ITEM 1A. RISK FACTORS
In addition
to the information contained in our Annual Report on Form 10-K for the fiscal year ended February 29, 2020, and this Quarterly
Report on Form 10-Q, we have identified the following material risks and uncertainties which reflect our outlook and conditions
known to us as of the date of this Quarterly Report. These material risks and uncertainties should be carefully reviewed by our
stockholders and any potential investors in evaluating the Company, our business and the market value of our common stock. Furthermore,
any one of these material risks and uncertainties has the potential to cause actual results, performance, achievements or events
to be materially different from any future results, performance, achievements or events implied, suggested or expressed by any
forward-looking statements made by us or by persons acting on our behalf. Refer to “Cautionary Note Regarding Forward-looking
Statements” as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 29, 2020.
There is no
assurance that we will be successful in preventing the material adverse effects that any one or more of the following material
risks and uncertainties may cause on our business, prospects, financial condition and operating results, which may result in a
significant decrease in the market price of our common stock. Furthermore, there is no assurance that these material risks and
uncertainties represent a complete list of the material risks and uncertainties facing us. There may be additional risks and uncertainties
of a material nature that, as of the date of this Quarterly Report, we are unaware of or that we consider immaterial that may become
material in the future, any one or more of which may result in a material adverse effect on us. You could lose all or a significant
portion of your investment due to any one of these material risks and uncertainties.
Risks Related to the Business
We have a limited operating
history and, as a result, our past results may not be indicative of future operating performance.
We have a limited operating history,
which makes it difficult to forecast our future results. You should not rely on our past results of operations as indicators of
future performance. You should consider and evaluate our prospects in light of the risks and uncertainty frequently encountered
by companies like ours.
If we fail to address the risks and
difficulties that we face, including those described elsewhere in this “Risk Factors” section, our business,
financial condition and results of operations could be adversely affected. Further, because we have limited historical financial
data and operate in an evolving market, any predictions about our future revenue and expenses may not be as accurate as they would
be if we had a longer operating history or operated in a more predictable market. We have encountered in the past, and will encounter
in the future, risks and uncertainties frequently experienced by growing companies with limited operating histories in rapidly
changing industries. If our assumptions regarding these risks and uncertainties are incorrect or change, or if we do not address
these risks successfully, our results of operations could differ materially from our expectations and our business, financial condition
and results of operations could be adversely affected.
We have a history of net losses
and we may not be able to achieve or maintain profitability in the future.
For all annual periods of our operating
history we have experienced net losses. We generated a net loss of approximately $0.58 million during the three months ended May
31, 2020 and net losses of approximately $3.0 million, $2.9 million and $1.8 million for the years ended February 28, 2020, 2019
and 2018, respectively. As of May 31, 2020 and February 28, 2020, we had an accumulated deficit of approximately $8.4 million and
$7.8 million, respectively. We have not achieved profitability, and we may not realize sufficient revenue to achieve profitability
in future periods. Our expenses will likely increase in the future as we develop and launch new offerings and platform features,
expand in existing and new markets, increase our sales and marketing efforts and continue to invest in our platform. These efforts
may be more costly than we expect and may not result in increased revenue or growth in our business. If we are unable to generate
adequate revenue growth and manage our expenses, we may continue to incur significant losses in the future and may not be able
to achieve or maintain profitability.
If we fail to effectively manage
our growth, our business, financial condition and results of operations could be adversely affected.
We are currently experiencing growth
in our business. This expansion increases the complexity of our business and has placed, and will continue to place, strain on
our management, personnel, operations, systems, technical performance, financial resources and internal financial control and reporting
functions. Our ability to manage our growth effectively and to integrate new employees, technologies and acquisitions into our
existing business will require us to continue to expand our operational and financial infrastructure and to continue to retain,
attract, train, motivate and manage employees. Continued growth could strain our ability to develop and improve our operational,
financial and management controls, enhance our reporting systems and procedures, recruit, train and retain highly skilled personnel
and maintain user satisfaction. Additionally, if we do not effectively manage the growth of our business and operations, the quality
of our offerings could suffer, which could negatively affect our reputation and brand, business, financial condition and results
of operations.
The impact of the novel
coronavirus (COVID-19) pandemic on the global economy, our operations and consumer demand for consumer goods and services remains
uncertain, which could have a material adverse impact on our business, results of operations and financial condition and on the
market price of our common shares.
In December 2019, a strain of novel
coronavirus (now commonly known as COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread rapidly throughout
many countries, and, on March 11, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain
and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented
restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that
have had significant outbreaks of COVID-19. Although our operating subsidiaries and contractually controlled entity report that
its operations have not been materially affected at this point, significant uncertainty remains as to the potential impact of the
COVID-19 pandemic on our operations and on the global economy as a whole. It is currently not possible to predict how long the
pandemic will last or the time that it will take for economic activity to return to prior levels. The COVID-19 pandemic has resulted
in significant financial market volatility and uncertainty in recent weeks. A continuation or worsening of the levels of market
disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business,
results of operations and financial condition, on the market price of our common shares, and on consumer demand for consumer services,
including those offered by our Company.
We depend on our key personnel
and other highly skilled personnel, and if we fail to attract, retain, motivate or integrate our personnel, our business, financial
condition and results of operations could be adversely affected.
Our success depends in part on the
continued service of our founders, senior management team, key technical employees and other highly skilled personnel and on our
ability to identify, hire, develop, motivate, retain and integrate highly qualified personnel for all areas of our organization.
We may not be successful in attracting and retaining qualified personnel to fulfill our current or future needs. Our competitors
may be successful in recruiting and hiring members of our management team or other key employees, and it may be difficult for us
to find suitable replacements on a timely basis, on competitive terms or at all. If we are unable to attract and retain the necessary
personnel, particularly in critical areas of our business, we may not achieve our strategic goals.
Our concentration of earnings from two telecommunications
companies may have a material adverse affect on our financial condition and results of operations.
We currently derive substantially
all of our revenue from the rebates we earn from China Unicom and China Mobile as a result of our processing payments for these
telecommunications companies’ consumers for mobile date and talk time. If we were to lose the business of one or both of
these mobile telecommunications companies, if either were to fail to fulfill its obligations to us, if either were to experience
difficulty in paying rebates to us on a timely basis, if either negotiated lower pricing terms, or if either increased the number
of licensed payment portals it permits to process its payments, it could have a material adverse effect on our competitive position,
business, financial condition, results of operations and cash flows. Additionally, we cannot guarantee that the volume of revenue
we earn from China Unicom and China Mobile will remain consistent going forward. Any substantial change in our relationships with
either China Uniocom or China Mobile, or both, whether due to actions by our competitors, regulatory authorities, industry factors
or otherwise, could have a material adverse effect on our business, financial condition and results of operations.
Any actual or perceived security
or privacy breach could interrupt our operations, harm our brand and adversely affect our reputation, brand, business, financial
condition and results of operations.
Our business involves the processing
and transmission of our users’ personal and other sensitive data. Because techniques used to obtain unauthorized access to
or to sabotage information systems change frequently and may not be known until launched against us, we may be unable to anticipate
or prevent these attacks. Unauthorized parties may in the future gain access to our systems or facilities through various means,
including gaining unauthorized access into our systems or facilities or those of our service providers, partners or users on our
platform, or attempting to fraudulently induce our employees, service providers, partners, users or others into disclosing names,
passwords, payment information or other sensitive information, which may in turn be used to access our information technology systems,
or attempting to fraudulently induce our employees, partners or others into manipulating payment information, resulting in the
fraudulent transfer of funds to criminal actors. In addition, users on our platform could have vulnerabilities on their own mobile
devices that are entirely unrelated to our systems and platform, but could mistakenly attribute their own vulnerabilities to us.
Further, breaches experienced by other companies may also be leveraged against us. For example, credential stuffing attacks are
becoming increasingly common and sophisticated actors can mask their attacks, making them increasingly difficult to identify and
prevent. Certain efforts may be state-sponsored or supported by significant financial and technological resources, making them
even more difficult to detect.
Although we have developed systems
and processes that are designed to protect our users’ data, prevent data loss and prevent other security breaches, these
security measures cannot guarantee security. Our information technology and infrastructure may be vulnerable to cyberattacks or
security breaches; also, employee error, malfeasance or other errors in the storage, use or transmission of personal information
could result in an actual or perceived privacy or security breach or other security incident.
Any actual or perceived breach of
privacy or security could interrupt our operations, result in our platform being unavailable, result in loss or improper disclosure
of data, result in fraudulent transfer of funds, harm our reputation and brand, damage our relationships with third-party partners,
result in significant legal, regulatory and financial exposure and lead to loss of confidence in, or decreased use of, our platform,
any of which could adversely affect our business, financial condition and results of operations. Any breach of privacy or security
impacting any entities with which we share or disclose data (including, for example, our third-party providers) could have similar
effects.
Additionally, defending against claims
or litigation based on any security breach or incident, regardless of their merit, could be costly and divert management’s
attention. We cannot be certain that our insurance coverage will be adequate for data handling or data security liabilities actually
incurred, that insurance will continue to be available to us on commercially reasonable
terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large
claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on our reputation, brand,
business, financial condition and results of operations.
Systems failures and
resulting interruptions in the availability of our platform or offerings could adversely affect our business, financial condition
and results of operations.
Our systems, or those of third parties
upon which we rely, may experience service interruptions or degradation because of hardware and software defects or malfunctions,
distributed denial-of-service and other cyberattacks, human error, earthquakes, hurricanes, floods, fires, natural disasters, power
losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses,
ransomware, malware or other events. Our systems also may be subject to break-ins, sabotage, theft and intentional acts of vandalism,
including by our own employees. Some of our systems are not fully redundant and our disaster recovery planning may not be sufficient
for all eventualities. Our business interruption insurance may not be sufficient to cover all of our losses that may result from
interruptions in our service as a result of systems failures and similar events.
We have not experienced any system
failures or other events or conditions that have interrupted the availability or reduced or affected the speed or functionality
of our offerings. These events, were they to occur in the future, could adversely affect our business, reputation, results of operations
and financial condition.
The successful operation of
our business depends upon the performance and reliability of Internet, mobile, and other infrastructures that are not under our
control.
Our business depends on the performance
and reliability of Internet, mobile and other infrastructures that are not under our control. Disruptions in Internet infrastructure
or the failure of telecommunications network operators to provide us with the bandwidth we need to provide our services and offerings
could interfere with the speed and availability of our platform. If our platform is unavailable when platform users attempt to
access it, or if our platform does not load as quickly as platform users expect, platform users may not return to our platform
as often in the future, or at all, and may use our competitors’ products or offerings more often. In addition, we have no
control over the costs of the services provided by national telecommunications operators. If mobile Internet access fees or other
charges to Internet users increase, consumer traffic may decrease, which may in turn cause our revenue to significantly decrease.
Our business depends on the efficient
and uninterrupted operation of mobile communications systems. The occurrence of an unanticipated problem, such as a power outage,
telecommunications delay or failure, security breach or computer virus could result in delays or interruptions to our services,
offerings and platform, as well as business interruptions for us and platform users. Furthermore, foreign governments may leverage
their ability to shut down directed services, and local governments may shut down our platform at the routing level. Any of these
events could damage our reputation, significantly disrupt our operations, and subject us to liability, which could adversely affect
our business, financial condition and operating results. We have invested significant resources to develop new products to mitigate
the impact of potential interruptions to mobile communications systems, which can be used by consumers in territories where mobile
communications systems are less efficient. However, these products may ultimately be unsuccessful.
We may be subject to claims, lawsuits, government investigations
and other proceedings that may adversely affect our business, financial condition and results of operations.
We may be subject to claims, lawsuits,
arbitration proceedings, government investigations and other legal and regulatory proceedings as our business grows and as we deploy
new offerings, including proceedings related to our products or our acquisitions, securities issuances or business practices. The
results of any such claims, lawsuits, arbitration proceedings, government investigations or other legal or regulatory proceedings
cannot be predicted with certainty. Any claims against us, whether meritorious or not, could be time-consuming, result in costly
litigation, be harmful to our reputation, require significant management attention and divert significant resources. Determining
reserves for litigation is a complex and fact-intensive process that requires significant subjective judgment and speculation.
It is possible that such proceedings could result in substantial damages, settlement costs, fines and penalties that could adversely
affect our business, financial condition and results of operations. These proceedings could also result in harm to our reputation
and brand, sanctions, consent decrees, injunctions or other orders requiring a change in our business practices. Any of these consequences
could adversely affect our business, financial condition and results of operations. Furthermore, under certain circumstances, we
have contractual and other legal obligations to indemnify and to incur legal expenses on behalf of our business and commercial
partners and current and former directors and officers.
We may require additional funding
to support our business.
To grow our business, FingerMotion
currently looks to take advantage of the immense mobile phone payment market, estimated at a monthly gross transaction volume (GTV)
is estimated at US$153 billion in 2019 and is expected to increase to US$165 billion by 2024 (source: https://telecomstechnews.com/news/2019/nov/21/total-mobile-service-revenue-china-hit-165bn-end-2024-reveals-globaldata/).
For the Company to continue to grow, the deposit with the Telecoms needs to increase, as the GTV we process is dependent on the
size of the deposit we have with each Telecom. We will likely need to raise additional capital to materially increase the amounts
of these deposits. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities
may have rights, preferences or privileges senior to those of our common stock, and our existing stockholders may experience dilution.
Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and
other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business
opportunities. We cannot be certain that additional funding will be available to us on favorable terms, or at all. If we are unable
to obtain adequate funding or funding on terms satisfactory to us, when we require it, our ability to continue to support our business
growth and to respond to business challenges could be significantly limited, and our business, financial condition and results
of operations could be adversely affected.
Claims by others that we infringed
their proprietary technology or other intellectual property rights could harm our business.
Companies in the Internet and technology
industries are frequently subject to litigation based on allegations of infringement or other violations of intellectual property
rights. In addition, certain companies and rights holders seek to enforce and monetize patents or other intellectual property rights
they own, have purchased or otherwise obtained. As we gain a public profile and the number of competitors in our market increases,
the possibility of intellectual property rights claims against us grows. From time to time, third parties may assert claims of
infringement of intellectual property rights against us. Many potential litigants, including some of our competitors and patent-holding
companies, have the ability to dedicate substantial resources to assert their intellectual property rights. Any claim of infringement
by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, could distract
our management from our business and could require us to cease use of such intellectual property. Furthermore, because of the substantial
amount of discovery required in connection with intellectual property litigation, we risk compromising our confidential information
during this type of litigation. We may be required to pay substantial damages,
royalties or other fees in connection with a claimant securing a judgment against us, we may be subject to an injunction or other
restrictions that prevent us from using or distributing our intellectual property, or we may agree to a settlement that prevents
us from distributing our offerings or a portion thereof, which could adversely affect our business, financial condition and results
of operations.
With respect to any intellectual
property rights claim, we may have to seek out a license to continue operations found to be in violation of such rights, which
may not be available on favorable or commercially reasonable terms and may significantly increase our operating expenses. Some
licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. If a third
party does not offer us a license to its intellectual property on reasonable terms, or at all, we may be required to develop alternative,
non-infringing technology, which could require significant time (during which we would be unable to continue to offer our affected
offerings), effort and expense and may ultimately not be successful. Any of these events could adversely affect our business,
financial condition and results of operations.
Risks Related to Our Securities
Our stock has limited liquidity.
Our common stock trades on the OTCQB
operated by OTC Markets Group Inc. Trading volume in our shares may be sporadic and the price could experience volatility. If adverse
market conditions exist, you may have difficulty selling your shares.
The market price of our common stock
may fluctuate significantly in response to numerous factors, some of which are beyond our control, including the following:
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actual or anticipated fluctuations in our operating results;
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changes in financial estimates by securities analysts or our failure to perform in line with such estimates;
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changes in market valuations of other companies, particularly those that market services such as ours;
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announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
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introduction of product enhancements that reduce the need for our products; and
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departure of key personnel.
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We do not intend to pay dividends
for the foreseeable future.
We have never declared nor paid cash
dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our
business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, stockholders must rely on
sales of their common stock after price appreciation as the only way to realize any future gains on their investment.
If securities or industry analysts
do not publish research or publish inaccurate or unfavorable research about our business, the market price and trading volume of
our common stock could decline.
The trading market for our common
stock may depend in part on the research and reports that securities or industry analysts publish about us, our business, our market
or our competition. The analysts’ estimates are based upon their own opinions and are often different from our estimates
or expectations. If one or more of the analysts who cover us downgrade our common stock, provide a more favorable recommendation
about our competitors or publish inaccurate or unfavorable research about our business, the price of our securities would likely
decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to
publish reports on us regularly, demand for our securities could decrease, which might cause the price and trading volume of our
common stock to decline.
We are subject to federal legislation
to protect investors against corporate fraud.
Federal legislation, such as the Sarbanes-Oxley
Act of 2002 and the Dodd- Frank Act, has resulted in the adoption of various corporate governance measures designed to promote
the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal
requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the
NYSE or the Nasdaq Stock Market, on which their
securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges
are those that address board of directors’ independence, audit committee oversight and the adoption of a code of ethics.
We have not yet adopted any
of these corporate governance measures such as an audit or other independent committees of our board of directors. Additionally,
since our securities are not yet listed on a national securities exchange, we are not required to do so. If we expand our board
membership in future periods to include independent directors, we may seek to establish an audit and other committees of our board
of directors. It is possible that if we were to adopt some or all of these corporate governance measures, stockholders would benefit
from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies
had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees
comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to
our senior officers and recommendations for director nominees are made by a majority of directors who have an interest in the
outcome of the matters being decided. Prospective investors should consider our current lack of corporate governance measures
in making their investment decisions.
If we fail to maintain an effective
system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial
statements or comply with applicable regulations could be impaired.
As a public company, we are subject
to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act requires, among other
things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing
to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be
disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated
and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over
financial reporting. We have expended, and anticipate that we will continue to expend, significant resources in order to maintain
and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting.
Our current controls and any new
controls that we develop may become inadequate because of changes in the conditions in our business. Further, weaknesses in our
disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or
maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our results of
operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for
prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect
the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding
the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic
reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting
could also cause investors to lose confidence in our reported financial and other information, which would likely adversely affect
the market price of our common stock.
Our Common Shares are categorized as
“penny stock”, which may make it more difficult for investors to buy and sell our Common Shares due to suitability
requirements.
Our Common Shares are considered
“penny stock”. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity
security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. The price of our Common Shares is significantly less than $5.00 per share. This designation imposes
additional sales practice requirements on broker-dealers who sell to persons other than established customers and
“accredited investors”. The penny stock rules require a broker-dealer buying securities to disclose certain
information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is
reasonably suitable to purchase the securities given the increased risks generally inherent in penny stocks. These rules may
restrict the ability and/or willingness of brokers or dealers to buy or sell our Common Shares, either directly or on behalf
of their clients, may discourage potential stockholders from purchasing our Common Shares, or may adversely affect the
ability of stockholders to sell their shares.
Financial Industry Regulatory Authority (“FINRA”)
sales practice requirements may also limit a shareholder’s ability to buy and sell our Common Shares, which could depress
the price of our Common Shares.
In addition to the “penny stock”
rules described above, FINRA has adopted rules that require a broker-dealer to have reasonable grounds for believing that the investment
is suitable for that customer before recommending an investment to a customer. Prior to recommending speculative low-priced securities
to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes
that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. Thus,
the FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our Common Shares, which
may limit your ability to buy and sell our Common Shares, have an adverse effect on the market for our Common Shares, and thereby
depress our price per Common Share.
Risks Related to the VIE Agreements
The PRC government may determine
that the VIE Agreements are not in compliance with applicable PRC laws, rules and regulations
JiuGe Management manages and operates
the mobile data business through JiuGe Technology pursuant to the rights its holds under the VIE Agreements. Almost all economic
benefits and risks arising from JiuGe Technology’s operations are transferred to JiuGe Management under these agreements.
There are risks involved with the
operation of our business in reliance on the VIE Agreements, including the risk that the VIE Agreements may be determined by PRC
regulators or courts to be unenforceable. Our PRC counsel has provided a legal opinion that the VIE Agreements are binding and
enforceable under PRC law, but has further advised that if the VIE Agreements were for any reason determined to be in breach of
any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with
such breach, including:
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imposing economic penalties;
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discontinuing or restricting the operations of JiuGe Technology or JiuGe Management;
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imposing conditions or requirements in respect of the VIE Agreements with which JiuGe Technology or JiuGe Management may not be able to comply;
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requiring our company to restructure the relevant ownership structure or operations;
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taking other regulatory or enforcement actions that could adversely affect our company’s business; and
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revoking the business licenses and/or the licenses or certificates of JiuGe Management, and/or voiding the VIE Agreements.
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Any of these actions could adversely
affect our ability to manage, operate and gain the financial benefits of JiuGe Technology, which would have a material adverse
impact on our business, financial condition and results of operations.
Our ability to manage and operate
JiuGe Technology under the VIE Agreements may not be as effective as direct ownership.
We conduct our mobile data business
in the PRC and generate virtually all of our revenues through the VIE Agreements. Our plans for future growth are based substantially
on growing the operations of JiuGe Technology. However, the VIE Agreements may not be as effective in providing us with control
over JiuGe Technology as direct ownership. Under the current VIE arrangements, as a legal matter, if JiuGe Technology fails to
perform its obligations under these contractual arrangements, we may have to (i) incur substantial costs and resources to enforce
such arrangements, and (ii) rely on legal remedies under PRC law, which we cannot be sure would be effective. Therefore, if we
are unable to effectively control JiuGe Technology, it may have an adverse effect on our ability to achieve our business objectives
and grow our revenues.
As the VIE Agreements are governed
by PRC law, we would be required to rely on PRC law to enforce our rights and remedies under them; PRC law may not provide us with
the same rights and remedies as are available in contractual disputes governed by the law of other jurisdictions.
The VIE Agreements are governed by
the PRC law and provide for the resolution of disputes through arbitral proceedings pursuant to PRC law. If JiuGe Technology or
its shareholders fail to perform the obligations under the VIE Agreements, we would be required to resort to legal remedies available
under PRC law, including seeking specific performance or injunctive relief, or claiming damages. We cannot be sure that such remedies
would provide us with effective means of causing JiuGe Technology to meet its obligations or recovering any losses or damages as
a result of non-performance. Further, the legal environment in China is not as developed as in other jurisdictions. Uncertainties
in the application of various laws, rules, regulations or policies in PRC legal system could limit our liability to enforce the
VIE Agreements and protect our interests.
The payment arrangement under the VIE
Agreements may be challenged by the PRC tax authorities.
We generate our revenues through
the payments we receive pursuant to the VIE Agreements. We could face adverse tax consequences if the PRC tax authorities determine
that the VIE Agreements were not entered into based on arm’s length negotiations. For example, PRC tax authorities may adjust
our income and expenses for PRC tax purposes which could result in our being subject to higher tax liability or cause other adverse
financial consequences.
Shareholders of JiuGe Technology
have potential conflicts of interest with our company which may adversely affect our business.
Li Li is the CEO, director and
is also the shareholder of JiuGe Technology. There could be conflicts that arise from time to time between our interests and
the interests of Ms. Li. There could also be conflicts that arise between us and JiuGe Technology that would require our
shareholders and JiuGe Technology’s shareholders to vote on corporate actions necessary to resolve the conflict. There
can be no assurance in any such circumstances that Ms. Li will vote her shares in our best interest or otherwise act in the
best interests of our company. If Ms. Li fails to act in our best interests, our operating performance and future growth
could be adversely affected.
We rely on the approval certificates
and business license held by JiuGe Management and any deterioration of the relationship between JiuGe Management and JiuGe Technology
could materially and adversely affect our business operations.
We operate our mobile data business
in China on the basis of the approval certificates, business license and other requisite licenses held by JiuGe Management and
JiuGe Technology. There is no assurance that JiuGe Management and JiuGe Technology will be able to renew their licenses or certificates
when their terms expire with substantially similar terms as the ones they currently hold.
Further, our relationship with JiuGe
Technology is governed by the VIE Agreements that are intended to provide us with effective control over the business operations
of JiuGe Technology. However, the VIE Agreements may not be effective in providing control over the application for and maintenance
of the licenses required for our business operations. JiuGe Technology could violate the VIE Agreements, go bankrupt, suffer from
difficulties in its business or otherwise become unable to perform its obligations under the VIE Agreements and, as a result, our
operations, reputations and business could be severely harmed.
If JiuGe Management exercises the purchase option it
holds over JiuGe Technology’s share capital pursuant to the VIE Agreements, the payment of the purchase price could materially
and adversely affect our financial position.
Under the VIE Agreements, JiuGe Technology’s
shareholders have granted JiuGe Management an option for the maximum period of time permitted by law to purchase all of the equity
interest in JiuGe Technology at a price equal to one dollar or the lowest applicable price allowable by PRC laws and regulations.
As JiuGe Technology is already our contractually controlled affiliate, JiuGe Management’s exercising of the option would
not bring immediate benefits to our company, and payment of the purchase prices could adversely affect our financial position.
Risks Related to Doing Business
in China
Changes in China's political
or economic situation could harm us and our operating results.
Economic reforms adopted by the Chinese
government have had a positive effect on the economic development of the country, but the government could change these economic
reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability. Some of
the things that could have this effect are:
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Level of government involvement in the economy;
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Control of foreign exchange;
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Methods of allocating resources;
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Balance of payments position;
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International trade restrictions; and
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International conflict.
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The Chinese economy differs from
the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways.
For example, state-owned enterprises still constitute a large portion of the Chinese economy and weak corporate governance and
a lack of flexible currency exchange policy still prevail in China. As a result of these differences, we may not develop in the
same way or at the same rate as might be expected if the Chinese economy was similar to those of the OECD member countries.
Uncertainties with respect
to the PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our
business through our operating subsidiary and affiliate in the PRC. Our principal operating subsidiary and affiliate, JiuGe Management
and JiuGe Technology, are subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable
to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for
reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced
the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve
rapidly, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations
and rules involves uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China
may be protracted and result in substantial costs and diversion of resources and management attention. In addition, most of our
executive officers and all of our directors are not residents of the United States, and substantially all the assets of these persons
are located outside the United States. As a result, it could be difficult for investors to effect service of process in the United
States or to enforce a judgment obtained in the United States against our Chinese operations, subsidiary and affiliate.
You may have difficulty enforcing judgments against
us.
We are a Delaware holding company,
but Finger Motion (CN) Limited is a Hong Kong company, and our principal operating affiliate and subsidiary, JiuGe Technology and
JiuGe Management, are located in the PRC. Most of our assets are located outside the United States and most of our current operations
are conducted in the PRC. In addition, most of our directors and officers are nationals and residents of countries other than the
United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be
difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to
enforce in U.S. courts judgments predicated on the civil liability provisions of the U.S. federal securities laws against us and
our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are
located outside the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce
judgments of U.S. courts. The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures
Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures
Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does
not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with
the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment
against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty,
security or the public interest. Therefore, it is uncertain whether a PRC court would enforce a judgment rendered by a court in
the United States.
The PRC government exerts substantial
influence over the manner in which we must conduct our business activities.
The PRC government has exercised
and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership.
Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import
and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China
are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of
the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in
the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese
properties or joint ventures.
Future inflation in China may inhibit
our ability to conduct business in China.
In recent years, the Chinese economy
has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by the Chinese government, from
time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation.
High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for our products and our company.
Restrictions on currency exchange
may limit our ability to receive and use our revenues effectively.
The majority of our revenues will
be settled in Chinese Renminbi (RMB), and any future restrictions on currency exchanges may limit our ability to use revenue generated
in RMB to fund any future business activities outside China or to make dividend or other
payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the
RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested
enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China
authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment
and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB.
Fluctuations in exchange
rates could adversely affect our business and the value of our securities.
The value of our common stock will
be indirectly affected by the foreign exchange rate between U.S. dollars and RMB and between those currencies and other currencies
in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect
our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of
operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged
into U.S. dollars as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB is no longer
pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent
significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the
U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations
in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions
are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions.
While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified
by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Restrictions under PRC law
on our PRC subsidiary’s ability to make dividends and other distributions could materially and adversely affect our ability
to grow, make investments or acquisitions that could benefit our business, pay dividends to our shareholders, and otherwise fund
and conduct our businesses.
Substantially all of our revenues
are earned by JiuGe Management, our PRC subsidiary. PRC regulations restrict the ability of our PRC subsidiary to make dividends
and other payments to its offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiary only
out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC
subsidiary is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax profits determined
in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital.
Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form
of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiary to transfer funds to us could materially
and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends
and otherwise fund and conduct our business.
Failure to comply with PRC regulations relating to
the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal
liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiary or affiliate, limit our PRC
subsidiary’s and affiliate’s ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, the Chinese State
Administration of Foreign Exchange (“SAFE”), issued the Notice on Relevant Issues in the Foreign Exchange Control
over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular
75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over
an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength
of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public
in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover the establishment or acquisition
of control by PRC residents of offshore entities which merely acquire “control” over domestic companies or assets,
even in the absence of legal ownership; (2) adding requirements relating to the source of the PRC resident’s funds used to
establish or acquire the offshore entity; covering the use of existing offshore entities for offshore financings; (3) purporting
to cover situations in which an offshore SPV establishes a new subsidiary in China or acquires an unrelated company or unrelated
assets in China; and (4) making the domestic affiliate of the SPV responsible for the accuracy of certain documents which must
be filed in connection with any such registration, notably, the business plan which describes the overseas financing and the use
of proceeds. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital,
transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China
to guarantee offshore obligations and Notice 106 makes the offshore SPV jointly responsible for these filings. In the case of an
SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular
75, a retroactive SAFE registration was required to have been completed before March 31, 2006; this date was subsequently extended
indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken
by the SPV and its affiliates were in compliance with applicable laws and regulations. Failure to comply with the requirements
of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion
of applicable foreign exchange restrictions. Any such failure could also result in the SPV’s affiliates being impeded or
prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the
SPV, or from engaging in other transfers of funds into or out of China.
We have advised our shareholders
who are PRC residents, as defined in Circular 75, to register with the relevant branch of SAFE, as currently required, in connection
with their equity interests in us and our acquisitions of equity interests in our PRC subsidiary and affiliate. However, we cannot
provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments
to their registration to fully comply with, all applicable registrations or approvals required by Circular 75. Moreover, because
of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot
predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiary’s
and affiliate’s ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders. In addition, such PRC residents
may not always be able to complete the necessary registration procedures required by Circular 75. We also have little control over
either our present or prospective direct or indirect shareholders or the outcome of such registration procedures. A failure by
our PRC resident beneficial holders or future PRC resident shareholders to comply with Circular 75, if SAFE requires it, could
subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiary’s and affiliate’s ability to make distributions or pay dividends or affect our ownership structure,
which could adversely affect our business and prospects.
Under the New EIT Law, we may
be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences
to us and our non-PRC shareholders.
Under the New EIT Law effective on
January 1, 2008, an enterprise established outside China with “de facto management bodies” within China is considered
a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise
income tax purposes. 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.
On April 22, 2009, the State Administration
of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated
Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application
of the New EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice,
an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a
“non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside
or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in
China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in
China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A resident enterprise
would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10%
when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore
enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts
of each case.
Given the above conditions, although
unlikely, we may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we
are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could
follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise
income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China
source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the New EIT Law and its implementing
rules dividends paid to us from our PRC subsidiary would qualify as “tax-exempt income,” we cannot guarantee that such
dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding
tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident
enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new
“resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends
we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
We are actively monitoring the possibility of “resident enterprise” treatment.
If we were treated as a “resident
enterprise” by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be
creditable against our U.S. tax.
We may be exposed to liabilities
under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could
have a material adverse effect on our business.
We are subject to the Foreign Corrupt
Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials
and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business.
We have operations, agreements with third parties and we earn the majority of our revenue in China. PRC also strictly prohibits
bribery of government officials. Our activities in China create the
risk of unauthorized payments or offers of payments by our executive officers, employees, consultants, sales agents or other representatives
of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage
these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective,
and the executive officers, employees, consultants, sales agents or other representatives of our Company may engage in conduct
for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or
civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and
financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations
committed by companies in which we invest or that we acquire.
Because our business
is located in the PRC, we may have difficulty establishing adequate management, legal and financial controls, which we are required
to do in order to comply with U.S. securities laws.
PRC companies have historically not
adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance,
internal controls and, computer, financial and other control systems. Some of our staff is not educated and trained in the Western
system, and we may have difficulty hiring new employees in the PRC with such training. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements,
books of account and corporate records and instituting business practices that meet Western standards. Therefore, we may, in turn,
experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley
Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls, which could impact the
reliability of our financial statements and prevent us from complying with Commission rules and regulations and the requirements
of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect
on our business.