margin for the year ended December 31, 2023.
Selling and marketing expense
Our selling and marketing expense mainly includes promotional and marketing expenses and compensation for our sales and marketing personnel.
Selling expense totaled $2,248,912 for the year ended December 31, 2023, as compared to $5,656,184 for the year ended December 31, 2022, a decrease of $3,407,272 or 60.2%. The decrease was primarily attributable to a decrease in salaries of sales and marketing personnel of approximately $3,121,000 as a result of a decrease in business volume, a decrease in travelling expenses of approximately $111,000 and a decrease in entertainment expense of approximately $113,000.
General and administrative expense
Our general and administrative expenses consist primarily of salaries and benefits for our general and administrative personnel, rent, fees and expenses for legal, accounting and other professional services.
General and administrative expense totaled $158,470,428 for the year ended December 31, 2023, as compared to $20,663,654 for the year ended December 31, 2022, an increase of $137,806,774 or 666.9%. The increase was primarily attributable to an increase in impairment loss of approximately $123,893,000, which mainly including impairment of goodwill of approximately$79,917,000, impairment of intangible assets of approximately $30,967,000, impairment of associate of approximately $7,566,000 and impairment of other asset state at cost of approximately $4,843,000, offset by a decrease in listing related fees of approximately $1,019,000, a decrease in rental fees of approximately $597,000, a decrease in legal and professional fee of approximately $287,000.
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Research and development expenses
Research and development expenses primarily consist of amortization of the intangible assets, and salaries and benefits for research and development personnel.
Research and development expenses totaled $25,180,425 for the year ended December 31, 2023, as compared to $49,873,652 for the year ended December 31, 2022, a decrease of $24,693,227 or 49.5%. The decrease was primarily attributable to a decrease in salaries and share based compensation of approximately $20,791,000 due to a decrease in the number of staff in the R&D department, a decrease in server expenses of approximately $239,000, a decrease in amortization of intangible asset of approximately $1,865,000, a decrease in on-site work fee of approximately $579,000 and research and development outsourcing fee of approximately $862,000.
Loss from operations
As a result of the factors described above, for the year ended December 31, 2023, loss from operations amounted to $181,294,255, as compared to loss from operations of $60,541,969 for the year ended December 31, 2022, an increase of $120,752,286, or 199.5%.
Other income/expense
Other income/expense mainly includes interest expenses from other loans and foreign currency gains/losses.
For the year ended December 31, 2023, other income, net, amounted to $2,327,999 as compared to $6,388,904 for the year ended December 31, 2022, a decrease of $4,060,905, or 63.6%, which was primarily attributable to a decrease in other income of approximately $9,939,000, due to the write-off of accounts payable of approximately $9,199,000 as two of our suppliers were dissolved in 2022 and an increase in interest expenses of approximately $137,000, offset by an increase in foreign exchange gain of approximately $478,000 and an increase in gain from investment of approximately $5,537,000 resulted from disposal of subsidiary.
Income tax
We had an income tax expense of $2,755,973 and income tax benefit of $3,941,324 the years ended 2023 and 2022, respectively. We are subject to various rates of income tax under different jurisdictions. The following summarizes the major factors affecting our applicable tax rates in the BVI, Hong Kong and the PRC.
BVI
We are an exempted company incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands, we are not subject to income, corporation or capital gains tax in the British Virgin Islands. In addition, our payment of dividends to our shareholders, if any, is not subject to withholding tax in the British Virgin Islands.
Hong Kong
Our subsidiaries in Hong Kong are subject to the uniform tax rate of 16.5%. Under Hong Kong tax law, our subsidiaries in Hong Kong are exempted from income tax on their foreign-derived income and there is no withholding tax in Hong Kong on remittance of dividends.
PRC
Generally, our PRC subsidiaries, our consolidated affiliated entities and their subsidiaries are subject to enterprise income tax on their taxable income in the PRC at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.
An enterprise may benefit from a preferential tax rate of 15% under the EIT Law if it qualifies as a High and New Technology Enterprise, which is normally effective for a period of three years. Our subsidiaries, Beijing Zhong Chuan Shi Xun Technology Limited, eMapgo Technologies (Beijing) Co., Ltd. and Beijing BotBrain AI Technology Co., Ltd. are High-tech enterprises and enjoy a favorable income tax rate of 15%.
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Net loss
As a result of the factors described above, our net loss was $181,722,229 for the year ended December 31, 2023, compared to net loss of $50,211,741 for the year ended December 31, 2022, an increase of $131,510,488 or 261.9%.
Net loss attributable to owners of the Company
The net loss attributable to owners of the Company was $181,331,324, or $81.55 per ordinary share (basic and diluted), for the year ended December 31, 2023, compared to net loss attributable to owners of the Company of $52,539,682, or $29.76 per ordinary share (basic and diluted), for the year ended December 31, 2022, an increase of $128,791,642 or 245.1%. Earnings per share is based on revised weighted average shares due to the March, 2023 and September 2024 reverse stock split.
Foreign currency translation adjustment
Our reporting currency is the U.S. dollar. The functional currency of our parent company and subsidiaries of LK Technology, MMB Mobile Media, SuperEngine Holding and PICO is the U.S. dollar and the functional currency of the Company’s subsidiaries incorporated in China is the Chinese Renminbi (“RMB”). The financial statements of our subsidiaries incorporated in China are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenue, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and comprehensive loss. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation loss of $197,519 for the year ended December 31, 2023, as compared to a foreign currency translation gain of $2,204,206 for the year ended December 31, 2022. This non-cash gain had the effect of decreasing our reported comprehensive loss.
Comprehensive loss
As a result of our foreign currency translation adjustment, we had comprehensive loss for the year ended December 31, 2023 of $181,914,730, compared to comprehensive loss of $48,007,535 for the year ended December 31, 2022.
Results of operations for the fiscal year ended December 31, 2022 compared to the fiscal year ended December 31, 2021.
Revenue
Our revenues primarily consist of advertising services, software and services and smart transportation from our subsidiaries and the VIEs, Jiangsu Zhong Chuan Rui You Information and Technology Limited (“Zhong Chuan Rui You”), Beijing Wave Function Culture Development Co., Ltd.(“Wave Function”), SuperEngine Graphics Software Technology Development (Suzhou) Co., Ltd (“SuperEngine”) and eMapgo Technologies (Beijing) Co., Ltd. (“EMG”).
Advertising services
Zhong Chuan Rui You and Wave Function derive revenue from the provision of user acquisition services to their advertisers on the strength of the LBS services they offer; customers pay them based on performance, as measured by CPI (Cost Per Install), CPM (Cost Per Mile), and CPC (Cost Per Click). They recognize revenue over time because customers receive and consume the benefit of their advertising services throughout the contract period.
Software and services
SuperEngine generates revenues primarily in the form of sale of a software license and provision of technology services. License fees include perpetual license fees, term license fees and royalties. Technology services primarily consist of fees for providing technology support services and technology solution services that enable customers to gain real-time operational intelligence by harnessing the value of their data.
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Revenue for the sale of software licenses is recognized at the point in time when the right to use the software is provided to its customers. Term license fees and royalties are recognized over time throughout the contract period.
Technology support service revenue is recognized over time as the services are performed because the customer receives and consumes the benefit of its performance throughout the contract period. Technology solution service revenue is recognized at the point in time when the service is completed. SuperEngine bills for the services it has performed in accordance with the terms of the contract. It recognizes the revenues associated with these professional services as it delivers the services to the customers.
Smart transportation
Map data licensing
EMG provides perpetual map data licenses to customers and collects one time license fees from customers. Revenue is recognized at the point in time when customers obtain the right to use the map data.
Autonomous driving simulation and verification test
EMG provides data collection and desensitization for compliance with legal requirements to system manufacturers and automobile manufacturers for autonomous driving simulation and verification testing. Revenues are derived from the provision of data collection and desensitization service for compliance with legal requirements. Revenues are recognized over time as the services are performed because the customer receives and consumes the benefit of its performance throughout the contract period.
Map service platform local deployment
Through local deployment, EMG provides a one-time map service platform license or a map service platform license for a certain period with updates to the map service platform during such contract period to certain public sectors and enterprises to support its location-based application. The map service platform includes map data and software that support certain map applications such as display, search, routing and others. Revenues from a map data license for a certain period are recognized ratably over time because the customer receives and consumes the benefit of the map services throughout the contract period.
| Fiscal Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| (dollars in thousands) | ||||||||
| Revenues | ||||||||
| Advertising | $ | 81,008 | $ | 131,423 | ||||
| Software and services | 508 | 4,545 | ||||||
| Smart transportation | 12,077 | 9,100 | ||||||
| Total revenues | $ | 93,593 | $ | 145,068 | ||||
| Advertising | 86.6 | % | 90.6 | % | ||||
| Software and services | 0.5 | % | 3.1 | % | ||||
| Smart transportation | 12.9 | % | 6.3 | |||||
| Total | 100.0 | % | 100.0 | % | ||||
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For the year ended December 31, 2022, we had revenue of $93,593,186, as compared to revenue of $145,067,965 for the year ended December 31, 2021, a decrease of $51,474,779, or 35.5%, which was primarily due to our adjustment of advertising placement and customer acquisition strategies, the number of customers decreased as we shifted our focus to providing services to customers with higher gross margins instead of solely focusing on volume of transactions based on the strength of the integration and improvement of geographic information points of interest (POI), characteristic areas of interest (AOI), and other data using AI algorithms. This integration and improvement ultimately led to improved advertising conversion rates, allowing us to increase the gross margin,
Cost of revenue
Cost of revenue primarily consists of traffic acquisition costs and salary and benefit expenses. Our traffic acquisition costs may vary due to a number of factors, including scale, targeted audience and the geography of traffic.
Salary and benefit expenses consist of costs for employees directly involved in data collection and processing and data collection costs, which are primarily comprised of field survey-related costs and hard disk materials costs, and depreciation of facilities and equipment used in data collection and processing.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Amount | % of cost of revenue | % of revenue | Amount | % of cost of revenue | % of revenue | |||||||||||||||||||
| Traffic acquisition costs | $ | 73,802 | 94.7 | % | 78.9 | % | $ | 124,997 | 96.9 | % | 86.2 | % | ||||||||||||
| Others | 4,140 | 5.3 | % | 4.4 | % | 4,029 | 3.1 | % | 2.8 | % | ||||||||||||||
| Total cost of revenue | $ | 77,942 | 100.0 | % | 83.3 | % | $ | 129,026 | 100.0 | % | 89.0 | % | ||||||||||||
Cost of revenue for the year ended December 31, 2022 was $77,941,665, representing a decrease of $51,084,421 or 39.6% as compared to $129,026,086 for the year ended December 31, 2021. The decrease was primarily attributable to the decrease of traffic acquisition costs incurred.
Gross profit margin increased to 16.7% for the year ended December 31, 2022 from 11.1% for the year ended December 31, 2021. The increase in gross profit margin was primarily attributable to value-added services in advertising and revenue from smart transportation, all of which yield increased gross profit margin.
Selling and marketing expense
Our selling and marketing expense mainly includes promotional and marketing expenses and compensation for our sales and marketing personnel.
Selling expense totaled $5,656,184 for the year ended December 31, 2022, as compared to $6,057,161 for the year ended December 31, 2021, a decrease of $400,977 or 6.6%. The decrease was primarily attributable to a decrease in marketing and advertising expenses of approximately $2,086,000 and a decrease in reimbursements to employees for out-of-pocket expenses of approximately $377,000, offset by an increase in salaries of approximately $2,096,000 due to an increase in the number of marketing personnel.
General and administrative expense
Our general and administrative expenses consist primarily of salaries and benefits for our general and administrative personnel, rent, fees and expenses for legal, accounting and other professional services.
General and administrative expense totaled $20,663,654 for the year ended December 31, 2022, as compared to $30,127,176 for the year ended December 31, 2021, a decrease of $9,463,522 or 31.4%. The decrease was primarily attributable to a decrease in consulting fees of approximately $4,891,000, a decrease in legal and professional fees of approximately $2,050,000, a decrease in impairment goodwill of BotBrain of approximately $141,000 and an increase in impairment loss of accounts and other receivables of approximately $54,000, offset by an increase in salary expenses of approximately $756,000 and a decrease in impairment on loans of approximately $4,724,000.
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Research and development expenses
Research and development expenses primarily consist of amortization of the intangible assets, and salaries and benefits for research and development personnel.
Research and development expenses totaled $49,873,652 for the year ended December 31, 2022, as compared to $45,476,113 for the year ended December 31, 2021, an increase of $4,397,539 or 9.7%. The increase was primarily attributable to an increase in salaries and share based compensation of approximately $4,094,000 due to an increase in the number of staff in the R&D department, and an increase in amortization of intangible assets of approximately $2,479,000.
Loss from operations
As a result of the factors described above, for the year ended December 31, 2022, loss from operations amounted to $60,541,969, as compared to loss from operations of $65,618,571 for the year ended December 31, 2021, a decrease of $5,076,602, or 7.7%.
Other income/expense
Other income/expense mainly includes interest expenses from other loans and foreign currency gains/losses.
For the year ended December 31, 2022, other income, net, amounted to $6,388,904 as compared to other expense, net, of $3,978,751 for the year ended December 31, 2021, a change of $10,367,655, or 260.6%, which was primarily attributable to a decrease in interest expenses of approximately $759,000 and an increase in other income of approximately $9,823,000, due to the write-off of accounts payable of approximately $9,199,000 as two of our suppliers were dissolved, offset by an increase in foreign currency transaction loss of approximately $224,000.
Income tax
We had an income tax benefit of $3,941,324 and $8,126,337 for the years ended 2022 and 2021, respectively. The benefit for 2021 represents a deferred tax credit arising from five of our subsidiaries as our management believes that the subsidiary will have future taxable income to absorb a portion of our net operating loss carry forwards. We are subject to various rates of income tax under different jurisdictions. The following summarizes the major factors affecting our applicable tax rates in the BVI, Hong Kong and the PRC.
BVI
We are an exempted company incorporated in the British Virgin Islands. Under the current laws of the British Virgin Islands, we are not subject to income, corporation or capital gains tax in the British Virgin Islands. In addition, our payment of dividends to our shareholders, if any, is not subject to withholding tax in the British Virgin Islands.
Hong Kong
Our subsidiaries in Hong Kong are subject to the uniform tax rate of 16.5%. Under Hong Kong tax law, our subsidiaries in Hong Kong are exempted from income tax on their foreign-derived income and there is no withholding tax in Hong Kong on remittance of dividends.
PRC
Generally, our PRC subsidiaries, our consolidated affiliated entities and their subsidiaries are subject to enterprise income tax on their taxable income in the PRC at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.
An enterprise may benefit from a preferential tax rate of 15% under the EIT Law if it qualifies as a High and New Technology Enterprise, which is normally effective for a period of three years. Our subsidiaries, Beijing Zhong Chuan Shi Xun Technology Limited, Superengine Graphics Software Technology Development (Suzhou) Co., Ltd, eMapgo Technologies (Beijing) Co., Ltd., DMG Infotech Co., Ltd and Beijing BotBrain AI Technology Ltd. are High-tech enterprises and enjoy a favorable income tax rate of 15%.
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Net loss
As a result of the factors described above, our net loss was $50,211,741 for the year ended December 31, 2022, compared to net loss of $61,470,985 for the year ended December 31, 2021, a decrease of $11,259,244 or 18.3%.
Net loss attributable to owners of the Company
The net loss attributable to owners of the Company was $52,539,682, or $3.72 per ordinary share (basic and diluted), for the year ended December 31, 2022, compared to net loss attributable to owners of the Company of $68,801,252, or $6.30 per ordinary share (basic and diluted), for the year ended December 31, 2021, a change of $16,261,570 or 23.6%. Earnings per share is based on revised weighted average shares due to the March reverse stock split.
Foreign currency translation adjustment
Our reporting currency is the U.S. dollar. The functional currency of our parent company and subsidiaries of LK Technology, MMB Mobile Media, SuperEngine Holding and PICO is the U.S. dollar and the functional currency of the Company’s subsidiaries incorporated in China is the Chinese Renminbi (“RMB”). The financial statements of our subsidiaries incorporated in China are translated to U.S. dollars using period end rates of exchange for assets and liabilities, and average rates of exchange (for the period) for revenue, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and comprehensive loss. As a result of foreign currency translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $2,204,206 for the year ended December 31, 2022, as compared to a foreign currency translation loss of $58,700 for the year ended December 31, 2021. This non-cash gain had the effect of decreasing our reported comprehensive loss.
Comprehensive loss
As a result of our foreign currency translation adjustment, we had comprehensive loss for the year ended December 31, 2022 of $48,007,535, compared to comprehensive loss of $61,529,685 for the year ended December 31, 2021.
Critical accounting policies
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of our financial condition and results and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical policies include revenue recognition, impairment of long-lived assets and goodwill, allowance for expected credit losses and valuation allowance for deferred tax assets.
Below, we discuss these policies further, as well as the estimates and judgments involved. We believe that our other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported financial condition and results of operations for a given period. For a discussion of all our significant accounting policies, see footnote 2 to the Consolidated Financial Statements included elsewhere in this Annual Report.
Revenue recognition
The Company recognizes revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers”
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Advertising services
Zhong Chuan Rui You and Wave Function derive revenue from the provision of user acquisition services to their advertisers on the strength of the LBS services they offer; customers pay them based on performance, as measured by CPI (Cost Per Install), CPM (Cost Per Mile), and CPC (Cost Per Click). They recognize revenue over time because customers receive and consume the benefit of their advertising services throughout the contract period.
Software and services
SuperEngine generates revenues primarily in the form of sale of a software license and provision of technology services. License fees include perpetual license fees, term license fees and royalties. Technology services primarily consist of fees for providing technology support services and technology solution services that enable customers to gain real-time operational intelligence by harnessing the value of their data.
Revenue for the sale of software licenses is recognized at the point in time when the right to use the software is provided to its customers. Term license fees and royalties are recognized over time throughout the contract period.
Technology support service revenue is recognized over time as the services are performed because the customer receives and consumes the benefit of its performance throughout the contract period. Technology solution service revenue is recognized at the point in time when the service is completed. SuperEngine bills for the services it has performed in accordance with the terms of the contract. It recognizes the revenues associated with these professional services as it delivers the services to the customers.
Smart transportation
Map data licensing
EMG provides perpetual map data licenses to customers and collects one time license fees from customers, is recognized at the point in time when customers obtain the right to use the map data.
Autonomous driving simulation & verification test
EMG provides data collection and desensitization for compliance with legal requirements to system manufacturers and automobile manufacturers for autonomous driving simulation and verification testing. Revenues are derived from the provision of data collection and desensitization service for compliance with legal requirements. Revenue is recognized over time as the services are performed because the customer receives and consumes the benefit of its performance throughout the contract period.
Map service platform local deployment
Through local deployment, EMG provides a one-time map service platform license or a map service platform license for a certain period with updates to the map service platform during such contract period to certain public sectors and enterprises to support their location-based application. The map service platform includes map data and software that support certain map applications such as display, search, routing and others. Revenues from a map data license for a certain period are recognized ratably over time because the customer receives and consumes the benefit of the map services throughout the contract period.
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Impairment of long-lived assets
Long-lived assets other than goodwill are included in impairment evaluations when events and circumstances exist that indicate the carrying value of these assets may not be recoverable. In accordance with FASB ASC 360, “Property, Plant and Equipment”, the Company assesses the recoverability of the carrying value of long-lived assets by first grouping its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the asset group) and, secondly, estimating the undiscounted future cash flows that are directly associated with and expected to arise from the use of and eventual disposition of such asset group. If the carrying value of the asset group exceeds the estimated undiscounted cash flows, the Company recognizes an impairment loss to the extent the carrying value of the long-lived asset exceeds its fair value. The Company determines fair value through quoted market prices in active markets or, if quotations of market prices are unavailable, through the performance of internal analysis using a discounted cash flow methodology or by obtaining external appraisals from independent valuation firms. The undiscounted and discounted cash flow analyses are based on a number of estimates and assumptions, including the expected period over which the asset will be utilized, projected future operating results of the asset group, discount rate and long-term growth rate.
As of December 31, 2023 and 2022, the Company assessed the impairment of its long-lived assets and identified impairment indications. The Company recorded impairment of long-lived assets of $38,630,310 and nil for the year ended December 31, 2023 and 2022.
Impairment of goodwill
The Company assesses goodwill for impairment in accordance with ASC 350-20, “Intangibles—Goodwill and Other: Goodwill”, which requires that goodwill to be tested for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined by ASC 350-20.
The Company has the option to assess qualitative factors first to determine whether it is necessary to perform the impairment test in accordance with ASC 350-20. If the Company believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, the quantitative impairment test described below is required. Otherwise, no further testing is required. In the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. In performing the quantitative impairment test, the Company compares the carrying amount of the reporting unit to the fair value of the reporting unit based on either quoted market prices of the ordinary shares or estimated fair value using a combination of the income approach and the market approach. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the excess is recognized as an impairment loss.
In 2023, the Company performed a qualitative assessment for goodwill and evaluated all relevant factors, including but not limited to macroeconomic conditions, industry and market conditions, and financial performance. The Company concluded that it is necessary to perform a quantitative assessment. The Company completed the quantitative goodwill impairment assessment based on the discounted future cash flows that the reporting units are expected to generate and determined after evaluating the results, events and circumstances, that the carrying values of the reporting units exceeded their fair values. Therefore, the Company recorded impairment on goodwill of $7,239,936 of Zhong Chuan Rui You, we noted starting from 2024, the profit margin contribution of traditional internet advertising business to the Company has becoming lower, a significant amount of cash investment is also required to improve the gross profit margin, the management of the Company determined to abandon Zhong Chuan Rui You’s business. The Company recorded impairment on goodwill of $71,808,110 of Saleya, we noted the market share and profitability of Saleya has been eroding and consistently underperformed financially. The Company recorded impairment on goodwill of $4,488,664 of Superengine, as it has entered the liquidation process in 2024. The Company recorded impairment on goodwill of $3,849,207 of BotBrain, we noted the demand for corporate training was significantly reduced, market competition, particularly due to the larger players offering lower prices, severely eroded Botbrain’s market share, and the increased investment of the larger players as indicators of an impairment.
In 2022, the Company performed a qualitative assessment for goodwill and evaluated all relevant factors, including but not limited to macroeconomic conditions, industry and market conditions, and financial performance. The Company concluded that it is necessary to perform a quantitative assessment. The Company completed the quantitative goodwill impairment assessment based on the discounted future cash flows that the reporting units are expected to generate and determined after evaluating the results, events and circumstances, that the carrying values of the reporting units exceeded their fair values. Therefore, the Company recorded impairment on goodwill of $1,854,221 of BotBrain. In assessing potential impairment of the goodwill attributed to BotBrain, we noted the demand for corporate training was significantly reduced, market competition, particularly due to the larger players offering lower prices, severely eroded BotBrain’s market share, and the increased investment of the larger players as indicators of an impairment.
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Allowance for expected credit losses
Effective January 1, 2020, the Company adopted Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”. The Company estimates its allowance for current expected credit losses based on an expected loss model, compared to prior periods which were estimated using an incurred loss model which did not require the consideration of forward-looking economic variables and conditions in the reserve calculation across the portfolio. The impact related to adopting the new standard was not material. Certain changes resulting from the new standard impacted the Company’s description of its significant accounting policies compared to 2019.
The Company estimates its allowances for expected credit losses for accounts and other receivables by considering past events, including any historical default, current economic conditions and certain forward-looking information, including reasonable and supportable forecasts. As of January 1, 2020, the methodologies that the Company uses to estimate the allowance for expected credit losses for accounts and other receivables are as follows:
Individually evaluated—The Company reviews all accounts and other receivables considered at risk semi-annually and performs an analysis based upon current information available about the customers and other debtors, such as financial statements, news reports, published credit ratings as well as collateral net of repossession cost, prior collection history and current and future expected economic conditions. Using this information, the Company determines the expected cash flow for the accounts and other receivables and calculates an estimate of the potential loss and the probability of loss. For those accounts for which the loss is probable, the Company records a specific allowance.
Collectively evaluated—The Company determines its allowances for credit losses for collectively evaluated accounts and other receivables based on appropriate groupings.
The Company considers forward-looking macroeconomic variables such as gross domestic product, unemployment rates, equity prices and corporate profits when quantifying the impact of economic forecasts on its allowance for expected credit losses. Macroeconomic variables may vary based on historical experiences, portfolio composition and current environment. The Company also considers the impact of current conditions and economic forecasts relating to specific industries and client-credit ratings, in addition to performing a qualitative review of credit risk factors across the portfolio. Under this approach, forecasts of these variables over two years are considered reasonable and supportable. Beyond two years, the Company reverts to long-term average loss experience. Forward-looking estimates require the use of judgment, particularly in times of economic uncertainty.
Income taxes
Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, and net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years to these items. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws and regulations applicable to the Company as enacted by the relevant tax authorities.
The impact of an uncertain income tax positions on the income tax return must be recognized at the largest amount that is more-likely-than not to be sustained upon audit by the relevant tax authorities. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, the Company classifies the interest and penalties, if any, as a component of income tax expense. For years ended December 31, 2023, 2022 and 2021, the Company did not have any material interest or penalties associated with tax positions nor did the Company have any significant unrecognized uncertain tax positions.
Recent accounting pronouncements
Please refer to Note 2 to the consolidated financial statements.
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B. LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. We historically have relied on cash flow provided by operations and financing to supplement our working capital. As of December 31, 2023 and 2022, we had cash balances of approximately $546,286 and $1,264,881, respectively. The significant portion of these funds are located in financial institutions located in the PRC and will continue to be indefinitely reinvested in our operations in the PRC.
The following table sets forth a summary of changes in our working capital from December 31, 2022 to December 31, 2023:
| Variance | ||||||||||||||||
| December 31, 2023 | December 31, 2022 | Change | Percentage Change | |||||||||||||
| Working capital deficit: | ||||||||||||||||
| Total current assets | $ | 7,148,724 | $ | 44,825,670 | $ | (37,676,946 | ) | (84.1 | )% | |||||||
| Total current liabilities | 100,740,467 | 94,831,612 | 5,908,855 | 6.2 | % | |||||||||||
| Working capital deficit: | $ | (93,591,743 | ) | $ | (50,005,942 | ) | $ | (43,585,801 | ) | 87.2 | % | |||||
Our working capital deficit increased by $43,585,801 to a working capital deficit of $93,591,743 at December 31, 2023 from working capital deficit of $50,005,942 at December 31, 2022. This increase in working capital deficit is primarily attributable to a decrease in accounts receivable, net of allowance for expected credit losses of approximately $3,934,000 and a decrease in other receivables and prepayment of approximately $33,391,000 as a result of deconsolidation of Wave Function, an increase in accrued liabilities and other payables of approximately $7,149,000, which was mainly due to an increase in accrued payroll of approximately $10,909,000 and offset by a decrease in other payable of approximately $3,761,000.
We intend to meet the cash requirements for the next 12 months from the issuance date of this report through a combination of debt and equity financing such as by way of private placements. Please see Notes 2 and 16 to the consolidated financial statements.
Cash flows for the year ended December 31, 2023 compared to the year ended December 31, 2022
The following summarizes the key components of our cash flows for the years ended December 31, 2023 and 2022:
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (420,840 | ) | $ | (17,870,525 | ) | ||
| Net cash used in investing activities | (436,581 | ) | (934,197 | ) | ||||
| Net cash provided by financing activities | 624,742 | 7,093,542 | ||||||
| Effect of foreign exchange rate changes | (485,916 | ) | (3,819,202 | ) | ||||
| Net decrease in cash | $ | (718,595 | ) | $ | (15,530,382 | ) | ||
Net cash flow used in operating activities was $420,840 for the year ended December 31, 2023 as compared to net cash flow used in operating activities of $17,870,525 for the year ended December 31, 2022, a decrease of $17,449,685.
Net cash flow used in operating activities for the year ended December 31, 2023 primarily reflected our net loss of approximately $181,722,229, and the add-back of non-cash items, mainly consisting of depreciation and amortization of approximately $14,685,000, amortization of right-of-use assets of approximately $1,280,000, an increase in allowance for expected credit losses of approximately $19,665,000, gain on disposal of property and equipment of approximately $40,000, share-based compensation expense of approximately $8,492,000, gain on disposal of subsidiaries of approximately $5,656,000, gain on derecognition of lease of approximately $26,000, impairment of intangible assets of approximately $30,967,000, impairment of goodwill of approximately $79,917,000, impairment of property and equipment of approximately $98,000, impairment on associate of approximately $7,566,000, impairment of other asset state at cost of approximately $4,843,000, change in deferred tax liability of approximately $2,736,000, and changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of approximately $2,268,000, a decrease in accrued liabilities and other payables of approximately $23,064,000, a decrease in accounts payable of approximately $1,645,000, offset by a decrease in other receivables and prepayment of approximately $7,174,000, a decrease in lease liability of approximately $1,350,000 and a decrease in tax liability of approximately $1,591,000.
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Net cash flow used in operating activities for the year ended December 31, 2022 primarily reflected our net loss of approximately $50,211,741, and the add-back of non-cash items, mainly consisting of depreciation and amortization of approximately $17,142,000, amortization of right-of-use assets of approximately $1,607,000, decrease in allowance for expected credit losses of approximately $223,000, share-based compensation expense of approximately $1,854,000, impairment of goodwill of approximately $1,854,000, impairment of Property, plant and equipment of approximately $163,000, change in deferred tax liability of approximately $3,950,000 and changes in operating assets and liabilities primarily consisting of an increase in other receivables and prepayment of approximately $923,000, a decrease in accounts payable of approximately $391,000, a decrease in lease liability of approximately $1,341,000, a decrease in accrued liabilities and other payables of approximately $9,458,000, offset by a decrease in accounts receivable of approximately $8,297,000, a decrease in notes receivable of approximately $561,000 and an increase in deferred revenue of approximately $682,000.
Net cash flow used in investing activities was $436,581 for the year ended December 31, 2023 as compared to net cash flow used in investing activities of $934,197 for the year ended December 31, 2022. During the year ended December 31, 2023, cash outflow from loss of control of subsidiaries of approximately $408,000, we made payment for the purchase of property, plant and equipment of approximately $28,000. During the year ended December 31, 2022, we made payment for the purchase of property, plant and equipment of approximately $425,000, purchase of other asset at a cost of approximately $726,000, offset by net cash inflow from acquisition of subsidiaries of approximately $217,000.
Net cash flow provided by financing activities was $624,742 for the year ended December 31, 2023 as compared to net cash flow provided by financing activities of $7,093,542 for the year ended December 31, 2022. During the year ended December 31, 2023, we received proceeds from related parties of approximately $625,000. During the year ended December 31, 2022, we received proceeds from the issuance of shares of approximately $7,420,000, offset by repaid advances from related parties of approximately $326,000.
Cash flows for the year ended December 31, 2022 compared to the year ended December 31, 2021
The following summarizes the key components of our cash flows for the years ended December 31, 2022 and 2021:
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (17,870,525 | ) | $ | (53,787,959 | ) | ||
| Net cash used in investing activities | (934,197 | ) | (78,396,485 | ) | ||||
| Net cash provided by financing activities | 7,093,542 | 148,910,734 | ||||||
| Effect of foreign exchange rate changes | (3,819,202 | ) | (2,820 | ) | ||||
| Net (decrease) increase in cash | $ | (15,530,382 | ) | $ | 16,723,470 | |||
Net cash flow used in operating activities was $17,870,525 for the year ended December 31, 2022 as compared to net cash flow used in operating activities of $53,787,959 for the year ended December 31, 2021, a decrease of $35,917,434.
Net cash flow used in operating activities for the year ended December 31, 2022 primarily reflected our net loss of approximately $50,211,741, and the add-back of non-cash items, mainly consisting of depreciation and amortization of approximately $17,142,000, amortization of right-of-use assets of approximately $1,607,000, decrease in allowance for expected credit losses of approximately $223,000, share-based compensation expense of approximately $1,854,000, impairment of goodwill of approximately $1,854,000, impairment of Property, plant and equipments of approximately $163,000, change in deferred tax liability of approximately $3,950,000 and changes in operating assets and liabilities primarily consisting of an increase in other receivables and prepayment of approximately $923,000, a decrease in accounts payable of approximately $391,000, a decrease in lease liability of approximately $1,341,000, a decrease in accrued liabilities and other payables of approximately $9,458,000, offset by a decrease in accounts receivable of approximately $8,297,000, a decrease in notes receivable of approximately $561,000 and an increase in deferred revenue of approximately $682,000.
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Net cash flow used in operating activities for the year ended December 31, 2021 primarily reflected our net loss of approximately $61,471,000, and the add-back of non-cash items, mainly consisting of depreciation and amortization of approximately $13,432,000, amortization of right-of-use assets of approximately $1,148,000, exchange difference of approximately $71,000, loss on disposal of property and equipment of approximately $107,000, allowance for expected credit losses of approximately $5,249,000, share-based compensation expense of approximately $21,186,000, impairment of goodwill of approximately $1,995,000, change in deferred tax liability of approximately $8,223,000 and changes in operating assets and liabilities primarily consisting of an increase in accounts receivable of approximately $8,004,000, an increase in other receivables and prepayment of approximately $23,050,000, an increase in note receivable of approximately $664,000 and a decrease in lease liability of approximately $997,000, offset by an increase in accounts payable of approximately $101,000, an increase in accrued liabilities and other payables of approximately $4,547,000 and an increase in deferred revenue of approximately $703,000.
Net cash flow used in investing activities was $934,197 for the year ended December 31, 2022 as compared to net cash flow used in investing activities of $78,396,485 for the year ended December 31, 2021. During the year ended December 31, 2022, we made payment for the purchase of property, plant and equipment of approximately $425,000, purchase of other asset at a cost of approximately $726,000, offset by net cash inflow from acquisition of subsidiaries of approximately $217,000. During the year ended December 31, 2021, we made the remaining payment for the acquisition of Saleya as disclosed in the Form 6-K filed on September 13, 2019 of approximately $67,957,000, investment of approximately $440,000, payment for the purchase of property, plant and equipment of approximately $1,542,000, purchase of other asset at a cost of approximately $4,151,000 and deposits for investments of approximately $6,436,000, offset by net cash inflow from acquisition of subsidiaries of approximately $2,129,000.
Net cash flow provided by financing activities was $7,093,542 for the year ended December 31, 2022 as compared to net cash flow provided by financing activities of $148,910,734 for the year ended December 31, 2021. During the year ended December 31, 2022, we received proceeds from the issuance of shares of approximately $7,420,000, offset by repaid advances from related parties of approximately $326,000During the year ended December 31, 2021, we received advances from related parties of approximately $1,091,000, additional capital investment from minority shareholders of approximately $378,000 and received proceeds from the issuance of shares of approximately $154,231,000, offset by dividends paid on preferred shares of approximately $666,000 and redemption of preferred shares of approximately $6,123,000.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
The discussions of our research and development activities are contained in “Item 4. Information about our Company – B. Business Overview – Research and Development” and “Item 5. Operating and Financial Review and Prospects – A. Operating Results – Operating Expenses – Research and Development Expenses”. In the years ended December 31, 2023, 2022 and 2021, we spent $25,180,425, $49,873,652and $45,476,113, respectively, on research and development activities.
D. TREND INFORMATION.
Industry and Market Outlook
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2023 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future results of operations or financial conditions.
E. CRITICAL ACCOUNTING ESTIMATES
For information on our critical accounting estimates, please see “Operating Resulting- Critical Accounting Policies” section of this annual report above.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
A. DIRECTORS AND SENIOR MANAGEMENT.
Executive Officers and Directors
The following table sets forth the names and ages as of the date of this annual report of each of our executive officers and directors:
| Name | Age | Position | ||
| Xuesong Song | 55 | Chief Executive Officer, Chairman and Director | ||
| Dongpu Zhang | 55 | President and Director | ||
| Baomin Li | 54 | Chief Technical Officer | ||
| Jian Zhang | 40 | Chief Financial Officer | ||
| David Wei Tang (1)(2)(4) | 58 | Director | ||
| Jin Meng Bryan Yap (1)(3)(4) | 60 | Director | ||
| Liangbing Yu (1)(2)(3)(4) | 50 | Director |
| (1) | Member of the Audit Committee. |
| (2) | Member of the Compensation Committee. |
| (3) | Member of the Nominating and Corporate Governance Committee. |
| (4) | Qualifies as “independent” based on NASDAQ listing rules. |
Set forth below is biographical information concerning our executive officers and directors.
Xuesong Song is a co-founder of C Media Limited and served as its Chairman of the board of directors and Chief Executive Officer from 2012 until the consummation of the AEA. From February 2014 through April 2017, Mr. Song served as a director of Seven Stars Cloud Group, Inc. (NASDAQ: SSC) and from January 2013 through February 2015, Mr. Song served as a director of Pingtan Marine Enterprise Ltd. (NASDAQ: PME). From May 2006 through January 2009, Mr. Song served as the Chairman of the Board of ChinaGrowth North Acquisition Corporation, a special purpose acquisition company, which acquired UIB Group Limited in January 2009, in which he remains a director. Mr. Song has been a principal of Chum Capital Group Limited since August 2001, a merchant banking firm that invests in growth Chinese companies and advises them in financings, mergers & acquisitions and restructurings, and Chief Executive Officer of Beijing Chum Investment Co., Ltd. since December 2001. Mr. Song has been a director of Mobile Vision Communication Ltd. since July 2004. Mr. Song received a Master’s of Business Administration degree from Oklahoma City/Tianjin Program.
Dongpu Zhang was appointed as the President of the Company effective on August 25, 2018 and was appointed as a director of the Company on August 18, 2020. Mr. Dongpu Zhang has served as the General Manager of Superengine Graphics Software Technology Development (Suzhou) Co., Ltd. (“Superengine Suzhou”) and the Chief Executive Officer of Superengine Holding Limited since September 2016. From February, 2014 to August, 2016, Mr. Zhang served as vice president of Industrial Development Group under China Fortune Land Development Co., Ltd. From March, 2009 to February, 2014, Mr. Zhang served as the vice president of Aerospace Science and Technology Holding Group Co., Ltd. Mr. Zhang receive his Master Degree of Computer Science from Harbin Institute of Technology in 1994 and his Bachelor Degree of information system from Changsha Institute of technology in 1991.
Baomin Li serves as the chief technology officer of the Company since February 1, 2019. From 2017 to 2019, Mr. Li served at Amazon as Sr. Software Development Manager, in charge of Amazon’s advertising targeting systems, overseeing infrastructure, data ingestion& modeling, and targeting products utilizing comprehensive Amazon’s ecommerce data. Prior to Amazon, Mr. Li served as the chief technology officer at C Media Limited from 2016 to 2017. Mr. Li worked at CreditEase Inc. as VP of Engineering in the Big Data Innovation Center from 2014 to 2016, and at Google as Engineering Manager in advertising quality from 2013 to 2014. From 1999 to 2012, Mr. Li worked at Microsoft Corporation and lastly served as Senior Development Manager. Mr. Li graduated from Peking University with a Bachelor’s Degree in Mechanics and a Master’s Degree in Applied Mathematics, and from University of Missouri with a Master’s Degree in Computer Science.
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Jian Zhang was appointed to be the Chief Financial Officer of the Company on June 5, 2023. Before that he served as the vice president of the Company since January 20, 2014, responsible for the Company's business operation management, internal control management and project management. From September 2009 to January 2014, Mr. Zhang served as the operation director of the company Qihoo 360 and was responsible for the operation of Qihoo 360’s online security products. From December 2007 to September 2009, Mr. Zhang worked for Rising Antivirus Software Company as the operation director and was responsible for the after-sales service support of Rising Enterprise Security Software. Mr. Zhang received a bachelor's degree in computer science from Heilongjiang Business School in 2007.
Mr. David Wei Tang was appointed as a director of our company on December 15, 2019. Prior to joining our Company, Mr. Tang served as President of Huakang Financial Holdings, a Chinese multi-disciplinary financial holdings group with subsidiaries in investments, insurance, wealth management and financial technology, from 2016 to 2018. From 2008 to 2010 and from 2012 to 2013, Mr. Tang served as Vice President, Chief Financial Officer and Chief Strategy Officer of Vimicro Corporation, a NASDAQ-listed company (NASDAQ: VIMC). Prior to that, from 2006 to 2008 he served as the Chief Financial Officer of Fanhua Inc., formerly known as “CNinsure Inc.”, a NASDAQ-listed company (NASDAQ: FANH), from 2003 to 2004, he served as the Chief Financial Officer of IRICO Group, a Hong Kong Stock Exchange-listed company (HKSE: 438) and in 2000, he served as the Chief Financial Officer of Chinasoft International, a Hong Kong Stock Exchange-listed company (HKSE: 354). Prior to those positions, he worked as an equity research analyst at Merrill Lynch & Co. in New York. Mr. Tang also serves as Chair of Audit Committee of HXD. Mr. Tang received a master’s degree in business administration from the Stern School of Business, New York University.
Mr. Jin Meng Bryan Yap was appointed as a director of our company on December 15, 2019, Mr. Yap has extensive experience in investment banking, financial and business consulting, financial structuring, capital raising, portfolio optimization and balance sheet restructuring. He is currently the CEO and Managing Director of Daun Consulting Singapore Pte Ltd, a single family office focusing on consulting and selective investments, a position he has held since 2008. He is also currently serving as the Honorary Treasurer of the ACI (Financial Markets Association) – Singapore since 2001.
Mr. Liangbing Yu was appointed as a director of our company on April 11, 2024. He previously was an Executive Partner at Beijing GloryHope Oriental Investment Center (Limited Partnership), a position he held since 2017. From 1998 to 2017, Mr. Yu worked at CYTS Holding Co. LTD., where he has served in various capacities including as Vice President of International Tourism Company, General Manager of Operations Management Department, General Manager of Inbound Online Business Department, General Manager of Destination Overseas Marketing Business Department, General Manager of Investment Management Department, and Strategic Planning Director of Securities Department. Mr. Yu received his dual Bachelor’s Degree in Investment Economics & Economic Law from Huazhong University of Science and Technology.
| Board Diversity Matrix (as of the date of this annual report) | ||||
| Country of Principal Executive Offices: | China | |||
| Foreign Private Issuer | Yes | |||
| Disclosure Prohibited under Home Country Law | No | |||
| Total Number of Directors | 5 | |||
| Female | Male | Non-Binary |
Did Not Disclose Gender | |
| Part I: Gender Identity | ||||
| Directors | 0 | 5 | 0 | 0 |
| Part II: Demographic Background | ||||
| Underrepresented Individual in Home Country Jurisdiction | 0 | |||
| LGBTQ+ | 0 | |||
| Did Not Disclose Demographic Background | 0 | |||
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B. COMPENSATION.
Compensation of Directors and Executive Officers
For the fiscal year ended December 31, 2023, we paid an aggregate of approximately $90,000 in cash compensation to our independent directors for serving on our board of directors.
In addition, during 2023, the Company issued 190,000 ordinary shares to current independent directors as compensation for their services.
Other than non-employee directors, we do not intend to compensate directors for serving on our board of directors or any of its committees. We do, however, intend to reimburse each member of our board of directors for out-of-pocket expenses incurred by each director in connection with attending meetings of the board of directors and its committees.
Administration
The Incentive Plan is administered by our board of directors, or at the discretion of the board, by our compensation committee. Our board of directors has delegated authority to our compensation committee to administer the Incentive Plan. Subject to the terms of the Incentive Plan, the compensation committee may select participants to receive awards, determine the types of awards and terms and conditions of awards, and interpret provisions of the Incentive Plan.
The ordinary shares issued or to be issued under the Incentive Plan consist of authorized but unissued shares. If any ordinary shares covered by an award are not purchased or are forfeited, or if an award otherwise terminates without delivery of any ordinary shares, then the number of ordinary shares counted against the aggregate number of ordinary shares available under the plan with respect to the award will, to the extent of any such forfeiture or termination, again be available for making awards under the Incentive Plan.
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Eligibility
Awards may be made under the Incentive Plan to our employees, officers, directors, consultants or advisers or to any of our affiliates, and to any other individual whose participation in the Incentive Plan is determined to be in our best interests by our board of directors.
Amendment or Termination of the Plan
Our board of directors may terminate or amend the Incentive Plan at any time and for any reason. No amendment, however, may adversely impair the rights of grantees with respect to outstanding awards. The Incentive Plan has a term of ten years. Amendments will be submitted for shareholder approval to the extent required by applicable stock exchange listing requirements or other applicable laws.
Options
The Incentive Plan permits the granting of options to purchase ordinary shares intended to qualify as incentive share options under the Internal Revenue Code and share options that do not qualify as incentive share options, or non-qualified share options.
The exercise price of each share option may not be less than 100% of the fair market value of our ordinary shares representing ordinary shares on the date of grant. In the case of certain 10% shareholders who receive incentive share options, the exercise price may not be less than 110% of the fair market value of our ordinary shares representing ordinary shares on the date of grant. An exception to these requirements is made for options that we grant in substitution for options held by employees of companies that we acquire. In such a case the exercise price is adjusted to preserve the economic value of the employee’s share option from his or her former employer.
The term of each share option is fixed by the compensation committee and may not exceed ten years from the date of grant. The compensation committee determines at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination of employment during which options may be exercised.
Options may be made exercisable in installments. The award agreement provides the vesting of the options. Exercisability of options may be accelerated by the compensation committee.
In general, an optionee may pay the exercise price of an option by (1) cash or check (in U.S. dollars or Renminbi or other local currency as approved by the compensation committee), (2) ordinary shares held for such period of time as may be required by the compensation committee, (3) delivery of a notice of a market order with a broker with respect to ordinary shares then issuable upon exercise of an option, and that the broker has been directed to pay us a sufficient portion of net proceeds of the sale in satisfaction of the exercise price, provided that payment of such proceeds is then made to us upon settlement of such sale, (4) other property acceptable to the compensation committee with a fair market value equal to the exercise price, (5) cashless exercise or (6) any combination of the foregoing.
Share options granted under the Incentive Plan may not be sold, transferred, pledged, or assigned other than by will or under applicable laws of descent and distribution. However, we may permit limited transfers of non-qualified options for the benefit of immediate family members of grantees to help with estate planning concerns or pursuant to a domestic relations order in settlement of marital property rights.
Other Awards
The compensation committee may also award under the Incentive Plan:
| 1. | ordinary shares subject to restrictions; |
| 2. | deferred ordinary shares, credited as deferred ordinary share units, but ultimately payable in the form of unrestricted ordinary shares in accordance with the terms of the grant or with the participant’s deferral election; |
| 3. | ordinary share units subject to restrictions; |
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| 4. | unrestricted ordinary shares, which are ordinary shares issued at no cost or for a purchase price determined by the compensation committee which are free from any restrictions under the 2011 Omnibus Incentive Plan; |
| 5. | dividend equivalent rights entitling the grantee to receive credits for dividends that would be paid if the grantee had held a specified number of ordinary shares; or |
| 6. | a right to receive a number of ordinary shares or, in the discretion of the compensation committee, an amount in cash or a combination of ordinary shares and cash, based on the increase in the fair market value of the ADSs representing ordinary shares underlying the right during a stated period specified by the compensation committee. |
Effect of Certain Corporate Transactions
Certain change of control transactions involving us may cause awards granted under the Incentive Plan to vest, unless the awards are continued or substituted for by the surviving company in connection with the corporate transaction.
Unless otherwise provided in the appropriate option agreement on the date of grant or provided by our board of directors thereafter with the consent of the grantee, options granted under the Incentive Plan become exercisable in full following (1) a dissolution of our company or a merger, consolidation or reorganization of our company with one or more other entities in which we are not the surviving entity, (2) a sale of substantially all of our assets to another person or entity, or (3) any transaction (including without limitation a merger or reorganization in which we are the surviving entity) which results in any person or entity owning 50% or more of the combined voting power of all classes of our shares.
Adjustments for Dividends and Similar Events
The compensation committee will make appropriate adjustments in outstanding awards and the number of ordinary shares available for issuance under the Incentive Plan, including the individual limitations on awards, to reflect ordinary share dividends, stock splits and other similar events.
C. BOARD PRACTICES.
Board of Directors
Our board of directors consists of five members being Messrs. Xuesong Song, Dongpu Zhang, David Wei Tang, Jin Meng Bryan Yap and Liangbing Yu. Our directors hold office until our annual meeting of shareholders, where their successors will be duly elected and qualified, or until the directors’ death, resignation or removal, whichever is earlier. Our directors are subject to a four-year term of office and hold office until their resignation, death or removal. A director will be removed from office if, among other things, there is a willful and continuous failure by the director to substantially perform his duties to our company (other than any such failure resulting from incapacity due to physical or mental illness) or the willful engaging by the director in gross misconduct materially and demonstrably injurious to our company.
Director Independence
Messrs. David Wei Tang, Jin Meng Bryan Yap and Liangbing Yu have been determined by us to be independent directors within the meaning of the independent director guidelines of the NASDAQ Corporate Governance Rules (the “NASDAQ Rules”).
Committees of Our Board of Directors
To enhance our corporate governance, we established three committees under our board of directors: an audit committee, a compensation committee, and a nominating and corporate governance committee. We have adopted a charter for each of these committees. The committees have the following functions and members.
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Audit Committee
Our audit committee reports to our board of directors regarding the appointment of our independent public accountants, the scope and results of our annual audits, compliance with our accounting and financial policies and management’s procedures and policies relating to the adequacy of our internal accounting controls. Our audit committee consists of Messrs. Liangbing Yu, David Wei Tang, and Jin Meng Bryan Yap. Mr. Laingbing Yu serves as the Chairman of the audit committee and is an “audit committee financial expert” as defined by the rules and regulations of the SEC. Our board of directors has determined that each of these persons meet the definition of an “independent director” under the applicable NASDAQ Rules and under Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Our audit committee is responsible for, among other things:
| ● | the appointment, evaluation, compensation, oversight and termination of the work of our independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting); |
| ● | an annual performance evaluation of the audit committee; |
| ● | establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls, auditing matters or potential violations of law, and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters or potential violations of law; |
| ● | ensuring that it receives an annual report from our independent auditor describing our internal control procedures and any steps taken to deal with material control deficiencies and attesting to the auditor’s independence and describing all relationships between the auditor and us; |
| ● | reviewing our annual audited financial statements and quarterly financial statements with management and our independent auditor; |
| ● | reviewing and approving all proposed related party transactions; |
| ● | reviewing our policies with respect to risk assessment and risk management; |
| ● | meeting separately and periodically with management and our independent auditor; and |
| ● | reporting regularly to our board of directors. |
Compensation Committee
Our compensation committee assists the board of directors in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. In addition, the compensation committee reviews share compensation arrangements for all of our other employees. Members of the compensation committee are not prohibited from direct involvement in determining their own compensation. Our Chief Executive Officer is not permitted to be present at any committee meeting during which his or her compensation is deliberated. Our compensation committee consists of Liangbing Yu David Wei Tang, with Mr. David Wei Tang serving as the Chairman of the compensation committee. Our board of directors has determined that each of these persons meet the definition of “independent director” under the applicable requirements of the NASDAQ Rules.
Our compensation committee is responsible for, among other things:
| ● | reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer, evaluating the performance of our Chief Executive Officer in light of those goals and objectives and setting the compensation level of our Chief Executive Officer based on this evaluation; |
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| ● | reviewing and making recommendations to the board with respect to the compensation of our executives, incentive compensation and equity-based plans that are subject to board approval; and |
| ● | providing annual performance evaluations of the compensation committee. |
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee assists the board of directors in identifying and selecting or recommending individuals qualified to become our directors, developing and recommending corporate governance principles and overseeing the evaluation of our board of directors and management. Our nominating and corporate governance committee consists of Jin Meng Bryan Yap and Liangbing Yu, with Mr. Jin Meng Bryan Yap serving as the Chairman of the nominating and corporate governance committee. Our board of directors has determined that each of these persons meet the definition of “independent director” under the applicable requirements of the NASDAQ Rules.
Our nominating and corporate governance committee is responsible for, among other things:
| ● | selecting and recommending to our board nominees for election or re-election to our board, or for appointment to fill any vacancy; |
| ● | reviewing annually with our board the current composition of the board of directors with regards to characteristics such as independence, age, skills, experience and availability of service to us; |
| ● | selecting and recommending to our board the names of directors to serve as members of the audit committee and the compensation committee, as well as the nominating and corporate governance committee itself; advising our board of directors periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance and on any remedial action to be taken; and |
| ● | monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
Code of Business Conduct and Ethics
Our board of directors has adopted a code of business conduct and ethics applicable to our directors, officers and employees. We have posted our code of business conduct and ethics code on our website at http://www.luokung.com.
Duties of Directors
Under British Virgin Islands law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum of association and articles of association. We have the right to seek damages if a duty owed by our directors is breached.
The functions and powers of our board of directors include, among others:
| ● | appointing officers and determining the term of office of the officers; |
| ● | authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable; |
| ● | exercising the borrowing powers of the company and mortgaging the property of the company; |
| ● | executing cheques, promissory notes and other negotiable instruments on behalf of the company; and |
| ● | maintaining or registering a register of mortgages, charges or other encumbrances of the company. |
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Remuneration and Borrowing
The directors may receive such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure for the directors.
Our board of directors may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
Qualification
A director is not required to hold shares as a qualification to office.
Limitation on Liability and Other Indemnification Matters
British Virgin Islands law does not limit the extent to which a company’s memorandum of association and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.
Under our memorandum of association and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith with a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause to believe their conduct was unlawful.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is an officer or employee of our company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.
Employment Agreements
On August 19, 2018, the Company entered into an Employment Agreement (the “Song Agreement”) with Mr. Xuesong Song, to serve as the Chief Executive Officer of the Company for a four-year term, subject to renewal. Under the terms of the Song Agreement, Mr. Song will receive no salary for his services but will be eligible for an annual cash bonus in the Board’s sole discretion. On June 8, 2021, the Compensation Committee of the Board of Directors of the Company approved an amendment to the employment agreement by and between the Company and Mr. Song, in order to provide the CEO with a salary of $500,000 annually, effective as of June 1, 2021.
On June 6, 2023, the Company entered into an Employment Agreement (the “Zhang Agreement”) with Mr. Jian Zhang, to serve as the Chief Financial Officer of the Company for a four-year term, subject to renewal. Under the terms of the Zhang Agreement, Mr. Zhang will receive an annual salary of RMB1,400,000, and 1,800,000 of the company’s ordinary shares per year will be eligible for an annual cash bonus in the Board’s sole discretion.
On February 1, 2019, the Company entered into an Employment Agreement (the “Li Agreement”) with Mr. Baomin Li, to serve as the Chief Technology Officer of the Company for a four-year term, subject to renewal. Under the terms of the Li Agreement, Mr. Li will receive an annual salary of RMB2,000,000, and will be eligible for an annual cash bonus in the Board’s sole discretion.
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D. EMPLOYEES.
As of December 31, 2023 and 2022, we had a total of 375 and 727 full-time employees, including 103 and 572 in research and development, 18 and 70 in sales and marketing and the rest in a variety of other divisions, respectively. All of our employees are full-time employees. None of our employees is currently represented by a union and/or collective bargaining agreements. We believe that we have good relations with our employees and since our inception we have had no history of work stoppages or union organizing campaigns.
E. SHARE OWNERSHIP.
The following table provides information as to the beneficial ownership of our ordinary shares as of December 31, 2023, by the persons listed. Beneficial ownership of shares is determined under the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. For purposes of the following table, a person is deemed to have beneficial ownership of any ordinary shares if such person has the right to acquire such shares within 60 days of December 31, 2023. For purposes of computing the percentage of outstanding shares held by each person, any shares that such person has the right to acquire within 60 days after of December 31, 2023 are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as otherwise noted, the persons named in the table have sole voting and investment power with respect to all of the ordinary shares beneficially owned by them. Unless otherwise indicated, the address of each person listed is c/o Luokung Technologies, B9-8, Block B, SOHO Phase II, No. 9, Guanghua Road, Chaoyang District, Beijing, People’s Republic of China.
Percentage ownership of the ordinary shares in the following table is based on 2,439,727 ordinary shares outstanding on December 31, 2023.
| Number of shares | Percent of class | |||||||
| Directors and named executive officers | ||||||||
| Xuesong Song, Chairman, Chief Executive Officer and Director (1)(2) | 117,319 | 4.81 | % | |||||
| Dongpu Zhang, President (3) | 9,674 | 0.40 | % | |||||
| (1) | Consists of (i) 16,795 ordinary shares owned directly by Charm Dragon International Limited, a British Virgin Islands company and (ii) 94,270 ordinary shares owned directly by Bravo First Development Limited, a British Virgin Islands company. |
| (2) | Mr. Xuesong Song is the controlling shareholder of Bravo First Development Limited. Mr. Xuesong Song is the sole director of Charm Dragon International Limited. Mr. Xuesong Song also owns all 10,417 of the Company’s outstanding preferred shares, and each preferred share has the right to 399 votes at a meeting of the shareholders of the Company. Mr. Song therefore is the controlling shareholder of the Company. |
| (3) | Consists of 9,674 ordinary shares owned directly by Genoa Peak Limited, a British Virgin Islands company. Mr. Dongpu Zhang controls Genoa Peak Limited. |
F. DISCLOSURE OF A REGISTRANT’S ACTION TO RECOVER ERRONEOUSLY AWARDED COMPENSATION
Effective as of December 1, 2023, our board of directors adopted an erroneously awarded policy, or the Clawback Policy, providing for the recoupment of certain incentive-based compensation from current and former executive officers of our company in the event we are required to restate any of our financial statements filed with the SEC under the Exchange Act in order to correct an error that is material to the previously-issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. Adoption of the Clawback Policy was mandated by new Nasdaq listing rules introduced pursuant to Exchange Act Rule 10D-1. In addition, Section 304 of the Sarbanes-Oxley Act of 2002 permits the SEC to order the disgorgement of bonuses and incentive-based compensation earned by a registrant issuer’s chief executive officer and chief financial officer in the year following the filing of any financial statement that the issuer is required to restate because of misconduct, and the reimbursement of those funds to the issuer. A copy of the Clawback Policy has been filed herewith as Exhibit 97.1.
In the year ended December 31, 2023, there is no outstanding balance as of December 31, 2023 of erroneously awarded compensation to be recovered.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. MAJOR SHAREHOLDERS
Please refer to Item 6.E “Directors, Senior Management and Employees — Share Ownership.”
To our knowledge, (A) we are not directly or indirectly owned or controlled by (i) another corporation or (ii) any foreign government and (B) there are no arrangements (including any announced or expected takeover bid), the operation of which may at a subsequent date result in a change in our control.
The voting rights of our major shareholders do not differ from the voting rights of other holders of the same class of shares.
B. RELATED PARTY TRANSACTIONS.
Our subsidiaries, consolidated affiliated entities, and the subsidiaries of the consolidated affiliated entities have engaged, during the ordinary course of business, in a number of customary transactions with each other. All of these inter-company balances have been eliminated in consolidation.
As of December 31, 2023, 2022 and 2021, the Company had amounts due to related parties, Mr. Song, in the amounts of $1.8 million, $0.9 million and $0.1 million, respectively. These amounts due to related parties are short term in nature, non-interest bearing, unsecured and payable on demand.
Our Chairman and Chief Executive Officer, Mr. Xuesong Song, serves as an officer of Beijing Zhong Chuan Shi Xun and is one of the legal owners of Beijing Zhong Chuan Shi Xun. The following table sets forth the relationship of Mr. Song with Beijing Zhong Chuan Shi Xun:
| Name | Relationship with Luokung Technology | Relationship with Beijing Zhong Chuan Shi Xun | Percentage Ownership Interest in Beijing Zhong Chuan Shi Xun | |||||
| Xuesong Song | Chief Executive Officer | Chief Executive Officer | 61.82 | % | ||||
C. INTERESTS OF EXPERTS AND COUNSEL.
Not applicable.
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ITEM 8. FINANCIAL INFORMATION.
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.
See “Item 18. Financial Statements.”
Legal Proceedings
From time to time, we are subject to legal proceedings, investigations and claims during the ordinary course of our business. We are not currently a party to any legal proceeding or investigation which, in the opinion of our management, is likely to have a material adverse effect on our business, financial condition or results of operations.
Dividend Policy
We currently intend to retain all of our available funds and future earnings for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Under the terms of our Amended and Restated Memorandum and Articles of Association the declaration and payment of any dividends in the future will be determined by our board of directors, in its discretion, and will depend on a number of factors, including our earnings, capital requirements and overall financial condition and our ability to receive dividends from our subsidiaries. If we pay any dividends, we will pay our shareholders’ dividends with respect to their underlying shares to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
Our ability to receive dividends from our subsidiaries may limit our ability to pay dividends on our ordinary shares. See Risk Factors – Risks Related to Doing Business in China – Our holding company structure may limit the payment of dividends” and “Item 10. Additional Information – D. Exchange Controls – Dividend Distribution”.
B. SIGNIFICANT CHANGES.
Not applicable (“N/A”)
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ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS.
Not Applicable.
B. PLAN OF DISTRIBUTION.
Not Applicable.
C. MARKETS.
The primary trading market for our ordinary shares is the NASDAQ Capital Market. Our ordinary shares trade on the NASDAQ Capital Market under the ticker symbol “LKCO”.
D. SELLING SHAREHOLDERS.
Not applicable.
E. DILUTION.
Not applicable.
F. EXPENSES OF THE ISSUE.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION.
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
We are a British Virgin Islands company incorporated with limited liability and our affairs are governed by the provisions of our memorandum of association and articles of association, as amended and restated from time to time, and by the provisions of applicable British Virgin Islands laws.
Our memorandum of association and articles of association authorize the issuance a maximum of 1,028,295,182 shares of par value US$0.0001 each, divided into (a) 1,000,000,000 ordinary shares of par value US$0.0001 each “Preferred Shares, and each, a “Preferred Share”); (c) 21,794,872 series A preferred shares of par value US$0.0001 each ("Series A Preferred Shares”, and each, an “Series A Preferred Share”); and (d) 1,500,310 series B preferred shares of par value US$0.0001 each (Series B Preferred Shares, and each, a “Series B Preferred Share”), in each case with the rights, preferences and privileges as set out in the memorandum and articles of association of our company.
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The following is a summary of the material provisions of our shares and our memorandum of association and articles of association.
Ordinary Shares
All of our issued and outstanding Ordinary Shares are fully paid and non-assessable. Holders of our Ordinary Shares who are non-residents of the British Virgin Islands may freely hold and vote their shares.
Subject to the memorandum and articles of association (and, for greater clarity, without prejudice to any special rights conferred thereby on the holders of any other shares), an Ordinary Share of our company confers on the holder:
| (a) | the right to one vote at a meeting of the members of our company or on any resolution of members; |
| (b) | the right to an equal share in any distribution paid by our company; and |
| (c) | the right to an equal share in the distribution of the surplus assets of our company on a winding up. |
Preferred Shares
Subject to the memorandum and articles of association (and, for greater clarity, without prejudice to any special rights conferred thereby on the holders of any other shares), a Preferred Share of our company confers on the holder:
| (a) | the right to 399 votes at a meeting of the members of our company or on any resolution of members; |
| (b) | the right to an equal share in any distribution paid by our company; |
| (c) | the right to an equal share in the distribution of the surplus assets of our company on a winding up; |
| (d) | be freely transferable, in whole or in part, by Mr. Xuesong Song to any third party through one or more Private Transactions (as defined in our articles of association), subject to Applicable Law (as defined in our articles of association); and |
| (e) | be freely transferable, in whole or in part, by Mr. Xuesong Song to any third party through one or more Public Transactions, subject to Applicable Law and Automatic Conversion (as defined in our articles of association) of such Preferred Share(s) into Ordinary Share(s). |
Each Preferred Share shall be automatically converted at any time after issue and without the payment of any additional sum into an equal number of fully paid Ordinary Shares upon the conclusion of any transfer by Mr. Xuesong Song to any third party through one or more Public Transactions (as defined in our articles of association).
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Series A Preferred Shares
Subject to the memorandum and articles of association (and, for greater clarity, without prejudice to any special rights conferred thereby on the holders of any other shares), a Series A Preferred Share of the Company confers on the holder:
| (a) | no right to vote at a meeting of the members of our company or on any resolution of members; |
| (b) | the right to an equal share in any distribution paid by our company; |
| (c) | the right to an equal share in the distribution of the surplus assets of our company on our liquidation; |
(d) the right, at such holder’s sole discretion, to convert all or any portion of the holder’s Series A Preferred Shares into Ordinary Shares at any time commencing after the date of issue of such Series A Preferred Shares. The conversion rate for the Series A Preferred Shares shall be one (1) Ordinary Share for every one (1) Series A Preferred Share. Before any holder of Series A Preferred Shares shall be entitled to convert the same into Ordinary Shares and to receive certificate(s) for such Ordinary Shares, he shall surrender the certificate(s) for his Series A Preferred Shares at the office of our company and shall give written notice to our company at such office that he elects to convert the same. Our company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Shares a certificate(s) for the number of Ordinary Shares to which he shall be entitled. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the certificate(s) for the Series A Preferred Shares to be converted, and the person or persons entitled to receive the Ordinary Shares issuable upon such conversion shall be treated for all purposes as the record holder(s) of such Ordinary Shares on such date. The directors may effect conversion in any matter permitted by law including, without prejudice to the generality of the foregoing, repurchasing or redeeming the relevant Series A Preferred Shares and applying the proceeds towards the issue of the relevant number of new Ordinary Shares. The provisions of clause 8(3)(e) of our memorandum of association shall not apply to the Ordinary Shares so converted; and
(e) the right, at such holder’s sole discretion, to require the redemption or repurchase by our company of all or any portion of the holder’s Series A Preferred Shares (the “Purchased Shares”) in cash at a Repurchase Price defined below upon the following events: (1) six (6) months after the closing date as defined in the share subscription agreement entered into between our company and Geely Technology dated 13 November 2019 (the “Share Subscription Agreement”); (2) the proposed acquisition of eMapgo Technologies (Beijing) Co., Ltd. (the “Proposed Acquisition”) by our company is terminated; (3) our company breaches the Share Subscription Agreement; or (4) within six (6) months from the closing date as defined in the Share Subscription Agreement provided that our company has sufficient funds after completing the Proposed Acquisition by our company. The repurchase price for each Series A Preferred Shares shall be the higher of (i) US$1.95 per share; or (ii) the US dollars equivalent to RMB13.7648 per share (the “Repurchase Price”), where the exchange rate shall be the central parity rate between RMB and USD published by the People’s Bank of China the day before Geely Technology issues the repurchase notice, plus an eight percent (8%) annual simple interest rate basis calculated from the date such Repurchase Price was fully paid until the date of full payment of the Repurchase Price, which shall be made in a lump sum on the date of the payment of the Repurchase Price, plus all declared but unpaid dividends with respect to the Series A Preferred Shares. Before any holder of Series A Preferred Shares shall be entitled to require the redemption or repurchase by our company of all or any portion of the holder’s Series A Preferred Shares, he shall surrender the certificate(s) for his Series A Preferred Shares at the office of our company and shall give written notice to our company (the “Redemption Notice”) at such office that he elects to require the redemption or repurchase by our company of the same. Our company shall pay the corresponding Repurchase Price within sixty (60) days following twelve (12) months after the Purchased Shares are issued.
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Series B Preferred Shares
Subject to the memorandum and articles of association (and, for greater clarity, without prejudice to any special rights conferred thereby on the holders of any other shares), a Series B Preferred Share of our company confers on the holder:
(a) Subject to compliance with the requirements of the laws of the Hong Kong Special Administrative Region of the People’s Republic of China and other restrictions under the purchase agreement entered into by and among our company, Zhi-Xun Wang and Hong-Bin Lu (the “Parties”) and other parties named therein on August 27, 2019 and the supplemental agreement entered into by and among the Parties and other parties on October 11, 2019, the Series B Preferred Shares shall be redeemable at the option of holders of the Series B Preferred Shares by delivery of a written request to the Purchaser (“Redemption Request”) within the period from 6th month to 12th month after its issuance. Our company cannot reject such Redemption Request and shall make the best efforts to implement such redemption by paying cash within 10 working days after receipt of the Redemption Request. The redemption price for each Series B Preferred Share redeemed shall be an amount of USD equivalent to RMB28.75 per share plus an internal rate of return of 10% per year.
(b) Any Series B Preferred Share may, at the option of the holder thereof, be converted into fully-paid and non-assessable Ordinary Shares without any restrictions under the Securities Act of 1933, the laws of the Hong Kong Special Administrative Region of the People’s Republic of China, our memorandum of association or any other contracts within the period from 9th month to 12th month after its issuance. The conversion ratio for Series B Preferred Shares to Ordinary Shares shall be 1:1.
Limitation on Liability and Indemnification Matters
Under British Virgin Islands laws, each of our directors and officers, in performing his or her functions, is required to act honestly and in good faith with a view to our best interests and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. These provisions will not limit the liability of directors under United States federal securities laws.
We may indemnify any of our directors or anyone serving at our request as a director of another entity against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings. We may only indemnify a director if he or she acted honestly and in good faith with the view to our best interests and, in the case of criminal proceedings, the director had no reasonable cause to believe that his or her conduct was unlawful. The decision of our board of directors as to whether the director acted honestly and in good faith with a view to our best interests and as to whether the director had no reasonable cause to believe that his or her conduct was unlawful, is in the absence of fraud sufficient for the purposes of indemnification, unless a question of law is involved. The termination of any proceedings by any judgment, order, settlement, conviction or the entry of no plea does not, by itself, create a presumption that a director did not act honestly and in good faith and with a view to our best interests or that the director had reasonable cause to believe that his or her conduct was unlawful. If a director to be indemnified has been successful in defense of any proceedings referred to above, the director is entitled to be indemnified against all expenses, including legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred by the director or officer in connection with the proceedings.
We may purchase and maintain insurance in relation to any of our directors or officers against any liability asserted against the directors or officers and incurred by the directors or officers in that capacity, whether or not we have or would have had the power to indemnify the directors or officers against the liability as provided in our memorandum of association and articles of association.
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Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors or officers under the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable as a matter of United States law.
Differences in Corporate Law
We were incorporated under, and are governed by, the laws of the British Virgin Islands. The corporate statutes of the State of Delaware and the British Virgin Islands are similar, and the flexibility available under British Virgin Islands law has enabled us to adopt memorandum of association and articles of association that will provide shareholders with rights that do not vary in any material respect from those they would enjoy if we were incorporated under the Delaware General Corporation Law, or Delaware corporate law. Set forth below is a summary of some of the differences between provisions of the BVI Act applicable to us and the laws application to companies incorporated in Delaware and their shareholders.
Director’s Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its stockholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to stockholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its stockholders take precedence over any interest possessed by a director, officer or controlling stockholder and not shared by the stockholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
British Virgin Islands law provides that every director of a British Virgin Islands company in exercising his powers or performing his duties shall act honestly and in good faith and in what the director believes to be in the best interests of the company. Additionally, the director shall exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances taking into account the nature of the company, the nature of the decision and the position of the director and his responsibilities. In addition, British Virgin Islands law provides that a director shall exercise his powers as a director for a proper purpose and shall not act, or agree to the company acting, in a manner that contravenes the BVI Act or the memorandum of association or articles of association of the company.
Amendment of Governing Documents
Under Delaware corporate law, with very limited exceptions, a vote of the stockholders is required to amend the certificate of incorporation. Under British Virgin Islands law and our memorandum of association and articles of association, (i) our shareholders may amend our memorandum of association and articles of association by a resolution of shareholders, or (ii) our board of directors may amend our memorandum of association and articles of association by a resolution of directors without a requirement for a resolution of shareholders so long as the amendment does not:
| ● | restrict the rights of the shareholders to amend the memorandum of association and articles of association; |
| ● | change the percentage of shareholders required to pass a resolution of shareholders to amend the memorandum of association and articles of association; |
| ● | amend the memorandum of association and articles of association in circumstances where the memorandum of association and articles of association cannot be amended by the shareholders; or |
| ● | amend the provisions of memorandum of association or the articles of association pertaining to “rights, privileges, restrictions and conditions attaching to shares,” “rights not varied by the issue of shares pari passu,” “variation of class rights” and “amendment of memorandum and articles of association”. |
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Written Consent of Directors
Under Delaware corporate law, directors may act by written consent only on the basis of a unanimous vote. Under British Virgin Islands law, directors may pass a written resolution (a) by such majority of the votes of the directors entitled to vote on the resolution as may be specified in the memorandum of association or articles of association or (b) in the absence of any provision in the memorandum of association or the articles of association, by all the directors entitled to vote on the resolution. Our articles of association provide that a resolution consented to in writing by the directors may be passed by a simple majority of the directors or of all members of the committee, as the case may be.
Written Consent of Shareholders
Under Delaware corporate law, unless otherwise provided in the certificate of incorporation, any action to be taken at any annual or special meeting of stockholders of a corporation, may be taken by written consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to take such action at a meeting. As permitted by British Virgin Islands law, subject to the memorandum or articles of association, an action that may be taken by members of the company at a meeting of shareholders may also be taken by a resolution of shareholders consented to in writing. Our articles of association provide that shareholders may approve corporate matters by way of a resolution consented to at a meeting of shareholders or in writing by a majority of shareholders entitled to vote thereon.
Shareholder Proposals
Under Delaware corporate law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings. British Virgin Islands law and our articles of association provide that our directors shall call a meeting of the shareholders if requested in writing to do so by shareholders entitled to exercise 30% or more of our outstanding voting shares in respect of the matter for which the meeting is requested.
Sale of Assets
Under Delaware corporate law, a vote of the stockholders is required to approve the sale of assets only when all or substantially all assets are being sold. In the British Virgin Islands, shareholder approval is required when more than 50% of the company’s total assets by value are being disposed of or sold.
Dissolution; Winding Up
Under Delaware corporate law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware corporate law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. As permitted by British Virgin Islands law and our articles of association, we may be voluntarily liquidated under Part XII of the BVI Act by resolution of directors and resolution of shareholders if we have no liabilities or we are able to pay our debts as they fall due and the value of our assets equals or exceeds our liabilities.
Redemption of Shares
Under Delaware corporate law, any stock may be made subject to redemption by the corporation at its option or at the option of the holders of such stock provided there remains outstanding shares with full voting power. Such stock may be made redeemable for cash, property or rights, as specified in the certificate of incorporation or in the resolution of the board of directors providing for the issue of such stock. As permitted by British Virgin Islands law, and our memorandum of association and articles of association, shares may be repurchased, redeemed or otherwise acquired by us. Our directors must determine that immediately following the redemption or repurchase we will be able to pay our debts as they fall due and the value of our assets exceeds our liabilities.
Variation of Rights of Shares
Under Delaware corporate law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. As permitted by British Virgin Islands law, and our memorandum of association and articles of association, if our share capital is divided into more than one class of shares, we may vary the rights attached to any class only with the consent in writing of holders of not less than three-fourths of the issued shares of that class and holders of not less than three-fourths of the issued shares of any other class of shares which may be affected by the variation.
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Removal of Directors
Under Delaware corporate law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate provides otherwise. As permitted by British Virgin Islands law and our memorandum of association and articles of association, directors may be removed with or without cause by resolution of directors or resolution of shareholders.
Mergers
Under the BVI Act, two or more companies may merge or consolidate in accordance with the statutory provisions. A merger means the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company. In order to merger or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which must be authorized by a resolution of shareholders.
Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum association or articles of association, would entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.
Inspection of Books and Records
Under Delaware corporate law, any shareholder of a corporation may for any proper purpose inspect or make copies of the corporation’s stock ledger, list of shareholders and other books and records. Holders of our shares have no general right under British Virgin Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide holders of our shares with annual audited financial statements. See “Where You Can Find Additional Information.”
Conflict of Interest
The BVI Act provides that a director shall, after becoming aware that he is interested in a transaction entered into or to be entered into by the company, disclose that interest to the board of directors of the company. The failure of a director to disclose that interest does not affect the validity of a transaction entered into by the director or the company, so long as the director’s interest was disclosed to the board prior to the company’s entry into the transaction or was not required to be disclosed (for example where the transaction is between the company and the director himself or is otherwise in the ordinary course of business and on usual terms and conditions). As permitted by British Virgin Islands law and our memorandum of association and articles of association, a director interested in a particular transaction may vote on it, attend meetings at which it is considered, and sign documents on our behalf which relate to the transaction.
Transactions with Interested Shareholders
Delaware corporate law contains a business combination statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or group who or that owns or owned 15% or more of the target’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction that resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware public corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
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British Virgin Islands law has no comparable provision. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although British Virgin Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and not with the effect of constituting a fraud on the minority shareholders.
Independent Directors
There are no provisions under Delaware corporate law or under the BVI Act that require a majority of our directors to be independent.
Cumulative Voting
Under Delaware corporate law, cumulative voting for elections of directors is not permitted unless the company’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions to cumulative voting under the laws of the British Virgin Islands, but our memorandum of association and articles of association do not provide for cumulative voting
Anti-takeover Provisions in Our Memorandum of association and articles of association
Some provisions of our memorandum of association and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares.
C. MATERIAL CONTRACTS
None.
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D. EXCHANGE CONTROLS.
This section sets forth a summary of the most significant regulations or requirements that may affect (1) the import or export of capital, including the availability of cash and cash equivalents for use by the company’s group; and (2) the remittance of dividends, interest or other payments to nonresident holders of the company’s securities:
Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations of the PRC, most recently amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the SAFE, by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China.
According to the Circular of SAFE on Further Improving and Adjusting the Foreign Exchange Policies on Direct Investment, promulgated in 2012 and latest amended in 2019, foreign exchange control measures related to foreign direct investment are improved, such as (1) the open of and payment into the foreign exchange account related to direct investment are no longer subject to approval by SAFE; (2) reinvestment with legal income of foreign investors in China is no longer subject to approval by SAFE; (3) purchase and external payment of foreign exchange related to foreign direct investment are no longer subject to approval by SAFE.
The SAFE issued the Circular on Reforming of the Management Method of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises (the “SAFE Circular 19”) on March 30, 2015, and it became effective on June 1, 2015, was partially repealed on December 30, 2019, and was latest amended on March 23, 2023. The SAFE Circular 19 expands a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises nationwide. In June 2016, SAFE further promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account (the “SAFE Circular 16”) which, among other things, amends certain provisions of SAFE Circular 19. Pursuant to the SAFE Circular 19 and SAFE Circular 16, the flow and use of the Renminbi capital converted from foreign currency denominated registered capital of a foreign-invested company is regulated such that Renminbi capital may not be used for business beyond its business scope or to provide loans to persons other than affiliates unless otherwise permitted under its business scope.
In October 2019, SAFE issued the Circular of Further Facilitating Cross-border Trade and Investment (the “SAFE Circular 28”), which cancels the restrictions on domestic equity investments by capital fund of non-investment foreign invested enterprises and allows non-investment foreign invested enterprises to use their capital funds to lawfully make equity investments in China, provided that such investments do not violate the Negative List and the target investment projects are genuine and in compliance with laws. According to the Circular on Optimizing Administration of Foreign Exchange to Support the Development of Foreign-related Business (the “SAFE Circular 8”), issued by SAFE in April 2020, under the prerequisite of ensuring true and compliant use of funds and compliance with the prevailing administrative provisions on use of income under the capital account, eligible enterprises are allowed to make domestic payments by using their capital funds, foreign credits and the income under capital accounts of overseas listing, without prior provision of the evidentiary materials concerning authenticity to the bank for each transaction. The handling banks shall conduct spot checks afterwards in accordance with the relevant requirements. The interpretation and implementation in practice of the SAFE Circular 28 and SAFE Circular 8 are still subject to substantial uncertainties given they are newly issued regulations.
Dividend Distribution
Wholly foreign-owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, these FIEs may not pay dividends unless they set aside at least 10 percent 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 percent of the enterprise’s registered capital. In addition, these companies also may allocate a portion of their after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not distributable as cash dividends.
Regulations relating to offshore investment
In July 2014, the SAFE issued the SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles (the “SAFE Circular 37”). SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles (the “SPV”), by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under the SAFE Circular 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 onshore or offshore assets or interests, while “round trip investment” refers to 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. The SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch.
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According to the Circular on Further Simplifying and Improving the Foreign Currency Management Policy on Direct Investment (the “SAFE Circular 13”), promulgated by SAFE in 2015 and latest amended in December 2019, local banks, instead of SAFE, will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration.
Foreign Currency Exchange
On August 29, 2008, the SAFE issued the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-funded Enterprises, or Circular 142. Pursuant to Circular 142, RMB converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise. The use of such Renminbi capital may not be changed without SAFE’s approval and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used.
See “Risk Factors — Risks Related to Doing Business in China — PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our initial public offering to make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business”.
Dividend Distribution
We are a British Virgin Islands holding company and substantially all of our operations are conducted through LK Technology. We rely on dividends and other distributions from our LK Technology and its subsidiaries to provide us with our cash flow and allow us to pay dividends on the shares underlying our ADSs and meet our other obligations. The principal regulations governing distribution of dividends paid by wholly foreign-owned enterprises include:
| 1. | Wholly Foreign-Owned Enterprise Law (1986), as amended; and |
| 2. | Implementation Rules on Wholly Foreign-Owned Enterprise Law (1990), as amended. |
Under these regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a FIE has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions
In October 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November 1, 2005, and was further supplemented by two implementation notices issued by the SAFE on November 24, 2005 and May 29, 2007, respectively. Under Circular 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in the PRC. An amendment to the registration or filing with the local SAFE branch by such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshore company, or any other material change with respect to the offshore company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment, debt investment, or creation of any security interest over any assets located in the PRC.
Under SAFE Notice 75, PRC residents are further required to repatriate into the PRC all of their dividends, profits or capital gains obtained from their shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The registration and filing procedures under SAFE Notice 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital reduction. Therefore, failure to comply with such registration may subject us to certain restrictions on, including but not limited to, the increase of the registered capital of our PRC subsidiary, making loans to our PRC subsidiary, and making distributions to us from our on-shore companies.
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E. TAXATION
The following discussion sets forth the material British Virgin Islands, PRC and U.S. federal income tax consequences of an investment in our ordinary shares represented by our ADSs, sometimes referred to collectively as the “securities”. It is based upon laws and relevant interpretations thereof in effect as of the date of this report, all of which are subject to change. This discussion does not deal with all possible tax consequences relating to an investment in the securities, such as the tax consequences under state, local and other tax laws. As used in this discussion, “we,” “our” and “us” refers only to Luokung Technology Corp..
British Virgin Islands Taxation
Under the laws of the British Virgin Islands as currently in effect, a holder of the securities who is not a resident of the British Virgin Islands is not liable for British Virgin Islands tax on dividends paid with respect to the securities and all holders of the securities are not liable to the British Virgin Islands for tax on gains realized during that year on the sale or disposal of such ordinary shares. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Act.
There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated under the BVI Act. In addition, shares of companies incorporated under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.
There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands or between China and the British Virgin Islands.
People’s Republic of China Taxation
In 2007, the PRC National People’s Congress enacted the new Enterprise Income Tax Law (the “EIT Law”), which became effective on January 1, 2008. The new EIT Law imposes a single uniform income tax rate of 25% on all Chinese enterprises, including foreign-invested enterprises, and levies a withholding tax rate of 10% on dividends payable by Chinese subsidiaries to their foreign shareholders unless any such foreign shareholders’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding agreement. Under the new EIT Law, enterprises established outside China but deemed to have a “de facto management body” within the country may be considered “resident enterprises” for Chinese tax purposes and, therefore, may be subject to an enterprise income tax rate of 25% on their worldwide income. Pursuant to the implementation rules of the new EIT Law, a “de facto management body” is defined as a body that has material and overall management control over the business, personnel, accounts and properties of the enterprise. Although substantially all members of our management are located in China, it is unclear whether Chinese tax authorities would require (or permit) us to be treated as PRC resident enterprises. If we are deemed a Chinese tax resident enterprise, we may be subject to an enterprise income tax rate of 25% on our worldwide income, excluding dividends received directly from another Chinese tax resident enterprise, as well as PRC enterprise income tax reporting obligations. If we are not deemed to be a Chinese tax resident enterprise, we may be subject to certain PRC withholding taxes. See “Risk Factors — Risks Related to Doing Business in China — Our holding company structure may limit the payment of dividends.” As a result of such changes, our historical tax rates may not be indicative of our tax rates for future periods and the value of our ADSs or ordinary shares may be adversely affected. If we are deemed a PRC resident enterprise and investors’ gain from the sales of the securities and dividends payable by us are deemed sourced from China, such gains and dividends payable by us may be subject to PRC tax. See “Risk Factors — Risks Related to Doing Business in China — If we were deemed a “resident enterprise” by PRC tax authorities, we could be subject to tax on our global income at the rate of 25% under the New EIT Law and our non-PRC shareholders could be subject to certain PRC taxes.
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United States Federal Income Taxation
General
The following is a discussion of the material U.S. federal income tax consequences to an investor of purchasing, owning and disposing of our securities. This discussion does not address any aspects of U.S. federal gift or estate tax or the state, local or non-U.S. tax consequences of an investment in the securities.
YOU SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF THE SECURITIES IN YOUR PARTICULAR SITUATION.
This discussion applies only to those investors that purchase the securities in this offering and that hold the securities as capital assets within the meaning of section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This section does not apply to holders that may be subject to special tax rules, including but not limited to:
| 1. | dealers in securities or currencies; |
| 2. | traders in securities that elect to use a mark-to-market method of accounting; |
| 3. | banks, insurance companies or certain financial institutions; |
| 4. | tax-exempt organizations; |
| 5. | governments or agencies or instrumentalities thereof; |
| 6. | partnerships or other entities treated as partnerships or other pass-through entities for U.S. federal income tax purposes or persons holding the securities through such entities; |
| 7. | regulated investment companies or real estate investment trusts; |
| 8. | holders subject to the alternative minimum tax; |
| 9. | holders that actually or constructively own 10% or more of the total combined voting power of all classes of our shares entitled to vote; |
| 10. | holders that acquired the securities pursuant to the exercise of employee stock options, in connection with employee stock incentive plans or otherwise as compensation; |
| 11. | holders that hold the securities as part of a straddle, hedging or conversion transaction; or |
| 12. | holders whose functional currency is not the U.S. dollar. |
This section is based on the Code, its legislative history, existing and proposed U.S. Treasury regulations, published rulings and other administrative guidance of the U.S. Internal Revenue Service (the “IRS”) and court decisions, all as in effect on the date hereof. These laws are subject to change or different interpretation by the IRS or a court, possibly on a retroactive basis.
We have not sought, and will not seek, a ruling from the IRS as to any U.S. federal income tax consequence described herein. The IRS may disagree with the discussion herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulation, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of the securities that is for U.S. federal income tax purposes:
| 1. | a citizen or resident of the United States; |
| 2. | a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or |
| 3. | organized) under the laws of the United States, any state thereof or the District of Columbia; |
| 4. | an estate whose income is subject to U.S. federal income tax regardless of its source; or |
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| 5. | a trust if (a) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. |
| 6. | persons are authorized to control all substantial decisions of the trust, or (b) if the trust has a valid election in effect under applicable U.S. |
Treasury regulations to be treated as a U.S. person.
If a beneficial owner of the securities is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable specifically to Non-U.S. Holders are described below under the heading “Tax Consequences to Non-U.S. Holders.”
If a partnership (including for this purpose any entity treated as a partnership for U.S. tax purposes) is a beneficial owner of the securities, the U.S. tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. A holder of the securities that is a partnership or partners in such a partnership should consult their own tax advisors about the U.S. federal income tax consequences of holding and disposing of the securities.
This discussion assumes that any distributions made (or deemed made) on the securities and any consideration received by a holder in consideration for the sale or other disposition of the securities will be in U.S. dollars.
Tax Consequences to U.S. Holders
Taxation of Distributions
Subject to the passive foreign investment company, or PFIC, rules discussed below, the gross amount of any cash distributions we make with respect to a U.S. Holder in respect of such U.S. Holder’s shares will generally be treated as dividend income if the distributions are made from our current or accumulated earnings and profits, calculated according to U.S. federal income tax principles. Cash dividends will generally be subject to U.S. federal income tax as ordinary income on the day the U.S. Holder actually or constructively receives such income. With respect to non-corporate U.S. Holders for taxable years beginning before January 1, 2011, dividends may be taxed at the lower applicable long-term capital gains rate provided that (a) our shares are readily tradable on an established securities market in the United States, or, in the event we are deemed to be a Chinese “resident enterprise” under the EIT Law (as described above under “People’s Republic of China Taxation”), we are eligible for the benefits of the income tax treaty between the United States and the PRC (the “U.S.-PRC Tax Treaty”), (b) we are not a PFIC, as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (c) certain holding period requirements are met. Under published IRS authority, shares are considered for purposes of clause (a) above to be readily tradable on an established securities market in the United States only if they are listed on certain exchanges, which presently include the NASDAQ Capital Market. U.S. Holders should consult their own tax advisors regarding the availability of the lower rate for any dividends paid with respect to our shares.
Dividends will not be eligible for the dividends-received deduction allowed to U.S. corporations in respect of dividends received from other U.S. corporations. Generally, if we distribute non-cash property as a dividend (other than pro rata distributions of our shares) out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes), a U.S. Holder generally will include in income an amount equal to the fair market value of the property, on the date that it is distributed.
Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of the U.S. Holder’s basis in its shares and thereafter as capital gain. However, we do not plan on calculating our earnings and profits in accordance with U.S. federal income tax principles. U.S. holders therefore should generally assume that any distributions paid by us will be treated as dividends for U.S. federal income tax purposes.
If PRC taxes apply to dividends paid by us to a U.S. Holder (see “People’s Republic of China Taxation,” above), such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and a U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty. The rules relating to the U.S. foreign tax credit are complex. U.S. Holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.
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Taxation of Dispositions of Shares
Subject to the PFIC rules discussed below, a U.S. holder that sells or otherwise disposes of its shares will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the amount realized and such U.S. Holder’s tax basis in its shares. Prior to January 1, 2011, capital gains of a non-corporate U.S. holder are generally taxed at a maximum rate of 15% where the property is held for more than one year (and 20% thereafter). The ability to deduct capital losses is subject to limitations.
If PRC taxes apply to any gain from the disposition of our shares by a U.S. Holder, such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and a U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.
Passive Foreign Investment Company
We do not expect to be a PFIC for U.S. federal income tax purposes for our current tax year or in the foreseeable future. The determination of whether or not we are a PFIC in respect of any of our taxable years is a factual determination that cannot be made until the close of the applicable tax year and that is based on the types of income we earn and the value and composition of our assets (including goodwill), all of which are subject to change. Therefore, we can make no assurances that we will not be a PFIC in respect of our current taxable year or in the future.
In general, we will be a PFIC in any taxable year if either:
| 1. | at least 75% of our gross income for the taxable year is passive income; or |
| 2. | at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income. |
Passive income includes dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business), the excess of gains over losses from certain types of transactions in commodities, annuities and gains from assets that produce passive income. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
If we are treated as a PFIC in any year during which a U.S. Holder owns the securities, and such U.S. Holder did not make a mark-to-market election, as described below, the U.S. Holder will be subject to special rules with respect to:
| 1. | any gain recognized by the U.S. Holder on the sale or other disposition of its shares; and any excess distribution that we make to the U.S. Holder (generally, the excess of the amount of any distributions to such U.S. Holder during a single taxable year of such U.S. Holder over 125% of the average annual distributions received by such U.S. Holder in respect of the shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder holding period for the shares). |
Under these rules:
| 2. | the gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the shares; |
| 3. | the amount allocated to the U.S. Holder’s taxable year in which it realized the gain or excess distribution or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we are a PFIC will be taxed as ordinary income; |
| 4. | the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax rate in effect for that year; and |
| 5. | the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder. |
| 6. | Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC. |
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Alternatively, if a U.S. Holder, at the close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election with respect to such shares for such taxable year. Our shares will be “marketable” to the extent that they remain regularly traded on a national securities exchange, such as the NASDAQ Capital Market. If a U.S. Holder makes this election in a timely fashion, it will not be subject to the PFIC rules described above. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value of its shares at the end of the taxable year over its adjusted basis in its shares. Any ordinary income resulting from this election would generally be taxed at ordinary income tax rates and would not be eligible for the reduced rate of tax applicable to qualified dividend income. The U.S. Holder will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its shares over the fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s basis in the shares will be adjusted to reflect any such income or loss amounts. U.S. Holders should consult their own tax advisor regarding potential advantages and disadvantages of making a mark-to-market election with respect to their shares.
Alternatively, a U.S. Holder of stock in a PFIC may avoid the PFIC tax consequences described above in respect to our or shares by making a timely “qualified electing fund” election to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our taxable year ends. However, the qualified electing fund election is available only if the PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under applicable U.S. Treasury regulations. We do not intend to furnish the information that a U.S. Holder would need in order to make a qualified electing fund election. Therefore, U.S. Holders will not be able to make or maintain such election with respect to their or shares.
If a U.S. Holder owns our shares or during any year that we are a PFIC, such holder must file U.S. Internal Revenue Service Form 8621 regarding such holder’s shares or and the gain realized on the disposition of the shares. The reduced tax rate for dividend income, discussed in “Taxation of Distributions,” is not applicable to dividends paid by a PFIC. U.S. Holders should consult with their own tax advisors regarding reporting requirements with respect to their shares.
Tax Consequences to Non-U.S. Holders
Dividends paid to a Non-U.S. Holder in respect of our or shares generally will not be subject to U.S. federal income tax, unless the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains in the United States).
In addition, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other disposition of our or shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of sale or other disposition and certain other conditions are met (in which case, such gain from United States sources generally is subject to tax at a 30% rate or a lower applicable tax treaty rate).
Dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject to tax in the same manner as for a U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
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Information Reporting and Backup Withholding
In general, information reporting for U.S. federal income tax purposes generally should apply to distributions made on the securities within the United States to a non-corporate U.S. Holder and to the proceeds from sales and other dispositions of the securities by a non-corporate U.S. Holder to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected at an office) outside the United States generally should be subject to information reporting in limited circumstances.
Dividend payments made to U.S. Holders and proceeds paid from the sale or other disposition the securities may be subject to information reporting to the IRS and possible U.S. federal backup withholding at a current rate of 28%. Certain exempt recipients, such as corporations, are not subject to these information reporting requirements. Backup withholding will not apply to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification, or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status must provide a duly executed IRS Form W-9.
A Non-U.S. Holder generally may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.
PROSPECTIVE PURCHASERS OF OUR SECURITIES SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY ADDITIONAL TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF OUR SECURITIES, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR NON-U.S. JURISDICTION, INCLUDING ESTATE, GIFT, AND INHERITANCE LAWS AND APPLICABLE TAX TREATIES.
F. DIVIDENDS AND PAYING AGENTS.
Not applicable.
G. STATEMENT BY EXPERTS.
Not applicable.
H. DOCUMENTS ON DISPLAY.
We are subject to certain of the information reporting requirements of the Securities and Exchange Act of 1934, as amended. As a foreign private issuer we are exempt from the rules and regulations under the Securities Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Securities Exchange Act, with respect to their purchase and sale of our shares. In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Securities Exchange Act. Nasdaq rules generally require that companies send an annual report to shareholders prior to the annual general meeting, however we rely upon an exception under the Nasdaq rules. Specifically, we file annual reports on Form 20-F, which contain financial statements audited by an independent accounting firm, electronically with the SEC and post a copy on our website.
The SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, and our SEC reports can be viewed or downloaded there. The address of this web site is http://www.sec.gov. In addition, information that we furnish or file with the SEC, including annual reports on Form 20-F, current reports on Form 6-K, proxy and information statements and any amendments to, or exhibits included in, those reports are available to be viewed or download, free of charge, on our website at http://www.luokung.com as soon as reasonably practicable after such materials are filed or furnished with the SEC. Information contained, or that can be accessed through, our website does not constitute a part of this annual report and is not incorporated by reference herein, and we have included our website address in this annual report solely for informational purposes.
I. SUBSIDIARY INFORMATION
For a listing of our subsidiaries, see “Item 4. Information on the Company – C. Organizational Structure.”
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
As of December 31, 2023, we had a loan from Geely Technology which bears interest at a fixed rate of 8% per annum. If we borrow money with variable interest in future periods, we may be exposed to interest rate risk. Our exposure to market risk for changes in interest rates relates primarily to the interest income generated by our cash deposits with our banks. We have not used any derivative financial instruments in our investment portfolio. Interest earning instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed to material risks due to changes in interest rates. However, our future interest income may fall short of expectations due to changes in interest rates.
Foreign Exchange Risk
Translation adjustments amounted to a $197,520 loss and $2,204,206 gain for the fiscal years ended December 31, 2023 and 2022, respectively. The Company translated balance sheet amounts with the exception of equity at December 31, 2023 at RMB 7.0827 to $1.00 as compared to RMB 6.9646 to $1.00 at December 31, 2022. The Company stated equity accounts at their historical rate. The average translation rates applied to income statement accounts for the fiscal years ended December 31, 2023 and 2022 were RMB 7.0467 and RMB6.7261 to US$1.00, respectively. So far, the PRC government has been able to manage a stable exchange rate between RMB and the U.S. Dollar. Our future downward translation adjustments may occur and can be significant due to changes in such exchange rate.
If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
The PRC government imposes strict restrictions on PRC resident companies regarding converting RMB into foreign currencies and vice versa under capital account transactions, such as receiving equity investments from outside of the PRC, making equity investments outside of the PRC, borrowing money from or lending money outside of the PRC, and repaying debt or remitting liquidated assets and/or accumulated profits outside of the PRC. These transactions have to be approved by the relevant PRC government authorities, including but not limited to the commerce bureau, the tax bureau and the State Administration of Foreign Exchange, or SAFE, and have to be conducted at banks entrusted by the local SAFE branch. As our business continues to grow, we may need to continuously finance our PRC subsidiaries by raising capital from outside of the PRC. The restriction on converting RMB into foreign currencies, and vice versa, may limit our ability to use capital resources from outside of the PRC. Such restrictions may also limit our ability to remit profits from our PRC subsidiaries outside of the PRC, therefore potentially limiting our ability to pay dividends to our shareholders. In addition, such restrictions will limit our ability to freely transfer temporary excess cash in our or our subsidiaries’ bank accounts in and out of the PRC, therefore limiting our ability to conduct cross-border cash management activities to optimize the utilization of our cash.
Inflation
Although China has experienced an increasing inflation rate, inflation has not had a material impact on our results of operations in recent years. According to the National Bureau of Statistics of China, the change in the consumer price index in China was 0.46%, (0.77%), and 1.16% in 2001, 2002 and 2003, respectively. However, in connection with a 3.9% increase in 2004, the PRC government announced measures to restrict lending and investment in China in order to reduce inflationary pressures in China’s economy. Following the government’s actions, the consumer price index decreased to 1.8% in 2005 and to 1.5% in 2006. In 2007, the consumer price index increased to 4.8%. In response, China’s central bank, the People’s Bank of China, announced that the bank reserve ratio would rise half a percentage point to 15.5% in an effort to reduce inflation pressures. China’s consumer price index growth rate reached 8.7% year over year in 2008. In 2009 and 2010, the change in the consumer price index in China was minus 0.7% and 3.3%.
China consumer price index in December 2023 was 0.3% lower than that of the same period in 2022. China consumer price index in December 2022 was 1.8% higher than that of the same period in 2021. China consumer price index in December 2021 was 9.1% higher than that of the same period in 2020. China consumer price index in December 2020 was 6.7% higher than that of the same period in 2019. China consumer price index in December 2019 was 2.6% higher than that of the same period in 2018. The results of the PRC government’s actions to combat inflation are difficult to predict. Adverse changes in the Chinese economy, if any, will likely impact the financial performance of a variety of industries in China that use, or would be candidates to use, our software products and services.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
A. DEBT SECURITIES.
Not applicable.
B. WARRANTS AND RIGHTS.
Not applicable.
C. OTHER SECURITIES.
Not applicable.
D. AMERICAN DEPOSITARY SHARES.
Not applicable.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, which included inquiries made to certain other of our employees. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that, as of December 31, 2023, the Company’s disclosure controls and procedures were not effective due to the material weakness described in the “Management’s Report on Internal Control over Financial Reporting” section below. However, we performed adequate analyses and procedures, including among other things, transaction reviews and account reconciliations, in order to provide assurance that our consolidated financial statements included in this annual report were prepared in accordance with U.S. GAAP and present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Any system of internal control, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management assessed our internal control over financial reporting as of December 31, 2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the report entitled “Internal Control-Integrated Framework (2013).” The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on such assessment, management concluded that its internal control over financial reporting as of December 31, 2023 was not effective because of the following material weakness:
Lack of U.S. GAAP expertise. Although our accounting personnel are professional and experienced in accounting requirements and procedures generally accepted in the PRC, they do not have sufficient knowledge, experience and training in maintaining our books and records and preparing financial statements in accordance with U.S. GAAP. The staff needs additional training to become experienced in U.S. GAAP-based reporting, including the skills of U.S. GAAP-based period end closing, consolidation of financial statements, and U.S. GAAP conversion.
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In order to address the above material weakness, our management plans to take the following steps:
We will employ, as needed, outside professionals to provide key accounting personnel ongoing technical trainings to ensure their proper understanding of U.S. GAAP and newly announced accounting standards.
The Company believes the foregoing measures will remediate the identified material weakness in future periods. The Company is committed to monitoring the effectiveness of these measures and making any changes that are necessary and appropriate.
However, giving full consideration to the material weaknesses described above, our Chief Executive Officer and Chief Financial Officer performed adequate analyses and procedures, including among other things, transaction reviews and account reconciliations, in order to provide assurance that our consolidated financial statements included in this annual report were prepared in accordance with U.S. GAAP and present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
Attestation Report of Independent Registered Public Accounting Firm
As we are a smaller reporting company, this Annual Report on Form 20-F is not required to include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during our fiscal year ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT.
Our board of directors has determined that Messrs. Liangbin Yu qualifies as an audit committee financial expert. Our board of directors has determined that each of Messrs. Liangbin Yu, David Wei Tang, and Jin Meng Bryan Yap meets the definition of an “independent director” under the applicable NASDAQ Rules and under Rule 10A-3 of the Securities Exchange Act of 1934, as amended.
ITEM 16B. CODE OF ETHICS.
Our board of directors has adopted a code of business conduct and ethics applicable to our directors, officers and employees. We have posted the code on our website at http://www.luokung.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
The following is a summary of the fees billed to the Company by its principal independent registered accounting firm for professional services rendered for the years ended December 31, 2023 and 2022 (in US dollars):
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Audit Fees | $ | $ | ||||||
| MSPC Certified Public Accountants and Advisors, PC (“MSPC”) | 440,000 | |||||||
| MRI Moores Rowland LLP (“MRI”) | 400,000 | |||||||
| Audit-Related Fees | ||||||||
| MSPC | - | 80,000 | ||||||
| TOTAL | $ | 400,000 | $ | 520,000 | ||||
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“Audit Fees” consisted of the aggregate fees billed for professional services rendered for the audit of our annual financial statements and the reviews of the financial statements included in our Forms 20-F and for any other services that were normally provided in connection with our statutory and regulatory filings or engagements.
“Audit Related Fees” consisted of the aggregate fees billed for professional services rendered for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and were not otherwise included in Audit Fees.
Tax Fees
We did not engage our principal accountants to provide tax or related services during the last two fiscal years.
All Other Fees
We did not engage our principal accountants to render services to us during the last two fiscal years, other than as reported above.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
ITEM 16G. CORPORATE GOVERNANCE.
The Company’s corporate governance practices do not differ from those followed by domestic companies listed on the NASDAQ Capital Market other than disclosed below.
NASDAQ Listing Rule 5620(a) requires each issuer to hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year end. However, NASDAQ Listing Rule 5615(a)(3) permits a foreign private issuer like us to follow home country practices in lieu of certain requirements of Listing Rule 5600, provided that such foreign private issuer discloses in its annual report filed with the SEC each requirement of Rule 5600 that it does not follow and describes the home country practice followed in lieu of such requirement. We follow home country practice with respect to annual meetings and did not hold an annual shareholder meeting in the year ended December 31, 2023. We may, however, hold annual shareholder meetings in the future if there are significant issues that require shareholders’ approvals.
NASDAQ Listing Rule 5635 generally provides that shareholder approval is required of U.S. domestic companies listed on the NASDAQ Capital Market prior to issuance (or potential issuance) of securities (i) equaling 20% or more of the company’s common stock or voting power for less than the greater of market or book value (ii) resulting in a change of control of the company; and (iii) which is being issued pursuant to a stock option or purchase plan to be established or materially amended or other equity compensation arrangement made or materially amended. Notwithstanding this general requirement, NASDAQ Listing Rule 5615(a)(3)(A) permits foreign private issuers to follow their home country practice rather than these shareholder approval requirements. The British Virgin Islands do not require shareholder approval prior to any of the foregoing types of issuances. The Company, therefore, is not required to obtain such shareholder approval prior to entering into a transaction with the potential to issue securities as described above. The Board of Directors of the Company has elected to follow the Company’s home country rules as to such issuances and will not be required to seek shareholder approval prior to entering into such a transaction.
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ITEM 16H. MINE SAFETY DISCLOSURE.
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
ITEM 16J. INSIDER TRADING POLICIES
Not applicable
ITEM 16K. CYBERSECURITY
Risk Management and Strategy
We have implemented cybersecurity risk assessment procedures to ensure effectiveness in cybersecurity management, strategy and governance and reporting cybersecurity risks. We have also integrated cybersecurity risk management into our overall enterprise risk management system.
We have developed a cybersecurity threat defense system to address both internal and external threats. This system encompasses various levels, including network, host and application security and incorporates systematic security capabilities for threat defense, monitoring, analysis, response, deception and countermeasures. We strive to manage cybersecurity risks and protect sensitive information through various methods, including technical safeguards, procedural requirements, an intensive monitoring program on our corporate network, continuous testing of our security posture both internally and with outside vendors, a robust incident response program, a review of the effectiveness of our security system with reference to applicable security standards by qualified third parties and regular cybersecurity awareness training for employees. We continuously monitor the performance of our apps, platforms and infrastructure to enable us to respond quickly to potential problems, including potential cybersecurity threats.
As of the date of this Annual Report, we have not experienced any material cybersecurity incidents or identified any material cybersecurity threats that have affected or are reasonably likely to materially affect us, our business strategy, results of operations or financial condition.
Governance
Our Board of Directors is responsible for overseeing the Company’s cybersecurity risk management and be informed on risks from cybersecurity threats. The Board shall review, approve and maintain oversight of the disclosure (i) on Form 6-K for material cybersecurity incidents (if any) and (ii) related to cybersecurity matters in the periodic reports (including annual report on Form 20-F) of the Company. In addition, our management team, including those with experience in dealing with confidentiality-related cybersecurity issues, oversee and manage cybersecurity related matters and formulate policies as necessary. Our Board review on an annual basis regarding assessment, identification and management on material risks from cybersecurity threats happened in the ordinary course of our business operations. If a cybersecurity incident occurs, our Board will promptly organize relevant personnel for internal assessment and, depending on the situation, seek the opinions of external experts and legal advisors. If it is determined that the incident could potentially be a material cybersecurity event, our Board will decide on the relevant response measures and whether any disclosure is necessary. If such disclosure is determined to be necessary, such disclosure material will be prepared and reviewed by our Board before it is disseminated to the public.
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PART III
ITEM 17. FINANCIAL STATEMENTS.
We have elected to provide financial statements and related information specified in Item 18.
ITEM 18. FINANCIAL STATEMENTS.
See “Index to Consolidated Financial Statements” for a list of all financial statements filed as part of this annual report. The Financial Statements begin on page F-1.
ITEM 19. EXHIBITS.
See the Exhibit Index following the signature page of this report, which is incorporated herein by reference.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| LUOKUNG TECHNOLOGY CORP. | ||
| By: | /s/ Xuesong Song | |
| Xuesong Song | ||
| Chief Executive Officer (principal executive officer) | ||
October 22, 2024
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INDEX
The following documents are filed as part of this annual report on Form 20-F.
99
| * | Previously filed as exhibits to the Company’s Annual Report on Form 20-F filed with the Commission on February 9, 2018 and incorporated herein by reference. |
| ** | Previously filed as exhibits to the Company’s Annual Report on Form 20-F filed with the Commission on October 12, 2018 |
| † | Indicates management contract or compensatory plan, contract or arrangement. |
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Luokung Technology Corp. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
| Page(s) | ||
| Reports of Independent Registered Public Accounting Firms | F-2 - F-12 | |
| Consolidated Financial Statements | ||
| Consolidated Balance Sheets | F-13 | |
| Consolidated Statements of Operations and Comprehensive Loss | F-14 | |
| Consolidated Statements of Changes in Shareholders’ Equity | F-15 | |
| Consolidated Statements of Cash Flows | F-16 | |
| Notes to Consolidated Financial Statements | F-17 - F-40 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Luokung Technology Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Luokung Technology Corp. and Subsidiaries (the “Company”) as of December 31, 2023, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 21, 2024, expressed an adverse opinion.
The Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying financial statements, the Company incurred losses for the year ended December 31, 2023, net current liabilities of the Company amounted to $84,146,605 as of December 31, 2023. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
MRI Moores Rowland LLP (T14LL1146H)
72 Anson Road #07-04 Anson House, Singapore 079911
Web www.mooresrowland.sg Tel + 65 6221 6116
Offices in
Australia | China | Hong Kong | India | Indonesia | Japan | Malaysia | Philippines | Singapore | Taiwan | Tajikistan | Thailand | Vietnam
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Luokung Technology Corp.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Goodwill and Intangible Assets
Critical Audit Matter Description
As reflected in the Company’s consolidated financial statements, as of December 31, 2023, the Company’s goodwill and intangible assets were $377,665 and $43,329,144, respectively. As disclosed in Note 2 to the consolidated financial statements, goodwill is tested for impairment at least annually or more frequently if indicators of impairment require the performance of an interim impairment assessment and intangible assets are tested for impairment when events and circumstances exist that indicate the carrying value of intangibles may not be recoverable.
Auditing management’s valuation of goodwill and intangible assets was complex and highly judgmental due to the significant measurement uncertainty in determining the fair values of the reporting units for purpose of goodwill valuation and the undiscounted estimated future cash flows that are directly associated with and expected to arise from the use of such intangible assets of the reporting units. In particular, the fair value estimates of the reporting units were sensitive to changes in significant assumptions such as discount rates, revenue growth rates, operating margins, estimated spend on capital expenditures, terminal growth rates and selection of the weighted average cost of capital. The undiscounted estimated future cash flows for intangible assets of reporting units were sensitive to significant assumptions such as revenue growth rates, operating margins, estimated spend on capital expenditures. These assumptions are affected by expected future market or economic conditions.
How We Addressed the Matter in Our Audit
Our audit procedures related to valuation of goodwill and intangible assets to address this critical audit matter included the following, among others:
| ● | We obtained an understanding and evaluated the operating design effectiveness of controls over the Company’s goodwill and intangible assets valuation process. | |
| ● | We evaluated reasonableness of valuation methodologies and the significant assumptions and underlying data used by the Company, including forecasted revenue based on expected growth rate, new contracts and operating margins. |
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Luokung Technology Corp.
Allowance for Expected Credit Losses
Critical Audit Matter Description
At December 31, 2023, the Company’s accounts receivable and other receivables were $25,182,891 and $22,630,450, respectively, and the allowances for expected credit loss reserve (“ECL”) related to the accounts receivable and other receivables balances were $21,833,387 and $18,511,411, respectively. As explained in Note 2 to the consolidated financial statements, the Company estimates its ECL primarily using an expected loss model that considers the likelihood of default and expected loss given default for an individual customer or other debtors.
Auditing the ECL is highly subjective due to the judgmental nature of the model and the underlying assumptions required to estimate expected credit losses as of the balance sheet date. For example, estimating the ECL required significant judgment with respect to various factors, including (i) the appropriate historical bad debt loss reference data, (ii) the expected timing of collection, (iii) calibration of the likelihood of default to reflect the risk characteristics of the Company’s receivable portfolio and (iv) the Company’s current and future view of the macroeconomic environment.
How We Addressed the Matter in Our Audit
Our audit procedures related to allowance for expected credit losses to address this critical audit matter included the following, among others:
| ● | We obtained an understanding of the Company’s controls over the allowance for expected credit losses process, including management’s review and approval of models used to calculate the estimate and the evaluation of the completeness and accuracy of data inputs, assumptions, and outputs of those models. | |
| ● | We examined the quantitative model methodology, assumptions used, and clerical accuracy of the segmentation level loss estimates. | |
| ● | We evaluated the inputs used by management in determining the qualitative adjustments for consistency with management’s evaluation framework and macro-economic trends. | |
| ● | We reviewed subsequent events and transactions to determine if these had any effects on the Company’s estimates. | |
| ● | We also assessed the adequacy of disclosures related to the allowance for credit losses. |
Revenue recognition
Critical Audit Matter Description
For the financial year ended December 31, 2023, the Company’s revenue of US$10,236,235 mainly generated from Smart Transportation revenue stream. As explained in Note 2 to the consolidated financial statements, the Company provides the following services within Smart Transportation, which are Map data licensing, Autonomous driving simulation & verification test and Map service platform local deployment. The accounting policies for revenue recognition and contract liabilities are set out in Note 2 to the consolidated financial statements and the various revenue streams for the Company.
The revenue recognition is the critical audit matters as there is an elevated inherent risk around the accuracy of amounts recorded as revenue due to different revenue recognition policies for rendering of services (over time) and sale of goods/license (point in time).
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Luokung Technology Corp.
How We Addressed the Matter in Our Audit
Our audit procedures related to revenue to address this critical audit matter included the following, among others:
| ● | We obtained an understanding of the nature of the various revenue streams and the related billing and revenue recording processes, systems and controls. | |
| ● | We tested, on a sample basis, over time and point in time revenue transactions recorded throughout the year. This testing included assessing, the validity of an underlying arrangement with the customer; the amounts invoiced to customers in accordance with the Company’s approved pricing list; and the timing of revenue recognition for each revenue contract based on completed performance obligations and the Company’s revenue recognition policy. |
Impairment of other assets
Critical Audit Matter Description
At December 31, 2023, the Company’s other assets were $4,843,393, and the other assets were fully impaired as at year end. The accounting policies for other assets and management’s assessment on impairment are set out in Note 2 and Note 8 to the consolidated financial statements, respectively.
Other assets include art pieces, which are recorded at cost, including the purchase price and any directly attributable costs necessary to bring the asset to its intended location and condition for use. These items are considered long-term assets as they are not held for sale in the ordinary course of business. The Company does not depreciate art pieces, as they are considered to have an indefinite useful life. Periodically, the Company reviews the carrying value of these assets to determine if any indicators of impairment exist. If indicators of impairment are present, the Company estimates the recoverable amount of the asset. An impairment loss is recognized in the statement of operations if the carrying amount of the art piece exceeds its recoverable amount.
Impairment assessment for art pieces is a critical audit matter given the elevated and significant inherent risks associated with the subjective valuation method for the art pieces.
How We Addressed the Matter in Our Audit
Our audit procedures related to impairment of other assets to address this critical audit matter included the following, among others:
| ● | We obtained an understanding of the nature of the other assets, the valuation method, and management’s judgements. | |
| ● | We performed an independent search to determine if there is an active market for those art pieces and any qualified valuer available to value those art pieces. |
F-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Luokung Technology Corp.
Going Concern
Critical Audit Matter Description
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Management’s plans for addressing going concern matter are described in Note 2.
We determined the Company’s ability to continue as a going concern is a critical audit matter due to the estimation and uncertainty regarding the Company’s future cash flows and the risk of bias in management’s judgments and assumptions in estimating these cash flows.
How We Addressed the Matter in Our Audit
Our audit procedures related to the Company’s assertion on its ability to continue as a going concern included the following, among others:
| ● | We identified the conditions and events noted above that indicate there is substantial doubt about the Company’s ability to continue as a going concern. | |
| ● | We evaluated management’s plans in connection with its intent to improve the business operation including cost cutting measurements and raise additional debt and equity financing and reviewed management’s forecasted revenue, operating expenses, and uses and sources of cash used in management’s assessment of whether the Company has sufficient liquidity to fund operations for at least one year from the consolidated financial statement issuance date. | |
| ● | We also reviewed and evaluated the consolidated financial statement presentation and disclosure regarding the substantial doubt about the ability of the Company to continue as a going concern. |
/S/ MRI MOORES ROWLAND LLP
Public Accountants and Chartered Accountants
Singapore, October 22, 2024
We have served as the Company’s auditor since 2023
PCAOB ID : 06955
F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Luokung Technology Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Luokung Technology Corp. and Subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022 and 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 15, 2023, expressed an adverse opinion.
The Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the accompanying financial statements, the Company has suffered recurring losses from operations and has net current liabilities of $50,005,942 as of December 31, 2022 that raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans in regard these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 |
www.mspc.cpa | ||
| An independent firm associated with | 340 North Avenue, Cranford, NJ 07016-2496 | 908 272-7000 | |
| Moore Global Network Limited | 546 5th Avenue, 6th Floor, New York, NY 10036-5000 | 212 682-1234 |  |
F-7
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Goodwill and Intangible Assets
Critical Audit Matter Description
As reflected in the Company’s consolidated financial statements, as of December 31, 2022, the Company’s goodwill and intangible assets were $80,294,407 and $87,659,719, respectively. As disclosed in Note 2 to the consolidated financial statements, goodwill is tested for impairment at least annually or more frequently if indicators of impairment require the performance of an interim impairment assessment and intangible assets are tested for impairment when events and circumstances exist that indicate the carrying value of intangibles may not be recoverable.
Auditing management’s valuation of goodwill and intangible assets was complex and highly judgmental due to the significant measurement uncertainty in determining the fair values of the reporting units for purpose of goodwill valuation and the undiscounted estimated future cash flows that are directly associated with and expected to arise from the use of such intangible assets of the reporting units. In particular, the fair value estimates of the reporting units were sensitive to changes in significant assumptions such as discount rates, revenue growth rates, operating margins, estimated spend on capital expenditures, terminal growth rates and selection of the weighted average cost of capital. The undiscounted estimated future cash flows for intangible assets of reporting units were sensitive to significant assumptions such as revenue growth rates, operating margins, estimated spend on capital expenditures. These assumptions are affected by expected future market or economic conditions.
How We Addressed the Matter in Our Audit
Our audit procedures related to valuation of goodwill and intangible assets to address this critical audit matter included the following, among others:
| ● | We obtained an understanding and evaluated the operating design effectiveness of controls over the Company’s goodwill and intangible assets valuation process. |
| ● | We evaluated reasonableness of valuation methodologies and the significant assumptions and underlying data used by the Company, including forecasted revenue based on expected growth rate, new contracts,, new product launches and operating margins |
F-8
Assessment of Realizability of Deferred Tax Assets
Critical Audit Matter Description
As discussed in Note 4 to the consolidated financial statements, the Company records a valuation allowance based on the assessment of the realizability of the Company’s deferred tax assets. For the year-ended December 31, 2022, the Company had deferred tax assets before valuation allowances of $25,506,592.
Auditing management’s assessment of recoverability of deferred tax assets involved subjective estimation and complex auditor judgment in determining whether sufficient future taxable income, including projected pre-tax income, will be generated to support the realization of the existing deferred tax assets before expiration.
How We Addressed the Matter in Our Audit
Our audit procedures related to assessment of realizability of deferred tax assets to address this critical audit matter included the following, among others:
| ● | We evaluated the assumptions used by the Company to develop projections of future taxable income, including pre-tax income, by income tax jurisdiction and tested the completeness and accuracy of the underlying data used in the projections. For example, we compared the projections of pre-tax income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends. |
| ● | We also compared the projections of future pre-tax income with other forecasted financial information prepared by the Company. |
| ● | We reviewed management’s estimate of the realizability of the deferred tax asset for reasonableness. |
Allowance for Expected Credit Losses
Critical Audit Matter Description
At December 31, 2022, the Company’s accounts receivable and other receivables were $28,383,755 and $49,048,118, respectively, and the allowances for expected credit loss reserve (“ECL”) related to the accounts receivable and other receivables balances were $21,100,189 and $14,546,581, respectively. As explained in Note 2 to the consolidated financial statements, the Company estimates its ECL primarily using an expected loss model that considers the likelihood of default and expected loss given default for an individual customer or other debtors.
Auditing the ECL is highly subjective due to the judgmental nature of the model and the underlying assumptions required to estimate expected credit losses as of the balance sheet date. For example, estimating the ECL required significant judgment with respect to various factors, including (i) the appropriate historical bad debt loss reference data, (ii) the expected timing of collection, (iii) calibration of the likelihood of default to reflect the risk characteristics of the Company’s receivable portfolio and (iv) the Company’s current and future view of the macroeconomic environment.
F-9
How We Addressed the Matter in Our Audit
Our audit procedures related to allowance for expected credit losses to address this critical audit matter included the following, among others:
| ● | We obtained an understanding of the Company’s controls over the allowance for expected credit losses process, including management’s review and approval of models used to calculate the estimate and the evaluation of the completeness and accuracy of data inputs, assumptions, and outputs of those models. |
| ● | We examined the quantitative model methodology, assumptions used, and clerical accuracy of the segmentation level loss estimates. |
| ● | We evaluated the inputs used by management in determining the qualitative adjustments for consistency with management’s evaluation framework and macro-economic trends. |
| ● | We reviewed subsequent events and transactions to determine if these had any effects on the Company’s estimates. |
| ● | We also assessed the adequacy of disclosures related to the allowance for credit losses. |
Going Concern
Critical Audit Matter Description
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Management’s plans for addressing going concern matter are described in Note 2.
We determined the Company’s ability to continue as a going concern is a critical audit matter due to the estimation and uncertainty regarding the Company’s future cash flows and the risk of bias in management’s judgments and assumptions in estimating these cash flows.
How We Addressed the Matter in Our Audit
Our audit procedures related to the Company’s assertion on its ability to continue as a going concern included the following, among others:
| ● | We identified the conditions and events noted above that indicate there is substantial doubt about the Company’s ability to continue as a going concern. |
| ● | We evaluated management’s plans in connection with its intent to raise additional debt and equity financing and reviewed management’s forecasted revenue, operating expenses, and uses and sources of cash used in management’s assessment of whether the Company has sufficient liquidity to fund operations for at least one year from the consolidated financial statement issuance date. |
| ● | We also reviewed and evaluated the consolidated financial statement presentation and disclosure regarding the substantial doubt about the ability of the Company to continue as a going concern. |
 | |
| MSPC | |
| Certified Public Accountants and Advisors, | |
| A Professional Corporation |
New York, New York
May 15, 2023
We have served as the Company’s auditor since 2021
PCAOB ID : 717
F-10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Luokung Technology Corp.
Adverse Opinion on Internal Control over Financial Reporting
We have audited Luokung Technology Corp.’s and Subsidiaries (the Company’s) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
Company personnel responsible for financial reporting lack sufficient US GAAP knowledge and the Company does not have a formal system of internal control that would provide management with reasonable assurance that the Company’s consolidated financial statements and related disclosures, including subsequent events, are complete and presented in accordance with US GAAP. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2022 consolidated financial statements, and this report does not affect our report dated May 15, 2023, on those consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows of the Company, and our report dated May 15, 2023, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 |
www.mspc.cpa | ||
| An independent firm associated with | 340 North Avenue, Cranford, NJ 07016-2496 | 908 272-7000 | |
| Moore Global Network Limited | 546 5th Avenue, 6th Floor, New York, NY 10036-5000 | 212 682-1234 |
F-11
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 | |
A Professional Corporation |
New York,
May 15, 2023
PCAOB ID :
F-12
LUOKUNG TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
| As of December 31, | ||||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net of allowance for expected credit losses | ||||||||
| Other receivables and prepayment, net | ||||||||
| Amounts due from associate | ||||||||
| Notes receivable | ||||||||
| Total current assets | ||||||||
| Non-current assets: | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Investment | ||||||||
| Right-of-use assets | ||||||||
| Deferred tax assets | ||||||||
| Other assets | ||||||||
| Other receivables, net (long term) | ||||||||
| Total non-current assets | ||||||||
| TOTAL ASSETS | ||||||||
| Liabilities | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | ||||||||
| Accrued liabilities and other payables | ||||||||
| Amounts due to associate | ||||||||
| Contract liabilities | ||||||||
| Lease liabilities – current portion | ||||||||
| Amounts due to related parties | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Lease liabilities – non-current portion | ||||||||
| Accrued liabilities and other payables | ||||||||
| Deferred tax liabilities | ||||||||
| Total non- current liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies | ||||||||
| Mezzanine equity | ||||||||
| Redeemable preferred shares, $ | ||||||||
| Shareholders’ Equity | ||||||||
| Share capital | ||||||||
| Preferred shares, $ | ||||||||
| Ordinary shares, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income/(loss) | ||||||||
| Total (deficit)/equity attributable to owners of the company | ( | ) | ||||||
| Non-controlling interest | ( | ) | ||||||
| Total Shareholders’ (Deficit)/Equity | ( | ) | ||||||
| TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to the consolidated financial statements
F-13
LUOKUNG TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(IN U.S. DOLLARS)
| For the years ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Less: Cost of revenues | ||||||||||||
| Less: Operating expenses: | ||||||||||||
| Selling and marketing | ||||||||||||
| General and administrative | ||||||||||||
| Allowance for expected credit losses | ( | ) | ||||||||||
| Research and development | ||||||||||||
| Total operating expenses | ||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||
| Other (expense)/income: | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||
| Foreign exchange gains/(losses), net | ( | ) | ( | ) | ||||||||
| Gain from investment | - | |||||||||||
| Other income, net | ||||||||||||
| Total other (expense)/income, net | ( | ) | ||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ||||||
| Income tax (expense)/benefit | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Less: Net loss/(income) attributable to non-controlling interest | ( | ) | ( | ) | ||||||||
| Net loss attributable to owners of the Company | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Comprehensive loss: | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||
| Other comprehensive income/(loss): | ||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Less: Comprehensive (loss)/income attributable to the non-controlling interest | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to owners of the Company | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss per ordinary share: | ||||||||||||
| Basic and Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Weighted average number of ordinary shares outstanding: Basic and Diluted | ||||||||||||
See accompanying notes to the consolidated financial statements
F-14
LUOKUNG TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(IN U.S. DOLLARS)
| Ordinary shares | Preferred shares | Additional paid-in | Accumulated | Accumulated other comprehensive Income | Non- controlling | Total Shareholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | deficit | (loss) | Interest | Equity | ||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| Issuance of ordinary shares | ||||||||||||||||||||||||||||||||||||
| Redemption of preferred shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Dividends of Preferred Shares | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Acquisition of subsidiaries | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Contribution | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| Issuance of ordinary shares | ||||||||||||||||||||||||||||||||||||
| Issuance of preferred shares | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Acquisition of subsidiaries | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||||
| Reverse split | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Issuance of ordinary shares | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Loss of control over subsidiaries | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
See accompanying notes to the consolidated financial statements
F-15
LUOKUNG TECHNOLOGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)
| For the years ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Amortization of right-of-use assets | ||||||||||||
| Exchange difference | ||||||||||||
| (Gain)/loss on disposal of property and equipment | ( | ) | ||||||||||
| Allowance for expected credit losses | ( | ) | ||||||||||
| Share-based compensation expense | ||||||||||||
| Gain on disposal of subsidiaries | ( | ) | ||||||||||
| Gain on derecognition of lease | ( | ) | ||||||||||
| Write-off of accounts and other payables | ( | ) | ||||||||||
| Impairment of intangible assets | ||||||||||||
| Impairment of goodwill | ||||||||||||
| Impairment of property and equipment | ||||||||||||
| Impairment on associate | ||||||||||||
| Impairment of other asset state at cost | ||||||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||||||
| Changes in assets and liabilities: | ||||||||||||
| Accounts receivable | ( | ) | ||||||||||
| Notes receivable | ( | ) | ||||||||||
| Other receivables and prepayment | ( | ) | ( | ) | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||||||
| Accrued liabilities and other payables | ( | ) | ||||||||||
| Contract liabilities | ( | ) | ||||||||||
| Lease liability | ( | ) | ( | ) | ( | ) | ||||||
| Tax payable | ( | ) | ( | ) | ( | ) | ||||||
| Inventories | ( | ) | ||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ( | ) | ||||||
| Purchase of other assets | ( | ) | ( | ) | ||||||||
| Partial payment made for acquisition of a subsidiary | ( | ) | ||||||||||
| Cash outflow from loss of control of subsidiaries | ( | ) | ||||||||||
| Purchase of investments | ( | ) | ||||||||||
| Deposit for investments | ( | ) | ||||||||||
| Proceeds from disposal of property and equipment | ||||||||||||
| Business acquisitions, net of cash acquired | ||||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Advances from (repayment to) related parties | ( | ) | ||||||||||
| Additional capital investment from minority shareholders | ||||||||||||
| Payment of preferred stock dividends | ( | ) | ||||||||||
| Redemption of preferred stock | ( | ) | ||||||||||
| Proceeds from issuance of debt | ||||||||||||
| Proceeds from issuance of shares | ||||||||||||
| Net cash provided by financing activities | ||||||||||||
| Effect of foreign exchange rate changes | ( | ) | ( | ) | ( | ) | ||||||
| Net (decrease) increase in cash | ( | ) | ( | ) | ||||||||
| Cash and restricted cash at beginning of the year | ||||||||||||
| Cash and restricted cash at end of the year | $ | $ | $ | |||||||||
| Supplemental cash flow disclosures: | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Interest paid | ||||||||||||
| Income taxes paid | ||||||||||||
| RECONCILIATION TO AMOUNTS ON CONSOLIDATED BALANCE SHEETS: | ||||||||||||
| Cash | ||||||||||||
| Restricted cash | ||||||||||||
| Total cash, and restricted cash | $ | |||||||||||
| Non- cash investing and financing transaction: | ||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | ||||||||||||
| Share-based compensation expense | ||||||||||||
See accompanying notes to the consolidated financial statements
F-16
LUOKUNG TECHNOLOGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
NOTE 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
Luokung Technology Corp. (“LKCO”), formerly Kingtone Wirelessinfo Solution Holding Ltd (“Kingtone Wireless”) was incorporated in the British Virgin Islands on October 27, 2009 under the name of Reizii Capital Management Limited. It has wholly-owned subsidiaries and a variable interest entity (“VIE”). Its wholly-owned subsidiaries include: Topsky Info-tech Holdings Pte Ltd. (“Topsky”), which was established in Singapore on November 3, 2009, and Xi’an Softech Co., Ltd. (“Softech”), which was established in Xi’an, Shaanxi Province, China on November 27, 2009 by Topsky. Its VIE is Xi’an Kingtone Information Technology Co., Ltd. (“Kingtone Information”) which was incorporated in Xi’an, Shaanxi province, China on December 28, 2001.
On May 10, 2019 and November 6, 2020, LK Technology
entered into a Stock Purchase Agreement and The Supplementary Agreement to Stock Purchase Agreement with the shareholders of BotBrain
AI Limited (“Botbrain”), a limited liability company incorporated under the laws of the British Virgin Islands, pursuant to
which LK Technology acquired
LKCO, its subsidiaries and its VIEs (collectively the “Company”) is a leading spatial-temporal intelligent big data services company and provider of interactive location-based services (“LBS”) and high-definition maps (“HD Maps”) in China. It has established its presence in smart transportation, carbon neutrality and natural resource management services, and LBS related intelligent industrialized applications. In smart transportation, not only does Luokung provide HD Map and other autonomous driving enabling technologies, such as vehicle position fusion, collaborative navigation, and simulation testing to enable smart vehicles, but also provides key enabling services, such as 24/7 road hazard awareness, real-time road visibility monitoring, intelligent road management and maintenance, and vehicle-road collaboration to assist smart road capabilities. In carbon neutrality and natural resource management services, Luokung expands on its remote sensing AI big data processing capabilities to address a broader market focusing on industrial applications in carbon emission, carbon neutrality, geographical resources, forestry resources, water resources, crops, etc. In LBS related intelligent industrialized applications, Luokung offers LBS, covering direct LBS business services, LBS as platform to enable business’ customer serving operations, and LBS advertising business.
F-17
| Name | Date of incorporation | Place of incorporation | Percentage of legal ownership | |||||
| Subsidiaries: | ||||||||
| LK Technology Ltd. | % | |||||||
| Dream Beyond Global Limited | % | |||||||
| Superengine Holding Limited | % | |||||||
| Saleya Holding Limited(1) | % | |||||||
| MMB Limited | % | |||||||
| Mobile Media (China) Limited | % | |||||||
| Beijing Luokuang Spatial-Temporal Data Technology Co., Ltd. | % | |||||||
| Shenzhen Luokung Technology Co., Ltd. | % | |||||||
| Yunnan Luokung Technology Co., Ltd. | % | |||||||
| DMG Infotech Co., Ltd(1) | % | |||||||
| Jiangsu Zhong Chuan Rui You Information and Technology Co., Ltd. (“Zhong Chuan Rui You”) | % | |||||||
| Huoerguosi Luokung Information and Technology Co., Ltd. | % | |||||||
| Shenzhen Jiu Zhou Shi Dai Digital and Technology Co., Ltd. | % | |||||||
| Shanghai PICO AI Technology Co., Ltd. | % | |||||||
| Luokung Zhitong Technology Co., Ltd. | % | |||||||
| Beijing Yuanli Anda Technology Co., Ltd. | % | |||||||
| BOTBRAIN AI LIMITED | % | |||||||
| BOTBRAIN LIMITED | % | |||||||
| Beijing BotBrain AI Information Technology Ltd. | % | |||||||
| Yunnan eMapgo Technologies Co., Ltd. | % | |||||||
| Beijing Luokung Zhishang Cateing Management Co., Ltd. | % | |||||||
| Pinkong Partner Ltd. | % | |||||||
| PICO AI Ltd. | % | |||||||
| PICO AI HongKong Limited | % | |||||||
| PicoAI US Inc. | % | |||||||
| Name | Date of incorporation | Place of incorporation | Percentage of legal ownership | |||||
| VIEs: | ||||||||
| Beijing Zhong Chuan Shi Xun Technology Co., Ltd. (“Zhong Chuan Shi Xun”) | % | |||||||
| Beijing BotBrain AI Technology Co., Ltd. (“Beijing BotBrain”) | % | |||||||
| eMapgo Technologies (Beijing) Co., Ltd. (1) (“EMG”) | % | |||||||
| (1) |
F-18
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
Going concern
The consolidated financial statements of the Company have been prepared
assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company incurred losses for the past three years and as of December 31, 2023, net current liabilities
of the Company amounted to $
As of the reporting date, subsidiaries like Zhong Chuan Shi Xun and Beijing Luokung have completed a new round of layoffs, and eMapgo will also complete a new round of layoffs this month.
Principles of consolidation
The consolidated financial statements include the financial statements of LKCO, its subsidiaries, including the wholly-foreign owned enterprises (“WFOEs”), entities the Company controls by contracts and VIEs for which the Company is the primary beneficiary. WFOEs are entities incorporated under the laws of the PRC and are wholly owned by foreign (non-PRC) investor(s). All transactions and balances among the Company, its subsidiaries, entities controlled by contracts and consolidated VIEs have been eliminated upon consolidation. The results of subsidiaries, entities controlled by contracts and consolidated VIEs acquired or disposed of are recorded in the consolidated statements of operations from the effective date of acquisition or control or up to the effective date of disposal, as appropriate.
A subsidiary is an entity in which (i) the Company directly or indirectly controls more than 50% of the voting power; or (ii) the Company has the power to appoint or remove the majority of the members of the board of directors or to cast a majority of votes at the meeting of the board of directors or to govern the financial and operating policies of the entity pursuant to a statute or under an agreement among the shareholders or equity holders. An entity controlled by contracts is required to be consolidated by the primary beneficiary of the entity if the equity holders in the entity do not have controlling financial interest in the entity. A VIE is required to be consolidated by the primary beneficiary of the entity if the equity holders in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
To comply with the PRC legal restrictions on foreign ownership, the Company operates such restricted services in the PRC through certain PRC domestic companies, whose nominal equity interests are held by certain management members or founders of the Company or certain other third parties. Part of the registered capital of these PRC domestic companies was funded by certain management members, or founders of the Company or certain other third parties. The Company has entered into certain exclusive business services agreements with these PRC domestic companies, which entitle it to receive a majority of their residual returns and make it obligatory for the Company to absorb a majority of the risk of losses from their activities. In addition, the Company has entered into certain agreements with those management members, founders, or certain other third parties, including equity interest pledge agreements of the nominal equity interests held by those management members, founders or certain other third parties in these PRC domestic companies, and exclusive option agreements to acquire such nominal equity interests in these PRC domestic companies when permitted by the PRC laws, rules and regulations.
F-19
Details of the typical VIE structure of the Company’s significant consolidated VIEs, namely Zhong Chuan Shi Xun, Beijing BotBrain and EMG are set forth below:
| (i) | Contracts that give the Company effective control of VIEs |
Exclusive option agreements
Each VIE equity holder has granted the WFOEs exclusive
call options to purchase the nominal equity interest in the VIEs at an exercise price equal to (i) with regard to Zhong Chuan Shi Xun,
the minimum price as permitted by applicable PRC laws, or (ii) with regard to Beijing BotBrain, RMB10 in aggregate, or if appraisal is
required as requested by relevant PRC laws, the price as determined by the relevant parties, or (iii) with regard to EMG, RMB 1 in aggregate
or other price as determined by the relevant parties, provided that if required by relevant PRC laws, the minimum price as permitted by
PRC laws shall apply. The WFOEs may designate another entity or individual to purchase the nominal equity interests, if applicable, under
the call options. Each call option is exercisable subject to the condition that applicable PRC laws, rules and regulations do not prohibit
completion of the transfer of the nominal equity interests pursuant to the call option. The VIEs shall not declare any dividend or other
distribution to its equity holders unless with the approval of the WFOEs. With regard to Zhong Chuan Shi Xun and Beijing BotBrain, the
exclusive call option agreements remain in effect for ten (
Equity pledge agreements
As for Zhong Chuan Shi Xun and Beijing BotBrain, pursuant to the relevant equity pledge agreements, the relevant VIE equity holders have pledged all of their interests in the equity of the VIEs as a continuing security interest in favor of the corresponding WFOEs to secure the performance of obligations by the VIEs and/or the equity holders under the exclusive business cooperation agreements. Each WFOE is entitled to exercise its right to dispose of the VIE equity holders’ pledged interests in the equity of the VIE in accordance with applicable PRC laws in the event of any breach or default, and VIE equity holders shall cease to be entitled to any rights or interests associated with their nominal equity interests in the VIEs. These equity pledge agreements remain in force until and unless the obligations of the VIE equity holders to the WFOEs under the exclusive business cooperation agreements have been fulfilled.
As for EMG, pursuant to the relevant equity pledge agreement, the relevant VIE equity holder has pledged all of its nominal equity interest in the VIE as a continuing first priority security interest in favor of the corresponding WFOE to secure the performance of obligations by the VIE as set forth in the relevant exclusive option agreement, proxy agreement, the equity pledge agreement and the VIE’s obligation to repay the secured indebtedness. The VIE equity holder shall not be entitled to receive any dividend associated with its nominal equity interest without the approval of the WFOE, and the dividend received by the VIE equity holder shall be deposited in the account designated by the WFOE and subject to the supervision of the WFOE. In the event of any breach or default, the WFOE shall be entitled to all rights to relief, including but not limited to disposing the nominal equity interest held by the VIE equity holder. The equity pledge agreement shall remain in force until and unless the obligations of the VIE equity holder to the WFOE under the exclusive option agreement, proxy agreement, the equity pledge agreement have been fulfilled or all the secured indebtedness has been paid off.
Power of Attorney.
As for Zhong Chuan Shi Xun and Beijing BotBrain, pursuant to the relevant power of attorney, each of the relevant VIE equity holders irrevocably appoints the corresponding WFOE as its attorney-in-fact to exercise on its behalf any and all rights that such equity holder has in respect of its nominal equity interests in the relevant VIE conferred by relevant laws and regulations and the articles of associate of such VIE. The power of attorney shall remain effective as long as such VIE equity holder remains as a shareholder of Zhong Chuan Shi Xun or Beijing BotBrain.
As for EMG, pursuant to the relevant
power of attorney, the relevant VIE equity holder irrevocably appoints certain the person designated by the corresponding WFOE as its
attorney-in-fact to exercise on its behalf any and all rights that such equity holder has in respect of its nominal equity interest in
the relevant VIE conferred by relevant laws and regulations and the articles of associate of such VIE. The power of attorney of EMG shall
remain effective until March 11, 2044, and will be renewed automatically for another ten (
F-20
| (ii) | Contracts that enable the Company to receive the economic benefits from the VIEs |
Exclusive business cooperation agreements
As for Zhong Chuan Shi Xun, Beijing BotBrain and
EMG, each relevant VIE has entered into an exclusive business services agreement with the corresponding WFOE, pursuant to which the relevant
WFOE provides exclusive business services to the VIE. In exchange, (i) Zhong Chuan Shi Xun pays a service fee to the corresponding WFOE
which shall be no less than
Based on these contractual agreements, the Company believes that the PRC domestic companies as described above should be considered as VIEs because the equity holders do not have significant equity at risk nor do they have the characteristics of a controlling financial interest. Given that the Company is the primary beneficiary of these PRC domestic companies, the Company believes that these VIEs should be consolidated based on the structure as described above.
Under the contractual arrangements with the consolidated VIEs, the Company has the power to direct activities of the consolidated VIEs. Therefore, the Company considers that there is no asset in any of the consolidated VIEs that can be used only to settle obligations of the consolidated VIEs, except for registered capital and PRC statutory reserves. As all consolidated VIEs are incorporated as limited liability companies under the Company Law of the PRC, creditors of the consolidated VIEs do not have recourse to the general credit of the Company for the liabilities of the consolidated VIEs.
Currently there is no contractual arrangement
which requires the Company to provide additional financial support to the consolidated VIEs. However, as the Company conducts its businesses
primarily based on the licenses and approvals held by its consolidated VIEs, the Company has provided and will continue to provide financial
support to the consolidated VIEs considering the business requirements of the consolidated VIEs, as well as the Company’s own business
objectives in the future. On March 29, 2022, the Company entered a SPA with the shareholders of iTraffic and its operating affiliate Hongda
Jiutong, per the SPA, the Company will purchase
Use of estimates
The preparation of consolidated financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates are the allowance for expected credit losses, the useful lives of property and equipment and intangible assets, valuation allowance for deferred tax assets, and impairment of long-lived assets and goodwill and the fair value of assets acquired and liabilities assumed in business combinations. Actual results could differ from those estimates.
Restricted cash
Restricted cash represents the Company is currently involved in litigations,
which has resulted in the freezing of its bank accounts. At December 31, 2023 and 2022, restricted cash amounted to $
Fair value measurements
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
F-21
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements”, provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Cash and cash equivalents
Cash primarily consists of cash on hand and deposits in bank accounts. As of December 31, 2023 and 2022, the Company had no cash equivalents, such as money market funds, investments in interest-bearing demand deposit accounts, time deposits, or highly liquid investments with original maturities of three months or less from the date of purchase.
Accounts receivable, net of allowance for expected credit losses
Accounts receivable are recognized and carried at the original invoiced amount less an allowance for expected credit losses.
Allowance for expected credit losses
Effective January 1, 2020, the Company adopted Accounting Standards Update 2016-13 “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”. The Company estimates its allowance for current expected credit losses based on an expected loss model, compared to prior periods which were estimated using an incurred loss model which did not require the consideration of forward-looking economic variables and conditions in the reserve calculation across the portfolio. The impact related to adopting the new standard was not material. Certain changes resulting from the new standard impacted the Company’s description of its significant accounting policies compared to 2020.
The Company estimates its allowances for expected credit losses for accounts and other receivables by considering past events, including any historical default, current economic conditions and certain forward-looking information, including reasonable and supportable forecasts. As of January 1, 2020, the methodologies that the Company uses to estimate the allowance for expected credit losses for accounts and other receivables are as follows:
Individually evaluated—The Company reviews all accounts and other receivables considered at risk semi-annually and performs an analysis based upon current information available about the customers and other debtors, such as financial statements, news reports, published credit ratings as well as collateral net of repossession cost, prior collection history and current and future expected economic conditions. Using this information, the Company determines the expected cash flow for the accounts and other receivables and calculates an estimate of the potential loss and the probability of loss. For those accounts for which the loss is probable, the Company records a specific allowance.
Collectively evaluated—The Company determines its allowances for credit losses for collectively evaluated accounts and other receivables based on appropriate groupings.
F-22
The Company considers forward-looking macroeconomic variables such as gross domestic product, unemployment rates, equity prices and corporate profits when quantifying the impact of economic forecasts on its allowance for expected credit losses. Macroeconomic variables may vary based on historical experiences, portfolio composition and current environment. The Company also considers the impact of current conditions and economic forecasts relating to specific industries and client-credit ratings, in addition to performing a qualitative review of credit risk factors across the portfolio. Under this approach, forecasts of these variables over two years are considered reasonable and supportable. Beyond two years, the Company reverts to long-term average loss experience. Forward-looking estimates require the use of judgment, particularly in times of economic uncertainty. The Company writes off receivables when all efforts at collection have been exhausted and the receivable is considered uncollectible.
Property and equipment, net
Property and equipment are carried at cost less
accumulated depreciation.
| Wi-Fi equipment | – |
||
| Office and other equipment | – |
||
| Vehicles | – |
Costs of repairs and maintenance are expensed as incurred and asset improvements are capitalized. The gain or loss on disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statement of operations and comprehensive loss. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.
Other assets
Other assets include art pieces, which are recorded at cost, including the purchase price and any directly attributable costs necessary to bring the asset to its intended location and condition for use. These items are considered long-term assets as they are not held for sale in the ordinary course of business. The Company does not depreciate art pieces, as they are considered to have an indefinite useful life. Periodically, the Company reviews the carrying value of these assets to determine if any indicators of impairment exist. If indicators of impairment are present, the Company estimates the recoverable amount of the asset. An impairment loss is recognized in the statement of operations if the carrying amount of the art piece exceeds its recoverable amount.
Intangible assets
Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives.
| Copyright | – |
| Trademarks | – |
| Patents | – |
| Customer Relationship | – |
| Technology | – |
| Software | – |
Goodwill
The Company assesses goodwill for impairment in accordance with FASB ASC subtopic 350-20, “Intangibles—Goodwill and Other: Goodwill (“ASC 350-20”),” which requires that goodwill to be tested for impairment at the reporting unit level at least annually and more frequently upon the occurrence of certain events, as defined by ASC 350-20.
The Company has the option to assess qualitative factors first to determine whether it is necessary to perform the impairment test in accordance with ASC 350-20. If the Company believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, the quantitative impairment test described below is required. Otherwise, no further testing is required. In the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. In performing the quantitative impairment test, the Company compares the carrying amount of the reporting unit to the fair value of the reporting unit based on either quoted market prices of the ordinary shares or estimated fair value using a combination of the income approach and the market approach. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then the excess is recognized as an impairment loss.
In 2023 and 2022, the Company performed a qualitative
assessment for goodwill and evaluated all relevant factors, including but not limited to macroeconomic conditions, industry and market
conditions, and financial performance. The Company concluded that it is necessary to perform a quantitative assessment. The Company completed
the quantitative goodwill impairment assessment based on the discounted future cash flows that the reporting units are expected to generate
and determined after evaluating the results, events and circumstances, that the carrying values of the reporting units exceeded their
fair values. Therefore, the Company recorded impairment on goodwill of $
F-23
Impairment or disposal of long-lived assets
Long-lived assets other than goodwill are included in impairment evaluations when events and circumstances exist that indicate the carrying value of these assets may not be recoverable. In accordance with FASB ASC 360, “Property, Plant and Equipment,” the Company assesses the recoverability of the carrying value of long-lived assets by first grouping its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the asset group) and, secondly, estimating the undiscounted future cash flows that are directly associated with and expected to arise from the use of and eventual disposition of such asset group. If the carrying value of the asset group exceeds the estimated undiscounted cash flows, the Company recognizes an impairment loss to the extent the carrying value of the long-lived asset exceeds its fair value. The Company determines fair value through quoted market prices in active markets or, if quotations of market prices are unavailable, through the performance of internal analysis using a discounted cash flow methodology or by obtaining external appraisals from independent valuation firms. The undiscounted and discounted cash flow analyses are based on a number of estimates and assumptions, including the expected period over which the asset will be utilized, projected future operating results of the asset group, discount rate and long-term growth rate.
As of December 31, 2023 and 2022, the Company assessed the impairment of its long-lived assets and identified impairment indications. For intangible assets, the impairment loss was , $ and $ for the years ended 2023, 2022 and 2021, respectively.
Business combination
The Company accounts for business combinations using the acquisition method of accounting in accordance with FASB ASC Topic 805, “Business Combinations”. Acquisition method accounting requires that the consideration transferred be allocated to the assets, including separately identifiable assets, and liabilities the Company acquired, based on their estimated fair values. The consideration transferred in an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total cost of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.
Revenue recognition
The Company recognizes revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers”
Internet LBS and related smart industry advertising
Advertising services LBS Business
Zhong Chuan Rui You and Beijing Wave Function Culture Development Co., Ltd (“Wave Function”) derive revenue from the provision of user acquisition services to their advertisers on the strength of the LBS services they offer; customers pay them based on performance, as measured by CPI (Cost Per Install), CPM (Cost Per Mile), and CPC (Cost Per Click). They recognize revenue over time because customers receive and consume the benefit of their advertising services throughout the contract period. There was no such revenue generated in 2023 due to Zhong Chuan Rui You suspended its business and Wave Function was deconsolidated as a result of termination of persons acting in concert agreement which was entered into by Zhong Chuan Rui You and certain shareholder as of January 5, 2023.
Software and services
Superengine Graphics Software Technology Development (Suzhou) Co., Ltd (“Superengine”) generates revenues primarily in the form of sale of a software license and provision of technology services. License fees include perpetual license fees, term license fees and royalties. Technology services primarily consist of fees for providing technology support services and technology solution services that enable customers to gain real-time operational intelligence by harnessing the value of their data.
Revenue for the sale of software licenses is recognized at the point in time when the right to use the software is provided to its customers. Term license fees and royalties are recognized over time throughout the contract period.
F-24
Technology support service revenue is recognized over time as the services are performed because the customer receives and consumes the benefit of its performance throughout the contract period. Technology solution service revenue is recognized at the point in time when the service is completed. SuperEngine bills for the services it has performed in accordance with the terms of the contract. It recognizes the revenues associated with these professional services as it delivers the services to the customers. There was no such revenue generated as Superengine was liquidated in 2023.
Smart transportation
Map data licensing
EMG provides perpetual map data licenses to customers and collects one time license fees from customers. Revenue is recognized at the point in time when customers obtain the right to use the map data.
Autonomous driving simulation & verification test
EMG provides data collection and desensitization for compliance with legal requirements to system manufacturers and automobile manufacturers for autonomous driving simulation and verification testing. Revenues are derived from the provision of data collection and desensitization service for compliance with legal requirements. Revenues are recognized over time as the services are performed because the customer receives and consumes the benefit of its performance throughout the contract period.
Map service platform local deployment
Through local deployment, EMG provides a one-time map service platform license or a map service platform license for a certain period with timely updates to the map service platform during such contract to certain public sectors and enterprises to support their location-based application. The map service platform includes map data and software that support certain map applications such as display, search, routing and others. Revenues from a map data license for a certain period are recognized ratably over time because the customer receives and consumes the benefit of the map services throughout the contract period.
The Company does not offer credits or refunds and therefore has not recorded any sales return allowance for any of the periods presented. Upon a periodic review of outstanding accounts receivable, amounts that are deemed to be uncollectible are written off against the allowance for doubtful accounts. The Company’s policy is to record revenues net of any applicable sales, use or excise taxes.
Contract liabilities represent prepayments from customers and are recognized as revenue when the services are rendered.
| Revenue recognised in 2022 | $ | ( | ) | |
| Increase in contract liabilities | ||||
| Exchange difference | ( | ) | ||
| December 31, 2022 | ||||
| Revenue recognised in 2023 | ( | ) | ||
| Increase in contract liabilities | ||||
| Write off | ( | ) | ||
| Exchange difference | ( | ) | ||
| December 31, 2023 | $ |
F-25
Disaggregation of revenue
| Fiscal Year Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| (dollars in thousands) | ||||||||||||
| Revenues | ||||||||||||
| Advertising | $ | $ | $ | |||||||||
| Software and services | ||||||||||||
| Smart transportation | ||||||||||||
| Others | ||||||||||||
| Total revenues | $ | $ | $ | |||||||||
| Advertising | % | % | ||||||||||
| Software and services | % | % | ||||||||||
| Smart transportation | % | % | % | |||||||||
| Smart transportation | % | |||||||||||
| Others | ||||||||||||
| Total | % | % | % | |||||||||
Foreign currency translation
The functional and reporting currency of the Company and the Company’s subsidiaries domiciled in BVI and Hong Kong is the United States dollar (“U.S. dollar”). The financial records of the Company’s other subsidiaries and VIEs located in the PRC are maintained in their local currency, the Chinese Renminbi (“RMB”), which is the functional currency of these entities.
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into the functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the statements of operations.
The Company’s entities with a functional currency of RMB translate their operating results and financial position into the U.S. dollar, the Company’s reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Revenues, expenses, gains and losses are translated using the average rate for the year. Retained earnings and equity are translated using the historical rate. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income.
Earnings per share
ASC Topic 260 “Earnings per Share,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares or resulted in the issuance of ordinary shares that then shared in the earnings of the entity.
F-26
Basic net loss per share is computed by dividing
net loss available to ordinary shareholders by the weighted average number of shares of ordinary shares outstanding during the period.
Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of ordinary shares, ordinary shares
equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive ordinary shares consist of the ordinary
shares issuable upon the exercise of ordinary shares warrants (using the treasury stock method). Ordinary shares equivalents are not included
in the calculation of diluted earnings per share if their effect would be anti-dilutive. In a period in which the Company has a net
loss, all potentially dilutive securities are excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive
impact. and
| Year Ended December 31, | ||||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Net loss available to owners of the Company for basic and diluted net loss per share of ordinary shares | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Weighted average ordinary stock outstanding - basic and diluted | ||||||||||||
| Net loss per ordinary share attributable to owners of the Company - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Income taxes
Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years to these items. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws and regulations applicable to the Company as enacted by the relevant tax authorities.
The impact of an uncertain income tax position
on the income tax return must be recognized at the largest amount that is more-likely-than not to be sustained upon audit by the relevant
tax authorities. An uncertain income tax position will not be recognized if it has less than a
Contingencies
The Company records accruals for certain of its outstanding legal proceedings or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. The Company evaluates the developments in legal proceedings or claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable.
Segment reporting
Operating segments are reported in a manner consistent
with the internal reporting provided to our chief operating decision maker, who is our Chief Executive Officer (“CEO”), who
reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance
and allocating resources. The Company had
F-27
Related parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all significant related party transactions.
Leases
According to FASB ASC 842 “Leases”,
lessees are required to record a right of use asset and lease liabilities for all leases other than those that have a lease term of
When the Company is the lessor, minimum contractual rental from leases is recognized on a straight-line basis over the non-cancelable term of the lease. With respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue commences when the customer assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements. If later, the billing amount exceeds the straight-line rental revenue, the variance will be credited to accrued straight-line rents receivable. Contingent rental revenue is accrued when the contingency is removed.
Advertising costs
Advertising costs include expenses associated
with direct marketing. All advertising costs are expensed as incurred and included in selling and marketing expenses. During the years
ended December 31, 2023, 2022 and 2021, advertising costs amounted to $, $
Comprehensive loss
Comprehensive loss includes net loss and foreign currency translation adjustments and is presented net of tax. The tax effect is for the three years ended December 31, 2023, 2022 and 2021 in the consolidated statements of comprehensive loss.
Concentration of credit risk
Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash, accounts receivable and other receivables. While the
cash maintained in banks in China is uninsured, these financial institutions all have high credit and quality ratings in China. For
the year ended December 31, 2023, one customer accounted for
| Year Ended December 31, | ||||||||||||
| Customer | 2023 | 2022 | 2021 | |||||||||
| A | % | |||||||||||
| B | % | |||||||||||
| C | % | |||||||||||
| D | % | |||||||||||
| E | % | |||||||||||
| F | % | |||||||||||
F-28
The following customers had balances of at least
| December 31, | ||||||||
| Customer | 2023 | 2022 | ||||||
| A | % | |||||||
| G | % | |||||||
| H | % | |||||||
| I | % | |||||||
Recent accounting pronouncements
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements. The amendments in this update modify the disclosure or presentation requirements of a variety of topics in the codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. The adoption of the amendment will occur on a prospective basis. The amendments in this ASU will be effective for public business entities on the effective date of the SEC’s removal of the related disclosures from Regulation S-X or Regulation S-K. If the SEC has not removed the applicable requirements from Regulation S-X or Regulation S-K by June 30, 2027, the amendments will not become effective for any entity. The Company is currently evaluating the impacts of the provisions of ASU 2023-06.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. The new guidance requires enhanced disclosures about significant segment expenses. ASU 2023-07 will be effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on our segment disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures. ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. The guidance is effective for public business entities for annual periods beginning after December 15, 2024, and for private entities for annual periods beginning after December 15, 2025, on a prospective basis. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
NOTE 3 – BUSINESS COMBINATIONS
Business combinations in 2021 :
On March 17, 2021, the Company completed the acquisition
of its
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| March 17, 2021 | ||||
| Purchase consideration | ||||
| Cash consideration | $ | |||
| Share based payment | ||||
| Net assets acquired, | ||||
| Cash | ||||
| Prepayment, deposit and other receivables (current) | ||||
| Accounts receivable | ||||
| Bills receivable | ||||
| Amount due from related parties | ||||
| Property, plant and equipment | ||||
| Intangible assets | ||||
| Accounts payable | ( | ) | ||
| Contract liabilities | ( | ) | ||
| Other payable | ( | ) | ||
| Amount due to related parties | ( | ) | ||
| Short term loan | ( | ) | ||
| Tax payable | ( | ) | ||
| Long-term payable | ( | ) | ||
| Deferred tax liability arising from IA (tax rate | ( | ) | ||
| Exchange reserve | ( | ) | ||
| Goodwill | ||||
Goodwill, which is non-deductible for tax purposes, is primarily attributable to the synergies expected to be achieved from the acquisition. Refer to Note 9 for details.
NOTE 4 – INCOME TAX
At December 31, 2023, the Company had unused net
operating loss carryforwards of approximately $
Valuation allowances provided against the deferred
tax assets are mainly related to the net operating loss carry forwards, as the Company’s management believes that only a portion
of the deferred tax benefit is more likely than not to be realized based on the Company’s forecasts of future taxable income. The
amount of the valuation allowance as of December 31, 2023 and 2022 was $
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Deferred tax liabilities arising from acquisitions of subsidiaries | $ | ( | ) | $ | ( | ) | ||
| Deferred tax asset | ||||||||
| Net operating loss carryforward | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax asset | ||||||||
| Net deferred tax (liabilities) / assets | ( | ) | ||||||
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| December 31, 2023 | December 31, 2022 | |||||||
| At the beginning of the year | $ | $ | ||||||
| (Disposal)/acquisition of subsidiary | ( | ) | ||||||
| Current year addition | ||||||||
| Expired | ( | ) | ( | ) | ||||
| Exchange difference | ( | ) | ( | ) | ||||
| Over provided in last year | ||||||||
| Disposed/(recognised) during the year | ( | ) | ||||||
| At the end of the year | ||||||||
The Company is not subject to taxation in BVI
under the current BVI law. Subsidiaries operating in the PRC are subject to PRC Enterprise Income Tax at the statutory rate of
| December 31, | December 31, | December 31, | ||||||||||
| 2023 | 2022 | 2021 | ||||||||||
| Loss before income taxes | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Tax loss at the PRC statutory tax rate of | ||||||||||||
| Taxable items | ( | ) | ||||||||||
| Deductible items | ||||||||||||
| Non-deductible items | ( | ) | ( | ) | ||||||||
| Non-taxable items | ||||||||||||
| Change in valuation allowance | ( | ) | ( | ) | ( | ) | ||||||
| Effect of different tax rates in other jurisdictions | ( | ) | ( | ) | ( | ) | ||||||
| Effect of | ( | ) | ( | ) | ||||||||
| Income tax benefit | ( | ) | ||||||||||
NOTE 5 – ACCOUNTS RECEIVABLE
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for expected credit losses | ( | ) | ( | ) | ||||
| $ | $ | |||||||
During the years ended December 31, 2023, 2022
and 2021, allowance for expected credit losses (recovery) amounted to $
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NOTE 6 – OTHER RECEIVABLES AND PREPAYMENT
| December 31, 2023 | December 31, 2022 | |||||||
| Current | ||||||||
| Advances to suppliers | $ | $ | ||||||
| VAT recoverable (1) | ||||||||
| Advances to business partners(2) | ||||||||
| Others(3) | ||||||||
| Other receivable from investors | ||||||||
| Less: allowance for expected credit losses | ||||||||
| Advances to suppliers | ( | ) | ( | ) | ||||
| Advances to business partners | ( | ) | ( | ) | ||||
| Others(3) | ( | ) | ( | ) | ||||
| Other receivable from investors | ( | ) | ( | ) | ||||
| $ | ( | ) | ( | ) | ||||
| Non-current | ||||||||
| Loans to employees | ||||||||
| Deposit for equity investment (4) | ||||||||
| Loan to minority shareholders (5) | ||||||||
| Other | ||||||||
| Less: allowance for expected credit losses | ||||||||
| Loans to employees | ( | ) | ||||||
| Deposit for equity investment (4) | ( | ) | ||||||
| Loan to minority shareholders (5) | ( | ) | ( | ) | ||||
| $ | ||||||||
| (1) | |
| (2) | |
| (3) | |
| (4) | |
| (5) |
During the years ended December 31, 2023, 2022
and 2021, allowance for expected credit losses/(recovery) amounted to $$
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NOTE 7 – PROPERTY AND EQUIPMENT
| December 31, | December 31, | |||||||||
| Useful life | 2023 | 2022 | ||||||||
| Wi-Fi equipment | $ | $ | ||||||||
| Vehicles | ||||||||||
| Office and other equipment | ||||||||||
| Less: accumulated depreciation and impairment | ( | ) | ( | ) | ||||||
| $ | $ | |||||||||
For the years ended December 31, 2023, 2022 and
2021, depreciation expense amounted to $
The Company recognized an impairment loss on property
and equipment of $
NOTE 8– OTHER ASSET
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Art pieces | $ | $ | ||||||
| Less: impairment | ( | ) | ||||||
| $ | $ | |||||||
The Company determined that an impairment charge was necessary to impair off the value of all art pieces held by the company. This decision was based on a comprehensive evaluation of market conditions, the liquidity of the art assets, and the alignment of these holdings with the company's goals. After considering various factors, including the current market value of these assets, future projections, and the Company's operational focus, it was concluded that retaining these art pieces no longer provided financial value. As a result, an impairment was recognized to reflect the fair value of the assets as of the reporting date.
NOTE 9 – INVESTMENT
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Investment in associate | $ | $ | ||||||
| Hainan Free Flow Transportation Technology Co., Ltd. | ||||||||
| Nanjing Antong Air Emergency Data Co., Ltd. | ||||||||
| Nanjing Weida Electronic Technology Co., Ltd. | ||||||||
| Beijing Wave Function | ||||||||
| Yunnan Wave Function | ||||||||
| Da Tong | ||||||||
| Less: impairment | ||||||||
| Nanjing Antong Air Emergency Data Co., Ltd. | ( | ) | ||||||
| Nanjing Weida Electronic Technology Co., Ltd. | ( | ) | ||||||
| Beijing Wave Function | ( | ) | ||||||
| Yunnan Wave Function | ( | ) | ||||||
| Da Tong | ( | ) | ||||||
| ( | ) | |||||||
| $ | $ | |||||||
In accordance with ASC Topic 323, the Company
elected to measure such investments under the equity method, the Company records its proportionate share of the net income or loss of
the associate in the consolidated statements of income (loss) and adjusts the carrying value of the investment on the balance sheet accordingly.
Dividends received from the associate reduce the carrying amount of the investment. The Company evaluates its investment in associate
for impairment when events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. If
a decline in value is determined to be other-than-temporary, the investment is written down to its fair value, and an impairment loss
is recognized in the consolidated statement of income (loss). The Company determined that the impairment was $
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NOTE 10 – INTANGIBLE ASSETS, NET
| As of December 31, 2023 | ||||||||||||
| Gross carrying value | Accumulated amortization and impairment | Net carrying value | ||||||||||
| Software | $ | $ | ( | ) | $ | |||||||
| Copyright | ( | ) | ||||||||||
| Trademarks | ( | ) | ||||||||||
| Customer relationship | ( | ) | ||||||||||
| Technology | ( | ) | ||||||||||
| Patents | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
| As of December 31, 2022 | ||||||||||||
| Gross carrying value | Accumulated amortization and impairment | Net carrying value | ||||||||||
| Software | $ | $ | ( | ) | $ | |||||||
| Copyright | ( | ) | ||||||||||
| Trademarks | ( | ) | ||||||||||
| Customer relationship | ( | ) | ||||||||||
| Technology | ( | ) | ||||||||||
| Patents | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
Amortization expense of intangible assets was
$
| Year ending December 31, | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ | ||||
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NOTE 11 – GOODWILL
In September of 2014, Zhong Chuan Shi Xun acquired
a
In August of 2018, LK Technology acquired a
On December 4, 2020, the Company acquired a
On March 17, 2021, the Company completed the acquisition
of its
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Gross carrying value of goodwill | ||||||||
| Zhong Chuan Rui You | $ | $ | ||||||
| Superengine | ||||||||
| BotBrain | ||||||||
| Saleya | ||||||||
| PICO | ||||||||
| Less: impairment | ||||||||
| Zhong Chuan Rui You | ( | ) | ( | ) | ||||
| Superengine | ( | ) | ||||||
| BotBrain | ( | ) | ( | ) | ||||
| Saleya | ( | ) | ||||||
| Net carrying value of goodwill | ||||||||
| Zhong Chuan Rui You | ||||||||
| Superengine | ||||||||
| BotBrain | ||||||||
| Saleya | ||||||||
| PICO | ||||||||
| $ | $ | |||||||
Our assessment of goodwill for impairment includes various inputs, including forecasted revenue, forecasted operating profits, terminal growth rates, and weighted-average costs of capital. The projected cash flows used in calculating the fair value of our reporting units, using the income approach, considered historical and estimated future results and general economic and market conditions, as well as the impact of planned business and operational strategies.
In assessing potential impairment of the
goodwill attributed to Zhong Chuan Rui You, we noted starting from 2024, the profit margin contribution of traditional internet advertising
business to the Company has becoming lower, a significant amount of cash investment is also required to improve the gross profit margin,
the management of the Company determined to abandon Zhong Chuan Rui You’s business. As a result of these indicators, we estimated
the fair value of the reporting units using an income approach based on projected discounted cash flows. Based principally on lower forecasted
revenue and operating profits caused by lower demand for our products, we recorded a $
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In assessing potential impairment of the goodwill
attributed to Saleya, we noted the market share and profitability of Saleya has been eroding and consistently underperformed financially.
As a result of these indicators, we estimated the fair value of the reporting units using an income approach based on projected discounted
cash flows. Based principally on lower forecasted revenue and operating profits caused by lower demand for our products, we recorded a
$
In assessing potential impairment of the goodwill
attributed to BotBrain, we noted the demand for corporate training was significantly reduced, market competition, particularly due to
the larger players offering lower prices, severely eroded Botbrain’s market share, and the increased investment of the larger players
as indicators of an impairment. As a result of these indicators, we estimated the fair value of the reporting units using an income approach
based on projected discounted cash flows. Based principally on lower forecasted revenue and operating profits caused by lower demand for
our products, we recorded a $
NOTE 12 – ACCRUED LIABILITIES AND OTHER PAYABLES
| December 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Current | ||||||||
| Accrued payroll | $ | $ | ||||||
| VAT payable | ||||||||
| Individual tax payable | ||||||||
| Other loans (1) | ||||||||
| Advertising payable (2) | ||||||||
| Other payable | ||||||||
| $ | $ | |||||||
| (1) | Other loans primarily consist of a loan from
Geely Technology which bears interest at
Pursuant to the Share Subscription Agreement,
Geely had the right to require the Company to repurchase all or part of the Preferred Shares in cash at a repurchase price upon the following
events: (i) six (6) months after the closing date; (ii) the proposed acquisition of eMapgo Technologies (Beijing) Co., Ltd. was terminated;
(iii) the Company breached the Share Subscription Agreement; or (iv) within six (6) months from the closing date provided that the Company
had sufficient funds after completing the Proposed Acquisition. The repurchase price per each Preferred Share was the higher of (i) $
Pursuant to the Share Subscription Agreement,
in addition to the Preferred Shares, the Company issued to Geely a warrant to purchase
Since the preferred stock may be redeemed at the option of the holder,
the redeemable preferred stock has been classified as mezzanine equity and recognized at the amount of the proceeds on the date of issuance
less the fair value of the loan portion of $ |
| (2) |
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NOTE 13 – AMOUNTS DUE TO RELATED PARTIES
| December 31, | December 31, | |||||||
| Name of related party | 2023 | 2022 | ||||||
| Mr. Song (1) | $ | $ | ||||||
| (1) |
Amounts due to related parties are non-interest
bearing, unsecured and payable on demand. This includes $
NOTE 14 – OPERATING LEASE
In accordance with ASC 842, the Company measured
and recognized a right of use asset of $
The Company entered into operating lease agreements primarily for offices. Certain lease agreements contain an option for the Company to renew a lease for a term of up to five years or an option to terminate a lease early. The Company considers these options in determining the classification and measurement of the leases.
| December 31, 2023 | December 31, 2022 | |||||||
| Lease cost | ||||||||
| Operating lease cost | $ | $ | ||||||
| Short term lease | ||||||||
| Total lease cost | $ | $ | ||||||
| Other information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | ||||||||
| Weighted-average remaining lease term - operating lease | ||||||||
| Weighted-average discount rate - operating lease | % | % | ||||||
| December 31, 2023 | ||||
| Maturity of lease liabilities | ||||
| 2024 | $ | |||
| 2025 | ||||
| Total minimum lease payments | $ | |||
| Short term lease | ( | ) | ||
| Imputed interest | ( | ) | ||
| Present value of minimum lease payments | $ | |||
| Less: classified as current liabilities | ( | ) | ||
| Non-current liabilities | $ | |||
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NOTE 15 – SHARE CAPITAL
| 2023 | 2022 | |||||||||||||||
| Warrants | Weighted average exercise price $ | Warrants | Weighted average exercise price $ | |||||||||||||
| Warrants outstanding at beginning of year | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Warrants outstanding at end of year | ||||||||||||||||
| Exercisable at end of year | 975,392 | 65.52 | 975,392 | 65.52 | ||||||||||||
During the year 2022, the Company issued
On July 26, 2022, the Company entered into another
securities purchase agreement with certain institutional investors for a registered direct offering of approximately $
On March 29, 2022, the Company issued
In February, 2023, the Company issued
On March 22, 2023, the Company implemented a 30-to-1 share combination on its ordinary shares.
During April to November, 2023, the Company issued
As of December 31, 2023 and 2022, we had
As of December 31, 2023 and 2022, we had
Preferred Shares
Subject to the memorandum and articles of association (and, for greater clarity, without prejudice to any special rights conferred thereby on the holders of any other shares), a Preferred Share of our company confers on the holder:
| (a) | the right to |
| (b) | the right to an equal share in any distribution paid by our company; |
| (c) | the right to an equal share in the distribution of the surplus assets of our company on a winding up; |
| (d) | be freely transferable, in whole or in part, by Mr. Xuesong Song to any third party through one or more Private Transactions (as defined in our articles of association), subject to Applicable Law (as defined in our articles of association); and |
| (e) | be freely transferable, in whole or in part, by Mr. Xuesong Song to any third party through one or more Public Transactions, subject to Applicable Law and Automatic Conversion (as defined in our articles of association) of such Preferred Share(s) into Ordinary Share(s). |
Each Preferred Share shall be automatically converted at any time after issue and without the payment of any additional sum into an equal number of fully paid Ordinary Shares upon the conclusion of any transfer by Mr. Xuesong Song to any third party through one or more Public Transactions (as defined in our articles of association).
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Series A Preferred Shares
Subject to the memorandum and articles of association (and, for greater clarity, without prejudice to any special rights conferred thereby on the holders of any other shares), a Series A Preferred Share of the Company confers on the holder:
(a) no right to vote at a meeting of the members of our company or on any resolution of members;
(b) the right to an equal share in any distribution paid by our company;
(c) the right to an equal share in the distribution of the surplus assets of our company on our liquidation;
(d) the right, at such holder’s
sole discretion, to convert all or any portion of the holder’s Series A Preferred Shares into Ordinary Shares at any time commencing
after the date of issue of such Series A Preferred Shares. The conversion rate for the Series A Preferred Shares shall be one (1) Ordinary
Share for every one (1) Series A Preferred Share. Before any holder of Series A Preferred Shares shall be entitled to convert the same
into Ordinary Shares and to receive certificate(s) for such Ordinary Shares, he shall surrender the certificate(s) for his Series A Preferred
Shares at the office of our company and shall give written notice to our company at such office that he elects to convert the same. Our
company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Shares a certificate(s)
for the number of Ordinary Shares to which he shall be entitled.
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NOTE 16 – RETIREMENT AND WELFARE BENEFITS
The Company’s full-time employees are entitled
to staff welfare benefits including medical care, casualty, housing benefits, education benefits, unemployment insurance and pension benefits
through a PRC government-mandated multi-employer defined contribution plan. The Company is required to accrue the employer-portion for
these benefits based on certain percentages of the employees’ salaries. The total provision for such employee benefits is $
NOTE 17 – STATUTORY RESERVES
As stipulated by the relevant law and regulations
in the PRC, the Group’s subsidiaries and VIEs in the PRC are required to maintain a non-distributable statutory surplus reserve.
Appropriations to the statutory surplus reserve are required to be made at not less than
NOTE 18 – SUBSEQUENT EVENTS
On August 30, 2024, the Board of the Company
approved by certain unanimous consent, that the Company shall effect an 8-to-1 (the “RS Ratio”) share combination, effective
on September 17, 2024. Upon the effectiveness of the share combination, every 8 shares of the Company’s issued and outstanding ordinary
shares will automatically be combined into
On the same day, the Board also unanimously approved
to change the authorized shares and par value that “the Company is authorised to issue a maximum of
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