We are a holding company that conducts our primary
businesses through our PRC subsidiaries and operating entities (the “VIEs”). We primarily operate a one-stop services for
our clients on our Omni-channel advertising, precision marketing and data analysis management system.
We derive our revenue principally by:
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distributing the right to use search engine marketing service we purchased from key search engines to increase the sales lead conversion
rate for our clients’ business promotion on both mobile and PC searches;
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selling Internet advertising space on our advertising portals and providing related data service to our clients through the Internet advertising
management systems developed and managed by us;
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selling effective sales lead information; and
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providing other e-commerce O2O advertising and marketing and related value-added technical services.
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We generated total revenues of US$38.4 million
for the year ended December 31, 2020, compared with US$58.1 million in 2019. Net loss attributable
to our stockholders was US$5.22 million and US$1.26 million for the years ended December 31, 2020 and 2019, respectively.
In early 2018, we commenced to expand our business
into the blockchain industry and the related technology. In January 2018, we announced our strategic partnership with Wuxi Jingtum Network
Technology ("Jingtum”), a credible blockchain ecology builder. This strategic partnership with Jingtum is focused on blockchain
technology to build a credible, fair and transparent platform for business opportunities and transactions. We aim to build a credible,
traceable, and highly secured blockchain application infrastructure platform and develop effective business applications, including both
mobile and web applications, to meet the large demand from the small and medium enterprises (“SMEs”). We believe that the
applications of blockchain in the field of business development and marketing can help SMEs build a new business ecosystem based on algorithmic
trust. With the introduction of blockchain technology, we will gradually shift our platform-centric services in the past towards decentralizing
services, solving trust issues in business cooperation and services and enhancing user vitality and loyalties. We also plan to gradually
shift from providing information services to providing transaction services for business opportunities so as to create a multi-industry
and cross-chain value-based internet sharing business.
For the years ended December 31, 2020 and 2019,
as we initiated our Business Opportunity Social Ecosystem (“BOSE”), we were in the process of developing two blockchain-technology
powered platform applications named BO!News and OMG, respectively. Our blockchain-powered platform together with the applications aim
to build a social community which facilitates various types of users, such as business owners, entrepreneurs, suppliers and customers
or any individual who is interested in starting up a business, to share business opportunities and related information and allows users
to conduct certain business transactions that can be recorded and verified through the blockchain-technology applied by our applications.
In return, our platform will use a reward point mechanism generated on blockchain in the form of token to keep track and award the users
for their contributions to our platform applications. These reward points are not associated with any cryptocurrency and will not be listed
in any crypto exchange can only be used within our BOSE, such as, exchange for our advertising and marketing services.
We have engaged RedRun
Limited (“RedRun”) and Beijing Shengshi Kaida Technical Service Co., Ltd. (“Shengshi Kaida”) for the development
of OMG and Bo!News, respectively. Total contract amounts for OMG and Bo!News is US$4.5 million and US$0.46 million, respectively. The
following table summarized the material remaining development costs of these blockchain-powered applications as of December 31, 2020.
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Total
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Estimated Payment
Schedule
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Amount
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Q3 2021
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Q4 2021
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(US$’000)
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(US$’000)
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(US$’000)
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Remaining development costs under RedRun Agreement:
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462
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300
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162
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Remaining development costs under Shengshi Kaida Agreement
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92
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-
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92
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Total Remaining Development Costs:
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554
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300
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254
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Our platform
will support two blockchain-powered Apps: BO!News and OMG.
Our users will use BO!News on account of that we publish
it as an App for life and entrepreneurial social interaction app, which enables its future users an much easier access to daily
news, social medias and social information associating with daily life events and entrepreneurship. In chorus, they can contribute
and share their own experiences by generating their personal contents in writing, forwarding from other medias, streaming or short
videos. In return, they would be rewarded with reward points in form of token, which
are recorded on the blockchain for a transparent and creditable proof with a fixed value (which value is not finally determined
yet). The reward points in form of token issued by the BO!News App, are not associated with cryptocurrency and will not be listed
in any crypto exchange. These reward points are also not transferrable and can only be used to exchange goods or products within
our ecosystem, i.e. the BOSE, of ChinaNet. For example, to exchange for advertising service, or other gifts offered on the App,
which will be further identified to the public when the DAU (“Daily Active User”) of BO!News App reaches sustainable
level. With the anticipated sustainable level of DAU on the App, we would also be able to introduce BO!News as a new marketing
channel for our existing client base, as well as acquisition of new clients, and to generate additional recurring internet advertising
revenues accordingly.
OMG is developed
for a larger business scope than BO!News, and is similar to an App called StorCard in Germany, but with more functions. OMG App will enable
users (consumers and merchants) to integrate other stores’ reward/loyalty point cards into OMG point consolidation and exchange
system built on the blockchain infrastructure platform. OMG will be also featured with its blockchain-powered CRM plus and Advertising
sharing system that combines with all previous advertising technology we have developed and sourced throughout years. It will provide
both consumers and merchants a very easy in-and-cross store spending experience through a combined reward card, which will help consumers
managing all of their different reward/loyalty points cards in a single way. Merchants will also get benefit of using it as a marketing
platform to push their advertising or promotion to their and non-competitors’ customer bases. For example: Merchant A and B are
both OMG App’s participating merchants, as a result, their customers’ loyalty points databases are connected to OMG through
secured API system. User X is a customer of both Merchant A and Merchant B, who wants to redeem a gift card with Merchant B’s loyalty/reward
points, however, he does not have enough Merchant B’s loyalty/reward points. Through the OMG App, User X makes an offer of exchange
Merchant A’s loyalty/reward points for Merchant B’s loyalty/reward points, and the OMG App matching system has found User
Y, who wants to exchange Merchant B’s loyalty/reward points for Merchant A’s points for redeeming a reward gift in Merchant
A. User X and Y are then acknowledged by the OMG App interactively, and then are able to exchange the loyalty/reward points for their
specific needs based on their own negotiated exchange rate between Merchant A and Merchant B’s loyalty/reward points. Their transaction
will be executed by the agreed terms input onto smart contract through the OMG App and recorded on the public chain for transaction authentication
and verification. In addition, this transaction activity will be recorded by the OMG App, and User X and Y will also be rewarded with
the loyalty points issued by OMG for conducting this transaction on OMG, which will be recorded and stored on our hyperledger blockchain
in the form of token.
Hence, all
the behaviors, including the merchants’ reward/loyalty points exchange transaction mentioned previously, conducted both personal
or business-oriented within OMG will be rewarded with points issued by the platform in form of token (“OMG reward points”).
Same as the points rewarded to the users of the BO!News App, the OMG reward points issued in form of token are also not associated with
cryptocurrency, and will not be listed in any crypto exchange. These reward points will grant privileges on higher sales discount, better
point consumption rate, credit rating, faster matching and so forth, which rules will be finalized before our final commercial release
of the OMG App, and will only be used for the business or consumption purposes within the BOSE of ChinaNet. Our final blockchain platform
has been designed and is developing to adopt both hyperledger and public chains in a hybrid structure.
We anticipant
to generate service revenues from our participating merchants for using our blockchain-powered OMG application. With sustainable level
of DAU on this App, we also anticipant to generate additional recurring internet advertising service revenues on OMG application from
our existing client base, as well as from new customers in future periods.
We have been
building our blockchain infrastructure platform on Ethereum platform, and is now integrating with hyperledger solution to ensure the openness
and easiness of the blockchain platform. The risks involved in our blockchain platform including but not exclusive to, the security risk,
infrastructure risk, transition (blackhole) risk and so forth. As such, any malfunction, breakdown, divergence or abandonment of the Ethereum
platform may have an adverse effect on the our blockchain-powered platform. As a result, we are in the process of testing and integrating
with hyperledger and other public cross-chain solution, to minimize related risks and challenges.
As in our
planning, we intend to issue reward points in the form of token for user interactions within our Apps and it is NOT officially implemented
yet. As previously mentioned, when users of our Apps (i.e. BO!News or OMG) post and share some contents, or conduct a transaction within
the App, they can get some rewards in the form of token as a proof recorded on the blockchain. The reward points will also be given to
the users when their article attracts internet traffics (i.e. clicks and viewings) and interactions (i.e. messages or the click on the
ads within the content). The reason of using blockchain is to improve the social credibility of activities recorded and transactions conducted.
All the points received by the users are stored in the wallet of the Apps on the hyperledger chain, which is in a closed environment.
If a person mobile phone got stolen and his password of the mobile phone and App got cracked, then his or her points will likely be stolen.
But as these points can only be used within our BOSE ecosystem, hence it means zero value outside of this ecosystem, and if we got informed
in advance, we can manage to cancel the points and reissue the points to them to prevent the owner’s possible losses. Finally, as
stated previously, the reward point issued in form of token is not equivalent to any cryptocurrency and will not be listed on any exchange.
In early December 2020, we completed our Blockchain
Integrated Framework, or BIF, for retail business, to provide a framework platform for more accessible and efficient integration of small
and medium sized retail business users. BIF provides on-time delivery, real-time information, and record-time service for retail business
users while consolidating both Key Opinion Leader (“KOL”) and Online-to-Offline marketing and advertising information. Harnessing
the benefits of blockchain-powered technology, we believe BIF could improve security, give retailers more control over their data,
and create new forms of marketing to help retailers meet consumer needs with higher precision and capture the value otherwise missed.
We plan to complete the integration of BO!News and OMG onto BIF for commercial release by the first half of 2021 and launch BIF to retail
business users before the end of the third fiscal quarter of 2021.
To enhance the reliability of our future blockchain
services and optimize location for client proximity, we incorporated a new wholly-owned subsidiary, ChinaNet Online (Guangdong) Technology
Co., Ltd. (“ChinaNet Online Guangdong”) in May 2020 as we are in the process of expanding our corporate business and technology
headquarters to the city of Guangzhou in Southern China. ChinaNet Online Guangdong has officially commenced its operations since July
2020. Along with the development of new customer base in southern China in future periods, we plan to gradually transfer a portion of
our core business activities to ChinaNet Online Guangdong. We are also currently seeking for new local business partners to develop new
high-technology related business, including blockchain services.
In early December 2020, we announced the official opening of our first live streaming platform
in Guangzhou, China. It features livestreaming ecommerce, ecommerce support service, influencer stream shopping, private traffic
boosting, supply chain service, and supply chain finance.
With further enhancement of technology on both
blockchain development and internet traffic and data analytics for the implementation of BOSE, in January and February 2021, we have initiated
and executed a series of partnerships and cooperation to execute our business plans on building up BOSE to capture the business opportunity
with the opening of our live steaming platform. Our preliminary business plans include: connecting BOSE to Enterprise Wechat and CRM SaaS
for consolidating and accumulating behavior data in social media; enhancing online branding and management service and aggregating more
efficient ROI and cost-effective advertising and marketing services to our clients; offering services for the supply chain finance with
the focus on the target audiences of KOLs and O2O e-commerce merchants, with options and selections of digital assets, and adopting crypto
payment gateways with licensed partners; utilizing upgraded decentralized financial technology and building Defi service on BIF platform
for intellectual property rights with expansion of the BIF technology on blockchain mining.
In December 2020, we completed an offering of shares
of our common stock together with warrants which resulted in gross proceeds of $7.0 million (the “2020 Financing”).
In February 2021, we completed an additional offering of shares of common stock and a concurrent private placement of warrants to purchase
common stock which results in gross proceeds of $18.7 million (the “February 2021 Financing”).
Impact of
COVID-19 on Our Operations and Financial Performance
Our business is subject to the impact of natural
catastrophic events, such as earthquakes, or floods, public health crisis, such as disease outbreaks, epidemics, or pandemics in China,
and all these could result in a decrease or sharp downturn of economies, including our markets and business locations in the current and
future periods. The outbreak of the coronavirus (COVID-19) pandemic in China resulted in increased travel restrictions, and
shutdown of businesses, which has caused slower recovery of the China economy. We may experience impact from quarantines, market
downturns and changes in customer behavior related to pandemic fears and impact on our workforce if the virus continues to spread. We
experienced a decrease in revenue in 2020 due to the outbreak. COVID-19 affected a significant number of our workforce employed in our
operations, and as a result we are experiencing a slow resumption of operations and may experience delays or the inability to delivery
our service on a timely basis. In addition, one or more of our customers, partners, service providers or suppliers may experience financial
distress, delayed or defaults on payment, file for bankruptcy protection, sharp diminishing of business, or suffer disruptions in their
business due to the outbreak. The extent to which the COVID-19 pandemic impacts our results will depend on future developments and reactions
in China, which are highly uncertain and will include emerging information concerning the severity of the COVID-19 pandemic and the actions
taken by governments and private businesses to attempt to contain the coronavirus. The COVID-19 situation is likely to result in a potential
material adverse impact on our business, results of operations and financial condition in the short run if it has become worse in China.
Wider-spread COVID-19 in China and globally could prolong the deterioration in economic conditions and could cause decreases or delays
in advertising spending and reduce and/or negatively impact our short-term ability to grow our revenues. Any decreased collectability
of accounts receivable, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic
conditions could negatively impact our results of operations.
Our Subsidiaries, Variable Interest Entities (VIEs) and Ownership
Interest Investment Affiliates
As of December 31, 2020, our corporate structure
is set forth below:
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(1)
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We sold the entity to unrelated parties in January 2021.
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(2)
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The entity was liquidated and deregistered with the local authorities in February 2021.
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(3)
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We sold the entity to unrelated parties in March 2021.
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We were incorporated in the State of Texas in April
2006 and re-domiciled to become a Nevada corporation in October 2006. On June 26, 2009, we consummated a share exchange transaction with
China Net Online Media Group Limited (“China Net BVI”) (the “Share Exchange”). As a result of the Share Exchange,
China Net BVI became a wholly owned subsidiary of ours and we are now a holding company, which, through certain contractual arrangements
with operating companies in the People’s Republic of China (the “PRC”), is primarily engaged in providing Internet advertising,
precision marketing, e-commerce online to offline (“O2O”) advertising and marketing and the related data and technical services
to SMEs in the PRC.
Effective
October 14, 2020, we changed our corporate name from ChinaNet Online Holdings, Inc. to ZW Data Action Technologies Inc.
Our subsidiaries and our VIE Structure
Our direct wholly owned subsidiary, China Net BVI,
was incorporated in the British Virgin Islands on August 13, 2007. On April 11, 2008, China Net BVI became the parent holding company
of a group of companies comprised of CNET Online Technology Co. Limited, a Hong Kong company (“China Net HK”), which established,
and is the parent company of, Rise King Century Technology Development (Beijing) Co., Ltd., a wholly foreign-owned enterprise (“WFOE”)
established in the PRC (“Rise King WFOE”). In October 2008, Rise King WFOE acquired control over Business Opportunity Online
(Beijing) Network Technology Co., Ltd. (“Business Opportunity Online”) and Beijing CNET Online Advertising Co., Ltd. (“Beijing
CNET Online”) (collectively the “PRC Operating Entities” or the “VIEs”) by entering into a series of contracts
(the “Contractual Agreements” or the “VIE Agreements”), which enabled Rise King WFOE to operate the business and
manage the affairs of the PRC Operating Entities.
China has adopted a reformed system with respect
to foreign investment administration, under which the Chinese government applies national treatment to foreign investors in terms of investment
entry and the foreign investor needs to comply with the requirements as provided in The Special Administrative Measures for Foreign Investment
(the “Negative List”). The Negative List will be issued by, amended or released upon approval by the State Council, from time
to time. The Negative List will consist of a list of industries in which foreign investments are prohibited and a list of industries in
which foreign investments are restricted. Foreign investors will be prohibited from making investments in prohibited industries, while
foreign investments must satisfy certain conditions for investments in restricted industries, such as: there always a limitation on foreign
investment and ownership. Foreign investments and domestic investments in industries outside the scope of the prohibited industries and
restricted industries will be treated equally. The most recent version of the Negative List was promulgated jointly by the Ministry of
Commerce (“MOFCOM”) and the National Development and Reform Commission (“NDRC”) on June 23, 2020, which came into
effective on July 23, 2020 (the “2020 Negative List”).
The business of the PRC Operating Entities falls
under the class of a business that provides Internet content or information services, a type of value-added telecommunication services,
for which restrictions upon foreign ownership apply. The 2020 Negative List retains the restrictions on foreign ownership related to value-added
telecommunication services. As a result, Rise King WFOE is not allowed to conduct the business the PRC Operating Entities companies are
currently pursuing. Advertising business is open to foreign investment but used to require that the foreign investors of a WFOE should
have been carrying out advertising business for over three years pursuant to the Foreign Investment Advertising Measures as amended by
MOFCOM and the State Administration of Industry and Commerce (“SAIC”, currently known as the State Administration for Market
Regulations, (“SAMR”)) on August 22, 2008, which was repealed in June 29, 2015. Before June 29, 2015, Rise King WFOE was not
allowed to engage in the advertising business because its shareholder, China Net HK, did not meet such requirements. As a result, in order
to control the business and operations of the PRC Operating Entities and consolidate the financial results of the two companies in a manner
that does not violate the related PRC laws, Rise King WFOE executed the Contractual Agreements with the PRC Shareholders and each of the
PRC Operating Entities.
Summary of the material terms of the VIE Agreements:
Exclusive Business Cooperation Agreements:
Pursuant to the Exclusive Business Cooperation
Agreements entered into by and between Rise King WFOE and each of the PRC Operating Entities, Rise King WFOE has the exclusive right provide
to the PRC Operating Entities complete technical support, business support and related consulting services during the term of these agreements,
which includes but is not limited to technical services, business consultations, equipment or property leasing, marketing consultancy,
system integration, product research and development, and system maintenance. In exchange for such services, each PRC Operating Entity
has agreed to pay a service fee consisting of a management fee and a fee for services provided, to Rise King WFOE, which shall be determined
by Rise King WFOE according to the following factors: the complexity and difficulty of the services, seniority of and time consumed by
the employees, specific contents, scope and value of the services, market price of the same type of services, and operation conditions
of the PRC Operating Entities. Each agreement shall remain effective unless terminated in accordance with the provisions thereof or terminated
in writing by Rise King WFOE.
Exclusive Option Agreements:
Under the Exclusive Option Agreements entered into
by and among Rise King WFOE, each of the PRC Shareholders irrevocably granted to Rise King WFOE, or its designated person, an exclusive
option to purchase, to the extent permitted by PRC law, a portion or all of their respective equity interest in any PRC Operating Entities
for a purchase price of RMB10, or a purchase price to be adjusted to be in compliance with applicable PRC laws and regulations. Rise King
WFOE, or its designated person, has the sole discretion to decide when to exercise the option, whether in part or in full. Each of these
agreements shall become effective upon execution and remain effective until all equity interests held by the relevant PRC Shareholder(s)
in the PRC Operating Entities have been transferred or assigned to Rise King WFOE and/or any other person designated by Rise King WFOE.
Equity Pledge Agreements:
Under the Equity Pledge Agreements entered into
by and among Rise King WFOE, the PRC Operating Entities and each of the PRC Shareholders, the PRC Shareholders pledged all of their equity
interests in the PRC Operating Entities to guarantee the PRC Operating Entities’ and the PRC Shareholders’ performance of
the relevant obligations under the Exclusive Business Cooperation Agreements and other Contractual Agreements. If the PRC Operating Entities
or any of the PRC Shareholders breaches its/his/her respective contractual obligations under these agreements, or upon the occurrence
of one of the events regarded as an event of default under each such agreement, Rise King WFOE, as pledgee, will be entitled to certain
rights, including the right to dispose of the pledged equity interests. The PRC Shareholders of the PRC Operating Entities agreed not
to dispose of the pledged equity interests or take any actions that would prejudice Rise King WFOE's interest, and to notify Rise King
WFOE of any events or upon receipt of any notices which may affect Rise King WFOE's interest in the pledge. Each of the equity pledge
agreements will be valid until all the obligations under the Exclusive Business Cooperation Agreements and other Contractual Agreements
have been fulfilled, including the service fee payments related to the Exclusive Business Cooperation Agreement are paid in full.
Irrevocable Powers of Attorney:
The PRC Shareholders have each executed an irrevocable
power of attorney to appoint Rise King WFOE as their exclusive attorneys-in-fact to vote on their behalf on all PRC Operating Entities
matters requiring shareholder approval. The term of each power of attorney is valid so long as such shareholder is a shareholder of the
respective PRC Operating Entity.
As a result of these Contractual Agreements, we
through our wholly-owned subsidiary, Rise King WFOE, were granted with unconstrained decision making rights and power over key strategic
and operational functions that would significantly impact the PRC Operating Entities or the VIEs’ economic performance, which includes,
but is not limited to, the development and execution of the overall business strategy; important and material decision making; decision
making for merger and acquisition targets and execution of merger and acquisition plans; business partnership strategy development and
execution; government liaison; operation management and review; and human resources recruitment and compensation and incentive strategy
development and execution. Rise King WFOE also provides comprehensive services to the VIEs for their daily operations, such as operational
technical support, office administration technical support, accounting support, general administration support and technical support for
products and services. As a result of the Exclusive Business Cooperation Agreements, the Equity Pledge Agreements and the Exclusive Option
Agreements, we will bear all of the VIEs’ operating costs in exchange for the net income of the VIEs. Under these agreements, we
have the absolute and exclusive right to enjoy economic benefits similar to equity ownership through the VIE Agreements with our PRC Operating
Entities and their shareholders. Due to the fact that Rise King WFOE and its indirect parent are the sole interest holders of the VIEs,
we included the assets, liabilities, revenues and expenses of the VIEs in our consolidated financial statements, which is consistent with
the provisions of FASB Accounting Standards Codification ("ASC") Topic 810 “Consolidation”, subtopic 10.
Please refer to the discussion of uncertainties and risks in relation to our VIE Structure on page
14 under Business-Government Regulation contained in Item 1 and page 24 under Risk Factors-Risks Relating to Regulation of Our
Business and to Our Structure contained in Item 1A of this Annual Report.
As of December 31, 2020, besides China Net BVI,
China Net HK and Rise King WFOE, as discussed above, we also have four other indirectly wholly-owned subsidiaries, ChinaNet Investment
Holding Ltd, a British Virgin Islands company (“ChinaNet Investment BVI”), Grandon Investments Limited, a British Virgin Islands
company (“Grandon BVI”), Winner Glory Limited, a Hong Kong company and ChinaNet Online Holdings Co., Ltd., a PRC company (“ChinaNet
Online PRC”). ChinaNet Investment BVI co-founded ChinaNet Online Holdings Korea, a Korean company (“ChinaNet Korea”)
with four unaffiliated individuals and beneficially owns 15% equity interest in ChinaNet Korea. The business activities of ChinaNet Korea
are currently dormant. ChinaNet Online PRC co-founded Business Opportunity Chain (Beijing) Technology Development Co., Ltd., a PRC company
(“Business Opportunity Chain Beijing”) with three unrelated parties, of which ChinaNet Online PRC owns 51% equity interest.
Business Opportunity Chain Beijing was established to perform research and develop and provide other technical support for our blockchain
business unit.
Our VIEs, VIEs’ subsidiaries and other ownership interest
investment affiliates
As discussed above, through Rise King WFOE, we
beneficially own two VIEs: Business Opportunities Online and Beijing CNET Online. Business Opportunities Online is primarily engaged in
providing Internet advertising, precision marketing and related data service to the SMEs. The business activities of Beijing CNET Online
are currently dormant.
As of December 31, 2020, Business Opportunity
Online has the following directly or indirectly wholly-owned subsidiaries in the PRC: Beijing Chuang Fu Tian Xia Network Technology
Co., Ltd. (“Beijing Chuang Fu Tian Xia”), Business Opportunity Online (Hubei) Network Technology Co., Ltd. (“Business
Opportunity Online Hubei”), Beijing Chuang Shi Xin Qi Advertising Media Co., Ltd. (“Beijing Chuang Shi Xin Qi”),
Beijing Hong Da Shi Xing Network Technology Co., Ltd. (“Beijing Hong Da Shi Xing”) and Beijing Shi Ji Cheng Yuan Advertising
Media Co., Ltd. (“Beijing Shi Ji Cheng Yuan”), all of which are engaged in providing Internet advertising, precision
marketing and related data service to the SMEs. Beijing Shi Ji Cheng Yuan was subsequently sold by us to unrelated parties in
January 2021.
To enhance the reliability of our future blockchain services and
optimize location for client proximity, we expanded our corporate business and technology headquarters to the city of Guangzhou
in Southern China. As a result, in May 2020, we incorporated a new wholly-owned subsidiary, ChinaNet Online (Guangdong) Technology
Co., Ltd. (“ChinaNet Online Guangdong”), which primarily focuses on the overall business and technology development
of our company and developing and operating blockchain technology-based products and services. In October 2020, we co-founded Qiweilian
(Guangzhou) Technology Co., Ltd. (“Qiweilian Guangzhou”), in which we beneficially owned a 51% equity interest. In
March 2021, due to changes in business strategy of the minority shareholder, we suspended the cooperation with the minority shareholder
and sold our 51% equity interest in Qiweilian to unrelated parties.
As of December 31, 2020, we also beneficially own
a 4.9% equity interest in Local Chain Xi’an Information Technology Co., Ltd. (“Local Chain Xi’an), a 19% equity interest
in both Guohua Shiji (Beijing) Communication Co., Ltd. (“Guohua Shiji”) and Business Opportunity Chain (Guangzhou) Technology
Co., Ltd. (“Business Opportunity Chain Guangzhou”) and a 25.5% equity interest in Zhao Shang Ke Network Technology (Hubei)
Co., Ltd. (“Zhaoshangke Hubei”). Except for Business Opportunity Chain Guangzhou, which is primarily engaged in the development
of webcast platform based business promotion service and franchise consultancy service, the business activities of all other investee
entities of us are dormant. Zhaoshangke Hubei was subsequently liquidated and deregistered with the local authorities in February 2021.
Industry
and Market Overview
Overview of the Advertising Market in China
According to the advertising spend forecasts released
by Dentsu International in January 2021, the global advertising spend will reach US$579 billion, with an estimated growth rate of 5.8%
in 2021. Ad spend in the Asia Pacific is expected to grow by 5.9%, with share of digital forecast to increase 9.1% to a share of 57.5%
of all spend.
China’s advertising market is slowing in
step with its economy and was also adversely affected by the COVID-19 outbreak in the first fiscal quarter of 2020, however, still remains
one of the key drivers of global growth of advertising. Dentsu International forecasts that China’s total advertising spend will
grow by 5.3% and 5.0% in 2021 and 2022, respectively.
The growth of China’s advertising market
is driven by a number of factors, including the sustained economic growth and increases in disposable income and consumption in China.
China was the second largest economy in the world in terms of gross domestic product (“GDP”), which amounted to US$15.5 trillion
in 2020, grew by 2.3% year over year. China is the only major economy in the world that achieved positive economic growth in 2020. According
to the National Bureau of Statistics of China, the annual disposable income per capita in urban households increased to RMB43,834 in 2020,
adjusted by the price factors, the actual increase was 1.2%.
Overview of the Internet Advertising Industry
According to the advertising spend forecasts released
by Dentsu International in January 2021, global ad-spend growth continues to be dominated by digital channels, which is expected to reach
US$289.5 billion and 50.0% of the total ad-spend in 2021, and further increase to 51.2% of the total ad-spend in 2022.
In China, the Internet advertising market growth
is expected to stem primarily from a higher internet penetration rate of just 70.4% by the end of December 2020, compared with 64.5% by
the end of March 2020. Total internet users reached to approximately 989 million people by the end of December 2020, increased by approximately
85.4 million people, compared with that as of March 2020. (According to the 47th China Internet Network Development Statistical
Report issued by China Internet Network Information Center (the “CNNIC”) in February 2021). According to the 47th
CNNIC report, as of December 2020, the mobile internet user reached to 986 million people, compared with 897 million people as of March
2020, which accounted for 99.7% of the total internet users, as compared with 99.3% as of March 2020.
According to a report published by iResearch Inc.
in July 2020, online advertising revenue in China reached RMB646.43 billion Yuan (approximately US$93.7 billion) in 2019 and was estimated
to hit RMB793.24 billion Yuan (approximately US$115.0 billion) in 2020, up 22.7% year-over-year. Its growth is forecasted to slow in step
with its economy in the next few years, with an estimation of a year-over-year increase of 23.9% and 22.4% in 2021 and 2022, respectively.
The diagram below depicts the Market Scale of China’s
Online Advertising from 2015 to 2022:
High Demand for the Internet Advertising from SMEs and O2O Business
in China
We believe that the Internet advertising market
in China has significant potential for future growth due to high demand from the rapid development of SMEs and O2O business.
The development of the SME market is still in its
early stages in China. Since their sales channels and distribution networks are still underdeveloped, they are driven to search for new
participants by utilizing Internet advertising and precision marketing. The SMEs tend to be smaller, less-developed brands primarily
focused on restaurants, garments, building materials, home appliances, and entertainment with low start-up costs. The Chinese government
has promulgated a series of laws and regulations to protect and promote the development of SMEs which appeals to entrepreneurs looking
to benefit from the central government’s support of increased domestic demand. SMEs are now responsible for about 50% of China’s
tax revenues, 60% of China’s GDP and employment of approximately 80% of the urban Chinese workforce. SMEs are creating new urban
jobs, and they are the main destination for new graduates entering the workforce and workers laid-off from state-owned enterprises (SOEs)
that re-enter the workforce.
In recent years, the capital market, Internet giants
and traditional offline services business in China have all accelerated their O2O business arrangement and development. With the advent
of the mobile Internet era, the innovation of user needs, and applications have become the main trend of the Internet, including online
payments, location-based services, online and offline interaction and more. Due to the slowdown of China’s economy growth in recent
years, the competitive market pressure within the local life services industry has increased. Under these circumstances, more and more
traditional offline service providers started to use the Internet-based tools (PC, tablet and mobile) to market and promote their products
and services. The rapid development of social media and tools, such as: WeChat and Weibo, also have had a very important influence on
the development of the O2O market, and using social media and tools to promote brands and maintain customer relationships has become an
important adverting and marketing trend for all offline business.
Our Principal Products and Services
Internet Advertising, Precision Marketing and
Related Data Services
Founded in 2003 and 2011, respectively, 28.com
and liansuo.com are two of the leading Internet portals for information relating to small business opportunities in China, and 28.com
is one of the earliest entrants in this sector. In the past few years, we further developed and upgraded the system and tools of our advertising
portals, including customer user interface, and integrated our mobile functions. Besides our advertising portals, we also have established
solid partnership relations with key search engines in China which entitle us to the distribution of the right to use their search engine
marketing service which allows our customers to invest in their online advertising and marketing campaign through multi-channel to maximize
market exposure and effectiveness.
Our Internet advertising, precision marketing and
related data services provide advertisers with tools to build sales channels directly in the form of franchisees, sales agents, distributors,
and/or resellers, and have the following features which enable them to be attractive to the advertisers:
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Allowing potential entrepreneurs interested in inexpensive franchise and other business ventures to find
in-depth details about these businesses in various industries and business categories, with real-time and online assistance through an
instant messenger;
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Providing one-stop integrated Internet marketing and advertising services for SMEs by offering customized
services and advertisement placement on various communication channels through intelligent based promotion systems;
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Generating effective sales leads information; and
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Bundling with advanced traffic generation techniques, search-engine optimization and marketing and other
Internet advertising management tools to assist our clients with monitoring, analyzing and managing their advertising and data collected
on our web portal.
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We typically charge our clients a fixed monthly
fee for the Internet advertising and related data services that we provide on our ad portals. For distribution of the right to use the
search engine marketing service, revenue is recognized on a monthly basis and at a gross amount, based on the direct cost consumed through
search engines for providing such services with a premium, which typically is 3%-8%. A certain group of our clients also purchase effective
sales lead information collected by our online advertising system, and we charge a fixed fee, which varies for different business types,
for each effective sales lead information delivered to clients.
For the year ended December 31, 2020, we had approximately
660 clients who used our Internet advertising, marketing and data services, compared with 1,100 clients for the year ended December 31,
2019. We achieved US$35.6 million and US$56.9 million of Internet advertising, precision marketing and related data and technical services
revenues for the years ended December 31, 2020 and 2019, respectively, which accounted for 92.7% and 97.9% of our total revenues for the
years ended December 31, 2020 and 2019, respectively. The overall gross profit margin of this business segment decreased significantly
to -0.2% for the year ended December 31, 2020 from 8% for the year ended December 31, 2019. The decrease in performances of this business
segment was directly resulted from the COVID-19 outbreak and business shutdown during the first
fiscal quarter of 2020 in China, and slow recovery of economy in the following quarters.
Other services revenues
For the year ended December 31, 2020, we achieved US$1.55 million
e-commerce O2O advertising and marketing service revenues and US$1.25 million other technical solution service revenues. For the
year ended December 31, 2019, we achieved US$1.2 million non-recurring software sales revenue.
Sales and Marketing
For the year ended December 31, 2020, we derived
92.7% of total net revenues from our Internet advertising and the provision of related data and technical services, compared with 97.9%
for the year ended December 31, 2019.
We employ experienced advertising sales people
and provide in-house education and training to our sales people to ensure that they provide our current and prospective clients with comprehensive
information about our services, the benefits of using our advertising, marketing and data services and relevant information regarding
the advertising industry. We also market our advertising services from time to time by placing advertisements on television and other
well-known portals in China, participating in domestic and international franchise exhibitions in China and other countries and acting
as a sponsor to third-party programming and shows.
Suppliers
Our suppliers are major search engines, Internet
gateways, other advertising resources suppliers and technical service providers. Among these suppliers, for the year ended December 31,
2020, resources purchased from one of the largest search engines in China counted for approximately 78% of our search engine resource
cost, compared with 89% for the year ended December 31, 2019.
Research and Development
We plan to increase expenditures to enhance the
safety of our hardware and server that we depend on to support our network and manage and monitor programs on the network in future years.
Whether we continue to further deploy newer technology will depend upon cost and network security. We also focus on enhancing related
software systems enabling us to track and monitor advertiser demands and the related data collection and analysis. In the next few years,
we intend to move our research and development efforts to mobile-based application system and data collection and analysis tools, and
our new blockchain-technology powered Business Opportunity Social Ecosystem.
Intellectual Property
As of December 31, 2020, we had twenty-four software
copyright certificates issued by the State Copyright Office of the PRC, including, but not limited to, software systems covering monitor
and management platforms on Internet advertising effects, analysis systems on Internet traffic statistics and Internet user behavior,
analysis systems on log-based visit hotspot and browsing trails, analysis systems on mobile advertising platform and cloud-compute technology.
Competition
We compete with other Internet advertising companies
for business opportunities in China, including companies that also distribute the right to use the search engine marketing services provide
by key search engines in China, such as: Media Linkage Technology (Beijing) Co., Ltd., Guangzhou Jiuxing Hudong Technology Co., Ltd.,
and Guangzhou Chengzhi Mingyuan Network Technology Co., Ltd, and companies that operate Internet advertising portals, such as u88.cn,
3158.cn and 78.cn. We compete for clients primarily on the basis of network size and coverage, location, price, the range of services
that we offer and our brand name. We also compete for overall advertising spending with other alternative advertising media companies,
such as wireless telecommunications, street furniture, billboards, frame and public transport advertising companies, and with traditional
advertising media, such as newspapers, magazines and radio.
Government Regulation
The PRC government imposes extensive controls and
regulations over the media industry, including on internet, television, radio, newspapers, magazines, advertising, media content production,
and the market research industry. This section summarizes the principal PRC regulations that are relevant to our lines of business.
Regulations on the Value-added Telecommunication
Services and Advertising Industry in China
Foreign Investments in Value-added Telecommunication
Services
The Negative List restricts foreign investments
in value-added telecommunication services, including providing Internet information services (“ICP”). In accordance with the
Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (“FITE Regulations”), which were issued
by the State Council of the PRC on December 11, 2001, became effective on January 1, 2002 and was subsequently amended on September 10,
2008 and February 6, 2016, respectively. The FITE Regulations stipulate that foreign invested telecommunications enterprises in the
PRC (“FITEs”) must be established as Sino-foreign equity joint ventures. Under the FITE Regulations and in accordance with
WTO-related agreements, the foreign party to a FITE engaging in value-added telecommunications services may hold up to 50% of the equity
of the FITE, with no geographic restrictions on the FITE’s operations. On June 30, 2016, the MIIT issued an Announcement of
the Ministry of Industry and Information Technology (the “MIIT”) on Issues concerning the Provision of Telecommunication Services
in the Mainland by Service Providers from Hong Kong and Macao, which provides that investors from Hong Kong and Macau may hold more than
50% of the equity in FITEs engaging in certain specified categories of value-added telecommunications services.
For a FITE to acquire any equity interest in a
value-added telecommunications business in China, it must satisfy a number of stringent performance and operational experience requirements,
including demonstrating a track record and experience in operating a value-added telecommunications business overseas. FITEs that meet
these requirements must obtain approvals from the MIIT and the MOFCOM or their authorized local counterparts, which retain considerable
discretion in granting approvals.
On July 13, 2006, the Notice of the Ministry
of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services (the “MIIT
Notice”), which reiterates certain provisions of the FITE Regulations, was issued. Under the MIIT Notice, if a FITE intends to invest
in a PRC value-added telecommunications business, the FITE must be established and must apply for a telecommunications business license
applicable to the business. Under the MIIT Notice, a domestic company that holds a license for the provision of Internet content services,
or an ICP license, is considered to be a type of value-added telecommunications business in China, and is prohibited from leasing, transferring
or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities,
to foreign investors to conduct value-added telecommunications businesses illegally in China. Trademarks and domain names that are used
in the provision of Internet content services must be owned by the ICP license holder or its shareholders. On November 27, 2017,
the MIIT promulgated the Notice Regulating the Use of Domain Names in the Provision of Internet-based Information Services, or the Domain
Names Notice, which became effective on January 1, 2018. Under the Domain Names Notice, a domain name used by a provider of Internet-based
information services must be registered and owned by the provider or, if the provider is an entity, by a shareholder or senior management
of the provider.
Foreign Investments in Advertising
In accordance with the Administrative Provision
on Foreign Investment in the Advertising Industry, jointly promulgated by the SAMR and MOFCOM on August 22, 2008 and became effective
on October 1, 2008, foreign investors can invest in PRC advertising companies either through wholly owned enterprises or joint ventures
with Chinese parties. However, the foreign investor must have at least three years of direct operations outside China in the advertising
industry as its core business. This requirement was reduced to two years if foreign investment in the advertising company is in the form
of a joint venture. The Administrative Provision on Foreign Investment in the Advertising Industry was subsequently repealed by the SAMR
and MOFCOM on June 29, 2015.
In consideration of the above discussed restrictions
on foreign investments in ICP and advertising business, our whole-owned subsidiary in China, Rise King WFOE, is ineligible to apply for
the required licenses for providing Internet information services and was ineligible to apply for the required licenses for providing
advertising services in China before June 29, 2015. Our ICP business and advertising business are operated by Business Opportunity Online
and Beijing CNET Online in China. We have been, and are expected to continue to be, dependent on these companies to operate our ICP business
and advertising business. We do not have any equity interest in our PRC Operating Entities, but Rise King WFOE receives the economic benefits
of the same through the Contractual Arrangements.
We have been advised by our PRC counsel, as of
the date hereof, our current contractual arrangements with our VIEs and their respective shareholders are valid, binding and enforceable.
However, there exist substantial uncertainties regarding the application, interpretation and enforcement of current and future PRC laws
and regulations and their potential effect on our corporate structure and contractual arrangements.
On March
15, 2019, the National People’s Congress of the PRC approved the Foreign Investment Law, which came into effect on January 1, 2020,
replaced the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law,
the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation
rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment
regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements
for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation
and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities
directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify
contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangements would
not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition
contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative
regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations
or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these
cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for
foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed
by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial
uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures
to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure,
corporate governance and business operations.
Business License and permits for ICP and Advertising
Companies
All PRC legal entities may commence operations
only upon obtaining a business license from the relevant local branch of the SAMR.
On October 27, 1994, the Tenth Session of the Standing
Committee of the Eighth National People’s Congress adopted the Advertising Law, which became effective on February 1, 1995, and
was subsequently amended on April 24, 2015 by the Fourteenth Session of the Standing Committee of the Twelfth National People’s
Congress, and on October 26, 2018 by the Sixth Session of the Standing Committee of the Thirteenth National People’s Congress, respectively.
The latest Revised Advertising Law became effective on October 26, 2018. According to the Revised Advertising Law and its various implementing
rules, companies engaging in advertising activities must obtain from the SAMR or its local branches a business license which specifically
includes within its scope the operation of an advertising business. Companies conducting advertising activities without such a license
may be subject to penalties, including fines, confiscation of advertising income and orders to cease advertising operations. The business
license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation
of any relevant law or regulation. We have obtained such a business license from the local branches of the SAMR as required by existing
PRC regulations. We do not expect to encounter any difficulties in maintaining the business license. However, if we seriously violate
the relevant advertising laws and regulations, the SAMR or its local branches may revoke our business licenses.
On September 25, 2000, the State Council issued
the Measures for the Administration of Internet Information Services (“ICP Measures”). Under the ICP Measures, entities that
provide information to online users on the Internet, or ICPs, are obliged to obtain an operating permit from the “MIIT or its local
branch. ICP permits are subject to annual inspection. Our PRC operating VIEs engaged in ICP business have obtained their respective ICP
permits and comply with the annual inspection and other related provisions. We do not expect to encounter any difficulties in maintaining
the ICP operating permits. However, if we seriously violate the relevant ICP laws and regulations, the SAMR or its local branches may
revoke our permits.
Advertising Content
PRC advertising laws, rules and regulations set
forth certain content requirements for advertisements in China including, among other things, prohibitions on false or misleading content,
superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement
of the public interest. Advertisements for anesthetic, psychotropic, toxic or radioactive drugs are prohibited. There are also specific
restrictions and requirements regarding advertisements that relate to matters such as patented products or processes, pharmaceutical products,
medical procedures, alcohol, tobacco, and cosmetics. In addition, all advertisements relating to pharmaceuticals, medical instruments,
agrochemicals and veterinary pharmaceuticals, together with any other advertisements which are subject to censorship by administrative
authorities according to relevant laws or regulations, must be submitted to relevant authorities for content approval prior to dissemination.
Advertisers, advertising operators, including advertising
agencies, and advertising distributors are required by PRC advertising laws and regulations to ensure that the content of the advertisements
they prepare or distribute is true and in full compliance with applicable laws. In providing advertising services, advertising operators
and advertising distributors must review the supporting documents provided by advertisers for advertisements and verify that the content
of the advertisements complies with applicable PRC laws, rules and regulations. Prior to distributing advertisements that are subject
to government censorship and approval, advertising distributors are obligated to verify that such censorship has been performed and approval
has been obtained. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders
to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances
involving serious violations, the SAMR or its local branches may revoke violators’ licenses or permits for their advertising business
operations. Furthermore, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe
on the legal rights and interests of third parties in the course of their advertising business.
In October 2013, the SARFT issued a notice to enhance
the management of TV shopping infomercials broadcasted in provincial satellite television stations, which further restricts the contents,
air time and duration of these infomercials. These restrictions have had and may continue to have a negative impact on our TV advertising
business.
We do not believe that advertisements containing
content subject to restriction or censorship comprise a material portion of the advertisements displayed on our media network. However,
there can be no assurance that each advertisement displayed on our network complies with relevant PRC advertising laws and regulations.
Failure to comply with PRC laws and regulations relating to advertisement content restrictions governing the advertising industry in China
may result in severe penalties.
Regulation on Intellectual Property
Regulation on Trademark
The Trademark Law of the PRC was adopted at the
24th meeting of the Standing Committee of the Fifth National People’s Congress on August 23, 1982 and amended on February 22, 1993,
October 27, 2001, August 30, 2013 and November April 23, 2019, respectively. The Trademark Law sets out the guidelines on administration
of trademarks and protection of the exclusive rights of trademark owners. In order to enjoy an exclusive right to use a trademark, one
must register the trademark with the Trademark Office of China National Intellectual Property Administration
under the SAMR and obtain a registration certificate.
Regulation on Patents
The Patent Law of the PRC was adopted at the 4th
Meeting of the Standing Committee of the Sixth National People’s Congress on March 12, 1984 and subsequently amended in 1992 and
2000 and 2008. The Patent Law extends protection to three kinds of patents: invention patents, utility patents and design patents. According
to the Implementing Regulations of the Patent Law, promulgated by the State Council of the PRC on June 15, 2001, and subsequently amended
in December 28, 2002 and January 9, 2010, respectively, an invention patent refers to a new technical solution relating to a product,
a process or improvement. When compared to existing technology, an invention patent has prominent substantive features and represents
notable progress. A utility patent refers to any new technical solution relating to the shape, the structure, or their combination, of
a product. Utility patents are granted for products only, not processes. A design patent (or industrial design) refers to any new design
of the shape, pattern or color of a product or their combinations, which creates an aesthetic feeling and are suitable for industrial
application. Inventors or designers must register with the State Intellectual Property Office to obtain patent protection. The term of
protection is twenty years for invention patents and ten years for utility patents and design patents. Unauthorized use of patent constitutes
an infringement and the patent holders are entitled to claims of damages, including royalties, to the extent reasonable, and lost profits.
Regulation on Copyright
The Copyright Law of the PRC was adopted at the
15th Meeting of the Standing Committee of the Seventh National People’s Congress on September 7, 1990 and amended on October 27,
2001, February 26, 2010, and November 11, 2020, respectively. Unlike patent and trademark protection, copyrighted works do not require
registration for protection in China. However, copyright owners may wish to voluntarily register with the China Copyright Protection Center
to establish evidence of ownership in the event enforcement actions become necessary. Consent from the copyright owners and payment of
royalties are required for the use of copyrighted works. Copyrights of movies or other audio or video works usually expire fifty years
after their first publication. The amended Copyright Law extends copyright protection to Internet activities, products disseminated over
the Internet and software products. The amended Copyright Law also requires registration of the pledge of a copyright.
Regulations on Foreign Currency Exchange
Foreign Currency Exchange
Pursuant to the Foreign Currency Administration
Rules promulgated in1996 and most recently amended in August 2008 and various regulations issued by SAFE and other relevant PRC government
authorities, the Renminbi is freely convertible only to the extent of current account items, such as trade-related receipts and payments,
interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, unless expressly
exempted by laws and regulations, require the prior approval from SAFE or its local branch for conversion of the Renminbi into a foreign
currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC.
Payments for transactions that take place within
the PRC must be made in Renminbi. Domestic companies or individuals can repatriate foreign currency payments received from abroad or deposit
these payments abroad subject to applicable regulations that expressly require repatriation within certain period. Foreign-invested enterprises
may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local branch. Foreign
currencies received under current account items can be either retained or sold to financial institutions engaged in the foreign exchange
settlement or sales business without prior approval from SAFE by complying with relevant regulations. Foreign exchange income under capital
account can be retained or sold to financial institutions engaged in foreign exchange settlement and sales business, with prior approval
from SAFE unless otherwise provided.
After a Notice on Further Simplifying and Improving
Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, became effective on June 1, 2015, instead of applying
for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities
and individuals will be required to apply for such foreign exchange registrations from qualified banks. The qualified banks, under the
supervision of SAFE, directly examine the applications and conduct the registration. On October 23, 2019, SAFE issued the Circular
on Further Promoting Cross-border Trade and Investment Facilitation, or SAFE Circular 28. Among others, SAFE Circular 28 relaxes the prior
restrictions and allows the foreign-invested enterprises without equity investment as in their approved business scope to use their capital
obtained from foreign exchange settlement to make domestic equity investment as long as the investments are real and in compliance with
the foreign investment-related laws and regulations. In addition, SAFE Circular 28 stipulates that qualified enterprises in certain pilot
areas may use their capital income from registered capital, foreign debt and overseas listing, for the purpose of domestic payments without
providing authenticity certifications to the relevant banks in advance for those domestic payments.
Our business operations, which are subject to the
foreign currency exchange regulations, have all been implemented in accordance with these regulations. We will take steps to ensure that
our future operations comply with these regulations.
Dividend Distribution
The principal laws, rules and regulations governing
dividends paid by PRC operating subsidiaries and VIEs include the Company Law of the PRC (1993), as amended in 2018 and the Foreign
Investment Law and its Implementation Rules (2019). Under these laws and regulations, PRC subsidiaries and VIEs, including wholly
owned foreign enterprises, or WFOEs, and domestic companies in China, may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations. In addition, its PRC subsidiaries and VIEs, including WFOEs and
domestic companies, are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their
statutory capital reserve fund until the cumulative amount of such reserve reaches 50% of their respective registered capital. These reserves
are not distributable as cash dividends.
Tax
On March 16, 2007, the Fifth Session of the Tenth
National People’s Congress of PRC passed the Enterprise Income Tax Law of the People’s Republic of China, or EIT Law, which
became effective on January 1, 2008 and was subsequently amended on February 24, 2017 and December 29, 2018, respectively. On November
28, 2007, the State Council at the 197th Executive Meeting passed the Regulation on the Implementation of the Income Tax Law of the People’s
Republic of China, which became effective on January 1, 2008 and was subsequently amended on April 23, 2019. The EIT Law adopted
a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises).
Under the EIT Law, enterprises are classified as
either “resident enterprises” or “non-resident enterprises.” Pursuant to the EIT Law and the Implementation Rules,
enterprises established under PRC laws, or enterprises established outside China whose “de facto management bodies” are located
in China, are considered “resident enterprises” and subject to the uniform 25% enterprise income tax rate for their global
income. According to the Implementation Rules, “de facto management body” refers to a managing body that in practice exercises
overall management and control over the production and business, personnel, accounting and assets of an enterprise. Our management is
currently based in China and is expected to remain in China in the future. In addition, although the EIT Law provides that “dividends,
bonuses and other equity investment proceeds between qualified resident enterprises” is exempted income, and the Implementation
Rules refer to “dividends, bonuses and other equity investment proceeds between qualified resident enterprises” as the investment
proceeds obtained by a resident enterprise from its direct investment in another resident enterprise, however, it is unclear whether our
circumstance is eligible for exemption.
Furthermore, the EIT Law and Implementation Rules
provide that the “non-resident enterprises” are subject to the enterprise income tax rate of 10% on their income sourced from
China, if such “non-resident enterprises” (i) do not have establishments or premises of business in China or (ii) have establishments
or premises of business in China, but the relevant income does not have actual connection with their establishments or premises of business
in China. Such income tax may be exempted or reduced by the State Council of the PRC or pursuant to a tax treaty between China and the
jurisdictions in which its non-PRC shareholders reside. Under the Double Tax Avoidance Arrangement between Hong Kong and Mainland China,
if the Hong Kong resident enterprise owns more than 25% of the equity interest in a company in China, the 10% withholding tax on the dividends
the Hong Kong resident enterprise received from such company in China is reduced to 5%. If China Net HK is considered to be a Hong Kong
resident enterprise under the Double Tax Avoidance Arrangement and is considered to be a “non-resident enterprise” under the
EIT Law, the dividends paid to us by Rise King WFOE may be subject to the reduced income tax rate of 5% under the Double Tax Avoidance
Arrangement. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, issued
on February 20, 2009 by the State Administration of Taxation, if the relevant PRC tax authorities determine, in their discretion, that
a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities
may adjust the preferential tax treatment.
Provisions Regarding Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors
On August 8, 2006, six PRC regulatory agencies,
including CSRC, MOFCOM, SAT, SASAC, SAMR and SAFE, jointly promulgated the M&A Rules, which became effective on September 8, 2006,
and was subsequently amended on June 22, 2009, to regulate foreign investment in PRC domestic enterprises. The M&A Rules provide
that the MOFCOM must be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic
enterprise and any of the following situations exist: (i) the transaction involves an important industry in China; (ii) the transaction
may affect national “economic security”; or (iii) the PRC domestic enterprise has a well-known trademark or historical Chinese
trade name in China. The M&A Rules also contain a provision requiring offshore SPVs formed for the purpose of the overseas listing
of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals, to obtain the approval of
the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC issued a clarification
that sets forth the criteria and procedures for obtaining any required approval from the CSRC. In
December 2020, the NDRC and the MOFCOM promulgated the Measures for the Security Review of Foreign Investment, which came into effect
on January 18, 2021. As these measures are recently promulgated, official guidance has not been issued by the designated office in
charge of such security review yet.
To date, the application of the M&A Rules is
unclear. Our PRC counsel has advised us that:
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the CSRC approval requirement applies to SPVs that acquire equity interests in PRC companies through share exchanges and cash, and seek
overseas listings; and
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based on their understanding of the current PRC laws, rules and regulations and the M&A Rules, unless there are new PRC laws and regulations
or clear requirements from the CSRC in any form that require the prior approval of the CSRC for the listing and trading of any overseas
SPV’s securities on an overseas stock exchange, the M&A Rules do not require that we obtain prior CSRC approval because: (i)
the Share Exchange is a purely foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations;
(ii) we are not a special purpose vehicle formed or controlled by PRC companies or PRC individuals; and (iii) we are owned or substantively
controlled by foreigners.
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However, the interpretation and application of
the M&A Rules remain unclear, and the PRC government authorities have the sole discretion to determine whether the transaction is
subject to the approval of the CSRC, especially when taking into consideration of the performance-based incentive option arrangement by
way of the Share Transfer Agreements. If the CSRC or another PRC regulatory agency subsequently determines that CSRC approval is required
for the transaction, we cannot predict how long it would take to obtain the approval. In addition, we may need to apply for a remedial
approval from the CSRC and may be subject to certain administrative or other sanctions from these regulatory agencies.
Further, new rules and regulations or relevant
interpretations may be issued from time to time that may require us to obtain retroactive approval from the CSRC in connection with the
business combination. If this were to occur, our failure to obtain or delay in obtaining the CSRC approval for the business combination
would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies. These sanctions could include fines and penalties
on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions
that may materially and adversely affect our business, results of operations and financial condition.
If the CSRC or another PRC regulatory agency subsequently
determines that CSRC approval is required for the business combination, we may need to apply for a remedial approval from the CSRC and
may be subject to certain administrative punishments or other sanctions from these regulatory agencies. New rules and regulations or relevant
interpretations may require that we retroactively obtain approval from the CSRC in connection with the business combination. If this were
to occur, our failure to obtain or delay in obtaining the CSRC approval for the transaction would subject us to sanctions imposed by the
CSRC and other PRC regulatory agencies. These sanctions could include fines and penalties on our operations in China, restrictions or
limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our
business, results of operations and financial condition.
The M&A Rules also established additional procedures
and requirements expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including
requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor
takes control of a PRC domestic enterprise. These rules may also require the approval from the MOFCOM where overseas companies established
or controlled by PRC enterprises or residents acquire affiliated domestic companies. Complying with the requirements of the new regulations
to complete such transactions could be time-consuming, and any required approval processes, including MOFCOM approval, may delay or inhibit
our ability to complete such transactions, which could affect our ability to expand our business.
Human Capital Resources
Employees Profiles
As of December 31, 2020, we had 103 full-time employees,
14 of whom are in sales and marketing, 43 of whom are in operations and support, 30 of whom are in management and administration and 16
of whom are in technology support and R&D.
Employee Benefit Plans
We are compliant with local prevailing wage, contractor
licensing and insurance regulations, and have good relations with our employees.
As required by PRC regulations, we participate
in various employee benefit plans that are organized by municipal and provincial governments, including pension, work-related injury benefits,
maternity insurance, medical and unemployment benefit plans. We are required under PRC laws to make contributions to the employee benefit
plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the
local government from time to time. Members of the retirement plan are entitled to a pension equal to a fixed proportion of the salary
prevailing at the member’s retirement date.
Generally, we enter into a standard employment
contract with our officers and managers for a set period of years and a standard employment contract with other employees for a set period
of years. According to these contracts, all of our employees are prohibited from engaging in any activities that compete with our
business during the period of their employment with us. Furthermore, the employment contracts with officers or managers include a
covenant that prohibits officers or managers from engaging in any activities that compete with our business for two years after the period
of employment.
Corporation Information
Our principal executive offices are located at
Room 1106, Xinghuo Keji Plaza, No. 2 Fengfu Road, Fengtai District, Beijing, PRC. Our telephone number at this address is (86 10)
60846616 and our fax number is (86 10) 88857816. For more information, see our corporate website at www.zdat.com.
In addition to the other information in this
Form 10-K, readers should carefully consider the following important factors. These factors, among others, in some cases have affected,
and in the future could affect, our financial condition and results of operations and could cause our future results to differ materially
from those expressed or implied in any forward-looking statements that appear in this on Form 10-K or that we have made or will make elsewhere.
Risks Related to Our Business
We are susceptible to general economic conditions, natural catastrophic
events and public health crises, and a potential downturn in advertising and marketing spending by advertisers could adversely affect
our operating results in the near future.
Our business is subject to the impact of natural
catastrophic events, such as earthquakes, or floods, public health crisis, such as disease outbreaks, epidemics, or pandemics in China,
and all these could result in a decrease or sharp downturn of economies, including our markets and business locations in the current and
future periods. The outbreak of the coronavirus (COVID-19) pandemic in China resulted in increased travel restrictions, and
shutdown of businesses, which has caused slower recovery of the China economy. We may experience impact from quarantines, market
downturns and changes in customer behavior related to pandemic fears and impact on our workforce if the virus continues to spread. We
experienced a decrease in revenue in 2020 due to the outbreak. COVID-19 affected a significant number of our workforce employed in our
operations, and as a result we are experiencing a slow resumption of operations and may experience delays or the inability to delivery
our service on a timely basis. In addition, one or more of our customers, partners, service providers or suppliers may experience financial
distress, delayed or defaults on payment, file for bankruptcy protection, sharp diminishing of business, or suffer disruptions in their
business due to the outbreak. The extent to which the COVID-19 pandemic impacts our results will depend on future developments and reactions
in China, which are highly uncertain and will include emerging information concerning the severity of the COVID-19 pandemic and the actions
taken by governments and private businesses to attempt to contain the coronavirus. The COVID-19 situation is likely to result in a potential
material adverse impact on our business, results of operations and financial condition in the short run if it has become worse in China.
Wider-spread COVID-19 in China and globally could prolong the deterioration in economic conditions and could cause decreases or delays
in advertising spending and reduce and/or negatively impact our short-term ability to grow our revenues. Any decreased collectability
of accounts receivable, bankruptcy of small and medium businesses, or early termination of agreements due to deterioration in economic
conditions could negatively impact our results of operations.
We may be subject to, and may expend significant resources in
defending against, government actions and civil suits based on the content and services we provide through our Internet advertising and
data service platforms.
PRC advertising laws and regulations require advertisers,
advertising operators and advertising distributors, including businesses such as ours, to ensure that the content of the advertisements
they prepare or distribute is fair, accurate and in full compliance with applicable laws, rules and regulations. Although we comply with
the requirements by reviewing the business licenses and the profiles of our clients, clients may post advertisements about business opportunities
that are not legitimate and over which we have no control. On April 24, 2015, the Fourteenth Session of the Standing Committee of the
Twelfth National People’s Congress adopted the Revised Advertising Law, which became effective on September 1, 2015 and was further
amended on October 26, 2018. The Revised Advertising Law further established the advertisement standards and restrictions of certain industries,
such as: medical instruments, education and training, franchise and investments; defined separate standards and restrictions for Internet
advertisements and reinforced the regulatory responsibilities of the related competent authorities. We cannot assure you that our operating
entities will be fully in compliance with these new rules during normal course of business. Violation of these laws, rules or regulations
may result in penalties, including fines, confiscation of advertising fees, orders to cease dissemination of the advertisements and orders
to publish an advertisement correcting the misleading information. In circumstances involving serious violations, the PRC government may
revoke a violator’s license for its advertising business operations.
We operate in the advertising and data service industry, which
is particularly sensitive to changes in economic conditions and advertising trends.
Advertising and data service spending by our clients
is particularly sensitive to changes in general economic conditions. For example, advertising and data service expenditures typically
decrease during periods of economic downturn. Advertisers may reduce the amount of money they spend to advertise and obtain precision
marketing data and data analysis on/from our advertising and data service platforms for a number of reasons, including:
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a general decline in economic conditions;
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a decline in economic conditions in the particular cities where we conduct business;
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a decision to shift advertising and marketing expenditures to other available less expensive advertising media; and
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a decline in advertising and marketing spending in general.
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A decrease in the demand for advertising media
in general, and for our advertising and marketing services in particular, would materially and adversely affect our ability to generate
revenues, and have a material adverse effect on our financial condition and results of operations.
We face significant competition, and if we do not compete successfully
against new and existing competitors, we may lose our market share, and our profitability may be adversely affected.
Increased competition could reduce our profitability
and result in a loss of market share. Some of our existing and potential competitors may have competitive advantages, such as significantly
greater financial, marketing or other resources, and may successfully mimic and adopt our business models. Moreover, increased competition
will provide advertisers with a wider range of media and advertising and marketing service alternatives, which could lead to lower prices
and decreased revenues, gross margins and profits. We cannot assure you that we will be able to successfully compete against new or existing
competitors.
Key employees are essential to growing our business.
Key employees, such as our chief executive officer,
head of our Internet advertising business unit and head of our research and development team are essential to our ability to continue
to grow our business. They have established relationships within the industries in which we operate. If they were to leave us, our growth
strategy might be hindered, which could limit our ability to increase revenue.
In addition, we face competition for attracting
skilled personnel with increasing labor cost. If we fail to attract and retain qualified personnel to meet current and future needs, this
could slow our ability to grow our business, which could result in a decrease in market share.
We may need additional capital and we may not be able to obtain
it at acceptable terms, or at all, which could adversely affect our liquidity and financial position.
We may need additional cash resources due to changed
business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell
additional equity or debt securities or obtain a credit facility. The incurrence of indebtedness would result in increased debt service
obligations and could result in operating and financing covenants that would restrict our operations and liquidity.
Our ability to obtain additional capital on acceptable
terms is subject to a variety of uncertainties, including:
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investors’ perception of, and demand for, securities of alternative advertising media companies;
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conditions of the U.S. and other capital markets in which we may seek to raise funds;
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our future results of operations, financial condition and cash flow;
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PRC governmental regulation of foreign investment in advertising service companies in China;
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economic, political and other conditions in China; and
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PRC governmental policies relating to foreign currency borrowings.
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Our failure to protect our intellectual property rights could
have a negative impact on our business.
We believe our brand, trade name, copyrights, domain
name and other intellectual property are critical to our success. The success of our business depends in part upon our continued ability
to use our brand, trade names and copyrights to further develop and increase brand awareness. The infringement of our trade names and
copyrights could diminish the value of our brand and its market acceptance, competitive advantages or goodwill. In addition, our information
and operational systems, which have not been patented or otherwise registered as our property, are a key component of our competitive
advantage and our growth strategy.
Monitoring and preventing the unauthorized use
of our intellectual property is difficult. The measures we take to protect our brand, trade names, copyrights, domain name and other intellectual
property rights may not be adequate to prevent their unauthorized use by third parties. Furthermore, application of laws governing intellectual
property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately
protect our brand, trade names, copyrights, domain name and other intellectual property rights, we may lose these rights and our business
may suffer materially. Further, unauthorized use of our brand, domain name or trade names could cause brand confusion among advertisers
and harm our reputation. If our brand recognition decreases, we may lose advertisers and fail in our expansion strategies, and our business,
results of operations, financial condition and prospects could be materially and adversely affected.
We may be subject to intellectual property infringement claims
or other allegations, which may materially and adversely affect our business, financial condition and prospects.
We cannot be certain that we do not or will not
infringe patents, copyrights, trademarks or other intellectual property rights held by external parties. From time to time, we may be
subject to legal proceedings and claims alleging infringement of patents, trademarks, copyrights or other intellectual property rights,
or misappropriation of creative ideas or formats, or other infringement of proprietary, which may materially and adversely affect our
business, financial condition and prospects.
We rely on computer software and hardware systems in managing
our operations, the failure of which could adversely affect our business, financial condition and results of operations.
We are dependent upon our computer software and
hardware systems in supporting our network and managing and monitoring programs on the network. In addition, we rely on our computer hardware
for the storage, delivery and transmission of the data on our network. Any system failure that interrupts the input, retrieval and transmission
of data or increases the service time could disrupt our normal operation. Any failure in our computer software or hardware systems could
decrease our revenues and harm our relationships with advertisers and consumers, which in turn could have a material adverse effect on
our business, financial condition and results of operations.
Any failure or interruptions in the internet infrastructure, bandwidth
providers, data center providers, other third parties or our own systems for providing our solutions to customers could negatively impact
our business.
Our ability to deliver
our solutions is dependent on the development and maintenance of the internet and other telecommunications services by third parties.
Such services include maintenance of a reliable network backbone with the necessary speed, data capacity and security for providing reliable
internet access and services and reliable telecommunications systems that connect our operations. While our solutions are designed to
operate without interruption, we may experience interruptions and delays in services and availability from time to time. We rely on systems
as well as third-party vendors, including data center, bandwidth, and telecommunications equipment providers, to provide our solutions.
We do not maintain redundant systems or facilities for some of these services. In the event of a catastrophic event with respect to one
or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our
relationship with our customers.
Privacy and data security concerns, laws, or other regulations
could expose us to liability or impair our operations.
Privacy and data
security are rapidly evolving areas of concern and regulation. Changes in laws restricting or otherwise governing data and transfer thereof
could be difficult to comply with, result in increased costs, or impair our operations. Security measures that we implement may fail due
to third-party attack, employee error or sabotage, or other causes. Hacking techniques change frequently and therefore can be difficult
to prevent. In addition, service providers could suffer security breaches or data losses that affect our customers’ information.
A security breach could damage our reputation, resulting in loss of customers or reluctance of potential customers to try our platform,
or civil or criminal liability.
The PRC Cyber Security
Law, effective on June 1, 2017, stipulates that a network operator must adopt technical measures and other necessary measures in accordance
with applicable laws and regulations as well as compulsory national and industrial standards to safeguard the safety and stability of
network operations, effectively respond to network security incidents, prevent illegal and criminal activities, maintain the integrity,
confidentiality and availability of network data. We are making efforts to comply with the applicable laws, regulations and standards,
but there can be no assurance that our measures will be effective and sufficient under the PRC Cyber Security Law. If we were found by
the regulatory authorities to have failed to comply with the PRC Cyber Security Law, we would be subject to warning, fines, confiscation
of illegal revenue, revocation of licenses, cancellation of filings, shutdown of our platform or even criminal liability and our business,
results of operations and financial condition would also be adversely affected. In addition, in light of the evolving regulatory framework
of China for the protection of information in cyberspace, we may be subject to uncertainties of and adjustments to our business practices,
which may incur additional operating expenses and adversely affect our results of operations and financial condition.
If we are unable to maintain appropriate internal financial reporting
controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements,
harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial
information and have a negative effect on the market price for shares of our Common Stock.
Effective internal controls are necessary for us
to provide reliable financial reports and effectively prevent fraud. We maintain a system of internal control over financial reporting,
which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer,
or persons performing similar functions, 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 generally accepted accounting principles.
As a public company, we have significant additional
requirements for enhanced financial reporting and internal controls. We are required to document and test our internal control
procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments
of the effectiveness of our internal controls over financial reporting. The process of designing and implementing effective internal
controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments
and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as
a public company.
Our management will continue to evaluate the effectiveness
of our overall control environment and will continue to refine existing controls as they, in conjunction with the Audit Committee of our
Board of Directors, chief executive officer and chief financial officer, consider necessary. We cannot assure you that we will not, in
the future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the
measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate
controls over our financial processes and reporting in the future as we continue our growth. If we are unable to maintain appropriate
internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement
of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence
in our reported financial information and have a negative effect on the market price for shares of our Common Stock.
Our blockchain business is at an early stage and the PRC laws
and regulations may have a potential effect.
As an initiation
of our Business Opportunity Social Ecosystem, we are in the process of developing our Business Opportunity Chain platform based
on the blockchain technology to facilitate our company’s business. The laws and regulations governing the blockchain in China are
developing and evolving and subject to changes.
The PRC government adopts a positive attitude to
the blockchain technology and it has been mentioned several times in the national strategy reports. However, for the initial coin offering
(the “ICO”) which may appear in the most blockchain projects, the PRC government authorities have strictly prohibited the
ICO and any similar activities within the PRC by issuing the Announcement of the People's Bank of China, the Office of the Central Leading
Group for Cyberspace Affairs, the Ministry of Industry and Information Technology and Other Departments on Preventing the Financing Risks
of Initial Coin Offerings on September 4, 2017. The Banking and Insurance Regulatory Commission, the Office of the Central Cyberspace
Affairs Commission, the Ministry of Public Security, the People's Bank of China and the State Administration for Market Regulation also
issued the Risk Warning for Preventing Illegal Fundraising in the Name of "Virtual Currency" or "Blockchain" on August 24, 2018. The Internet
Finance Association of China also issued a series of notices to remind the potential risks of ICO and the cryptocurrency trading to the
PRC residents, including the Risk Warning on Guarding against the "Virtual Currency" such as Bitcoin on September 13, 2017, Risk Warning
on Guarding against the Disguised Initial Coin Offering Activities on January 12, 2018 and Risk Warning on Guarding against the Offshore
Initial Coin Offering Activities and the Cryptocurrency Trading on January 26, 2018.
We do not plan to initiate any ICO in China or
any other jurisdictions. We have been advised by our PRC counsel, as long as we do not issue any virtual currency coins, we only need
to record filing as required by the Cyberspace Administration of China's Regulations on the Management of Blockchain Information
Services that went into effect on February 15, 2019. We do not believe that such record filing procedure will have a material effect on
our blockchain-powered platform. However, as the laws and regulations governing the blockchain in China are developing and evolving and
subject to changes, we cannot assure you that that our blockchain technology related business will continue to be compliance with the
PRC law. If our practice is deemed to have violated any PRC law or regulations, our blockchain related business would be materially and
adversely affected.
Given the continuing changing of the regulation
regime and the government policy of this area in the PRC, an overall limited industry experiences in developing and operating a blockchain-powered
platform, and our lack of operating history to serve as a transaction facilitation and verification services provider, our ability to
generate substantial revenue from the blockchain-powered platform upon its launch remains unproven. It may be difficult for you to evaluate
its performance and prospects.
Risks Relating to Regulation of Our Business
and to Our Structure
If the PRC government finds that the agreements that establish
the structure for operating our China business do not comply with PRC governmental restrictions on foreign investment in industries in
which we operate, we could be subject to severe penalties.
Our operations are substantially conducted through
our PRC Operating Entities, or VIEs, and through our contractual agreements with each of our PRC Operating Entities in China. PRC regulations
restrict foreign investments in value-added telecommunication services, including providing Internet information services (“ICP”)
and used to have restrictions on foreign investments in advertising business, which was lifted on June 29, 2015. In consideration of the
restrictions on foreign investments in ICP and advertising business, our whole-owned subsidiary in China, Rise King WFOE, is ineligible
to apply for the required licenses for providing Internet information services and was ineligible to apply for the required licenses for
providing advertising services in China before June 29, 2015. Our PRC Operating Entities hold the requisite licenses and permits to provide
Internet information services and advertising services in China. We have been and are expected to continue to be dependent on these PRC
Operating Entities to operate our ICP and advertising business for the foreseeable future. We have entered into Contractual Agreements
with the PRC Operating Entities, pursuant to which we, through Rise King WFOE, provide technical support and consulting services to the
PRC Operating Entities. In addition, we have entered into agreements with our PRC Operating Entities and each of their shareholders which
provide us with the substantial ability to control these affiliates.
As discussed above, the Foreign Investment Law,
which came into effect on January 1, 2020, replaced the trio of existing laws regulating foreign investment in China, together with their
implementation rules and ancillary regulations. The Foreign Investment Law stipulates three forms of foreign investment but does not explicitly
stipulate the contractual arrangements under the VIE structure as a form of foreign investment. The Foreign Investment Law also stipulates
that foreign investment includes “foreign investors invest in China through any other methods under laws, administrative regulations,
or provisions prescribed by the State Council.”
Since the Foreign Investment Law is relatively
new, uncertainties still exist in relation to its interpretation and implementation. There is no assurance that foreign investment via
contractual arrangements would not be interpreted as a type of indirect foreign investment activities under the Foreign Investment Law
in the future.
If our contractual arrangements will be deemed
to be in violation of the market access requirements for foreign investment under the PRC laws and regulations, or furthermore we will
fail to complete any actions to be taken by companies with respect to existing contractual arrangements as mandated by future laws, administrative
regulations or provisions prescribed by the State Council in a timely manner, or at all, the relevant PRC regulatory authorities, including
the SAMR and the MIIT, which regulates ICP and advertising companies, would have broad discretion in dealing with such violations, including:
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revoking the business and operating licenses of Rise King WFOE and/or the PRC Operating Entities;
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discontinuing or restricting the operations of Rise King WFOE and/or the PRC Operating Entities;
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imposing conditions or requirements with which we, Rise King WFOE and/or our PRC Operating Entities may not be able to comply; or
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requiring us or Rise King WFOE and/or PRC Operating Entities to restructure the relevant ownership structure or operations.
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The imposition of any of these penalties would
result in a material and adverse effect on our ability to conduct our business and would have a material adverse impact on our cash flows,
financial position and operating performance.
We rely on contractual arrangements with the PRC Operating Entities
and their shareholders for our China operations, which may not be as effective in providing operational control as direct ownership.
We rely on contractual arrangements with our PRC
Operating Entities and their shareholders to operate our ICP and advertising business. These contractual arrangements may not be as effective
in providing us with control over the PRC Operating Entities as direct ownership. If we had direct ownership of the PRC Operating Entities,
we would be able to exercise our rights as a shareholder to effect changes in the board of directors of those companies, which in turn
could affect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual
arrangements, as a legal matter, if the PRC Operating Entities or any of their subsidiaries and shareholders fail to perform its or their
respective obligations under these contractual arrangements, we may have to incur substantial costs and resources to enforce such arrangements,
and rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we
cannot assure you to be effective. Accordingly, it may be difficult for us to change our corporate structure or to bring claims against
the PRC Operating Entities if they do not perform their obligations under its contracts with us or if any of the PRC citizens who hold
the equity interest in the PRC Operating Entities do not cooperate with any such actions.
Many of these contractual arrangements are governed
by PRC laws and provide for the resolution of disputes through either arbitration or litigation in the PRC. Accordingly, these contracts
would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal
environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC
legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to enforce these contractual
arrangements, we may not be able to exert effective control over our operating entities, and our ability to conduct our business may be
negatively affected. In addition, a PRC court or arbitration tribunal may refuse to enforce the contractual arrangements on the grounds
that they are designed to circumvent PRC foreign investment restrictions and therefore are against PRC public policy.
Contractual arrangements we have entered into among the PRC Operating
Entities may be subject to scrutiny by the PRC tax authorities and a finding that we owe additional taxes or are ineligible for our tax
exemption, or both, could substantially increase our taxes owed, and reduce our net income and the value of your investment.
Under PRC law, arrangements and transactions among
related parties may be subject to audit or challenge by the PRC tax authorities. If any of the transactions we have entered into among
our subsidiaries and affiliated entities are found not to be on an arm’s-length basis, or to result in an unreasonable reduction
in tax under PRC law, the PRC tax authorities have the authority to disallow our tax savings, adjust the profits and losses of our respective
PRC entities and assess late payment interest and penalties.
If any of our PRC Operating Entities incurs debt
on its own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions
to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements with the PRC
Operating Entities we currently have in place in a manner that would materially and adversely affect the PRC Operating Entities’
ability to pay dividends and other distributions to us. Furthermore, relevant PRC laws and regulations permit payments of dividends by
the PRC Operating Entities only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations.
Under PRC laws and regulations, each of the PRC Operating Entities is also required to set aside a portion of its net income each year
to fund specific reserve funds. These reserves are not distributable as cash dividends. In addition, subject to certain cumulative limits,
the statutory general reserve fund requires annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends.
As a result of these PRC laws and regulations, the PRC Operating Entities are restricted in their ability to transfer a portion of their
net assets to us whether in the form of dividends, loans or advances. Any limitation on the ability of the PRC Operating Entities to pay
dividends to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to
our businesses, pay dividends, or otherwise fund and conduct our business.
Risks Associated With Doing Business In
China
There are substantial risks associated with doing business in China,
as set forth in the following risk factors.
Our operations and assets in China are subject to significant
political and economic uncertainties.
Changes in PRC laws and regulations, or their interpretation,
or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency
or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of
operations and financial condition. Under its current leadership, the Chinese government has been pursuing economic reform policies that
encourage private economic activity and greater economic decentralization. There is no assurance, however, that the Chinese government
will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
We derive a substantial portion of our sales from China.
We derive a substantially portion of our sales
from China. We anticipate that sales of our services in China will continue to represent a substantial proportion of our total sales in
the near future. Any significant decline in the condition of the PRC economy could adversely affect consumer demand of our services, among
other things, which in turn would have a material adverse effect on our business and financial condition.
Currency fluctuations and restrictions on currency exchange may
adversely affect our business, including limiting our ability to convert Chinese Renminbi into foreign currencies and, if Chinese Renminbi
were to decline in value, reducing our revenue in U.S. dollar terms.
Our reporting currency is the U.S. dollar and our
operations in China use the local currency as their functional currencies. We are subject to the effects of exchange rate fluctuations
with respect to any of these currencies. For example, the value of the Renminbi depends to a large extent on Chinese government policies
and China’s domestic and international economic and political developments, as well as supply and demand in the local market. On
July 21, 2005, the Chinese government changed its policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy,
Chinese Renminbi may fluctuate within a narrow and managed band against a basket of certain foreign currencies. It is possible that the
Chinese government could adopt a more flexible currency policy, which could result in more significant fluctuation of Chinese Renminbi
against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be stable against the U.S. dollar or any other foreign currency.
The income statements of our operations are translated
into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies,
the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for
our international operations. Similarly, to the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign
currency denominated transactions results in increased revenue, operating expenses and net income for our international operations. We
are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign operating subsidiaries and
VIEs into U.S. dollars in consolidation. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries
and VIEs’ financial statements into U.S. dollars will lead to a translation gain or loss which is recorded as a component of other
comprehensive income. In addition, we have certain assets and liabilities that are denominated in currencies other than the relevant entity’s
functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that will lead to a
transaction gain or loss. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although
we may do so in the future. The availability and effectiveness of any hedging transaction may be limited and we may not be able to successfully
hedge our exchange rate risks.
Although Chinese governmental policies were introduced
in 1996 to allow the convertibility of Chinese Renminbi into foreign currency for current account items, conversion of Chinese Renminbi
into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration
of Foreign Exchange, or SAFE, which is under the authority of the People’s Bank of China. These approvals, however, do not guarantee
the availability of foreign currency conversion. We cannot be sure that we will be able to obtain all required conversion approvals for
our operations or those Chinese regulatory authorities will not impose greater restrictions on the convertibility of Chinese Renminbi
in the future. Because a significant amount of our future revenue may be in the form of Chinese Renminbi, our inability to obtain the
requisite approvals or any future restrictions on currency exchanges could limit our ability to utilize revenue generated in Chinese Renminbi
to fund our business activities outside of China, or to repay foreign currency obligations, including our debt obligations, which would
have a material adverse effect on our financial condition and results of operations.
We may have limited legal recourse under PRC laws if disputes
arise under our contracts with third parties.
The Chinese government has enacted laws and regulations
dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience
in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. If our new business ventures are unsuccessful, or other adverse circumstances arise from
these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions, or, may hinder or
prevent us from accessing important information regarding the financial and business operations of these acquired companies. The resolution
of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated
to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance,
or to seek an injunction under PRC law, in either of these cases, are severely limited, and without a means of recourse by virtue of the
Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material
adverse effect on our business, financial condition and results of operations.
We must comply with the Foreign Corrupt Practices Act.
We are required to comply with the United States
Foreign Corrupt Practices Act, which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials
for the purpose of obtaining or retaining business. Foreign companies, including some of our competitors, are not subject to these prohibitions.
If our competitors engage in these practices, they may receive preferential treatment from personnel of some companies, giving our competitors
an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put
us at a disadvantage. Although we inform our personnel that such practices are illegal, we cannot assure you that our employees or other
agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged
in such practices, we could suffer severe penalties.
Changes in foreign exchange regulations in the PRC may affect
our ability to pay dividends in foreign currency or conduct other foreign exchange business.
The Renminbi is not a freely convertible currency,
and the restrictions on currency exchanges may limit our ability to use revenues generated in Renminbi to fund our business activities
outside the PRC or to make dividends or other payments in United States dollars. The PRC government strictly regulates conversion of Renminbi
into foreign currencies. Over the years, foreign exchange regulations in the PRC have significantly reduced the government’s control
over routine foreign exchange transactions under current accounts. In the PRC, the State Administration for Foreign Exchange, or
the SAFE, regulates the conversion of the Renminbi into foreign currencies. Pursuant to applicable PRC laws and regulations, foreign invested
enterprises incorporated in the PRC are required to apply for foreign exchange registration certificates. Currently, conversion within
the scope of the “current account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected
without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items
such as direct investments, loans, securities, etc.) still requires the approval of SAFE.
PRC regulations relating to mergers and acquisitions of domestic
enterprises by foreign investors may increase the administrative burden we face and create regulatory uncertainties.
The Regulations on Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, (the “M&A Rules”), which adopted by six PRC regulatory agencies, took effect
as of September 8, 2006 and was subsequently amended on June 22, 2009. This regulation, among other things, has certain provisions
that require special purpose vehicles, or SPVs, formed for the purpose of acquiring PRC domestic companies and controlled by PRC individuals,
to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. However, the regulation does
not expressly provide that approval from the CSRC is required for the offshore listing of the SPV which acquires, directly or indirectly,
equity interest or shares of domestic PRC entities held by domestic companies or individuals by cash payment, nor does it expressly provide
that approval from CSRC is not required for the offshore listing of a SPV which has fully completed its acquisition of equity interest
of domestic PRC equity prior to September 8, 2006. On September 21, 2006, the CSRC published on its official website a notice specifying
the documents and materials that are required to be submitted for obtaining CSRC approval.
It is not clear whether the provisions in the regulation
regarding the offshore listing and trading of the securities of a SPV applies to an offshore company such as us which owns controlling
contractual interest in the PRC Operating Entities. We believe that the M&A Rules and the CSRC approval are not required in the context
of the share exchange under our transaction because (i) such share exchange is a purely foreign related transaction governed by foreign
laws, not subject to the jurisdiction of PRC laws and regulations; (ii) we are not a SPV formed or controlled by PRC companies or PRC
individuals; and (iii) we are owned or substantively controlled by foreigners. However, we cannot be certain that the relevant PRC
government agencies, including the CSRC, would reach the same conclusion, and we still cannot rule out the possibility that CSRC may deem
that the transactions effected by the share exchange circumvented the M&A rules, the PRC Securities Law and other rules and notices.
If the CSRC or another PRC regulatory agency subsequently
determines that the CSRC’s approval is required for the transaction, we may face sanctions by the CSRC or another PRC regulatory
agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges
in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, restrict or prohibit payment or remittance
of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations,
reputation and prospects, as well as the trading price of our shares. The CSRC or other PRC regulatory agencies may also take actions
requiring us, or making it advisable for us, to delay or cancel the transaction.
The M&A Rules, along with foreign exchange
regulations discussed in the above subsection, will be interpreted or implemented by the relevant government authorities in connection
with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy. For example,
our operating companies’ ability to remit dividends to us, or to engage in foreign-currency-denominated borrowings, may be conditioned
upon compliance with the SAFE registration requirements by such Chinese domestic residents, over whom we may have no control. In addition,
such Chinese domestic residents may be unable to complete the necessary approval and registration procedures required by the SAFE regulations.
Such uncertainties may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects.
Future inflation in China may inhibit our activity to conduct
business in China.
In recent years, the Chinese economy has experienced
periods of rapid expansion and high rates of inflation. These factors have led to the adoption by 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 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 services.
The enforcement of the PRC Labor Contract Law and other labor-related
regulations in the PRC may adversely affect our business and results of operations.
The Standing Committee of the National People’s
Congress enacted the Labor Contract Law on January 2008 and amended it on December 28, 2012. The Labor Contract Law introduced specific
provisions related to fixed-term employment contracts, part-time employment, probationary periods, consultation with labor unions and
employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining to enhance previous
PRC labor laws. Under the Labor Contract Law, an employer is obligated to sign an unlimited-term labor contract with any employee who
has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract
that has already been entered into twice consecutively, the resulting contract, with certain exceptions, must have an unlimited term.
With certain exceptions, an employer must pay severance to an employee where a labor contract is terminated or expires. In addition, PRC
governmental authorities have continued to introduce various new labor-related regulations since the effectiveness of the Labor Contract
Law.
Under the PRC Social Insurance Law and the Administrative
Measures on Housing Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance,
unemployment insurance, maternity insurance and housing funds and employers are required, together with their employees or separately,
to pay the social insurance premiums and housing funds for their employees.
These laws designed to enhance labor protection
tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our employment
practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties or incur
significant liabilities in connection with labor disputes or investigations, which could have a material adverse effect on our results
of operations and financial condition.
We may have difficulty establishing adequate management, legal
and financial controls in the PRC.
We may have difficulty in hiring and retaining
a sufficient number of qualified employees to work in the PRC. 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. We may have difficulty establishing adequate management, legal
and financial controls in the PRC.
You may experience difficulties in effecting service of legal
process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us and
our management.
We conduct a substantial portion of our operations
in China and a substantial portion of our assets are located in China. In addition, some of our directors and executive officers reside
within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon
some of our directors and senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable
state securities laws. It would also be difficult for investors to bring an original lawsuit against us or our directors or executive
officers before a Chinese court based on U.S. federal securities laws or otherwise. Moreover, China does not have treaties with the United
States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.
It may be difficult for overseas regulators 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 the securities
regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore,
according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities
regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. 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 difficulties faced by you in protecting
your interests.
PRC enterprise income tax law could adversely affect our business
and our net income.
On March 16, 2007, the National People’s
Congress of the PRC passed the revised Enterprise Income Tax Law (or EIT Law), which took effect on of January 1, 2008 and was subsequently
amended on February 24, 2017 and December 29, 2018, respectively. The EIT Law imposes a unified income tax rate of 25% on all companies
established in China. Under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within
the PRC is considered as a resident enterprise and will normally be subject to the enterprise income tax at the rate of 25% on its global
income. The EIT Law, however, does not define the term “de facto management bodies.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our global income will be subject to PRC income tax at a tax rate
of 25%.
With the introduction of the EIT Law, China has
resumed imposition of a withholding tax (10% in the absence of a bilateral tax treaty or new domestic regulation reducing such withholding
tax rate to a lower rate). Per the Double Tax Avoidance Arrangement between Hong Kong and Mainland China, a Hong Kong company as
the investor, which is considered a “non-resident enterprise” under the EIT Law, may enjoy the reduced withholding tax rate
of 5% if it holds more than 25% equity interest in its PRC subsidiary. As China Net HK is the sole shareholder of Rise King WFOE,
substantially all of our income will derive from dividends we receive from Rise King WFOE through China Net HK. When we declare dividends
from the income in the PRC, we cannot assure whether such dividends may be taxed at a reduced withholding tax rate of 5% per the Double
Tax Avoidance Arrangement between Hong Kong and Mainland China as the PRC tax authorities may regard our China Net HK as a shell company
formed only for tax purposes and still deem Rise King WFOE in the PRC as the subsidiary directly owned by us. Based on the Notice on Certain
Issues with respect to the Enforcement of Dividend Provisions in Tax Treaties, issued on February 20, 2009 by the State Administration
of Taxation, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax
rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment.
Investors should note that the EIT Law provides
only a framework of the enterprise tax provisions, leaving many details on the definitions of numerous terms as well as the interpretation
and specific applications of various provisions unclear and unspecified. Any increase in our tax rate in the future could have a
material adverse effect on our financial conditions and results of operations.
Under the EIT Law, we may be classified as a “resident enterprise”
of China. Such classification will likely result in unfavorable tax consequences to us and holders of our securities.
Under the EIT Law, an enterprise established outside
of China with its “de facto management body” in China is considered a “resident enterprise,” meaning that it can
be treated the same as a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law defines “de
facto management body” as an organization that exercises “substantial and overall management and control over the production
and operations, personnel, accounting, and properties” of an enterprise. Currently no interpretation or application of the EIT Law
and its implementing rules is available, therefore it is unclear how tax authorities will determine tax residency based on the facts of
each case.
If the PRC tax authorities determine that China
Net is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could
follow. First, we will be subject to enterprise income tax at a rate of 25% on our worldwide income as well as PRC enterprise income tax
reporting obligations. This would mean that income such as interest on offering proceeds and other non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us by our
PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10%
withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with
respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, a 10% withholding tax will be imposed on dividends we pay to our non-PRC shareholders.
Our Chinese operating companies are obligated to withhold and
pay PRC individual income tax in respect of the salaries and other income received by their employees who are subject to PRC individual
income tax. If they fail to withhold or pay such individual income tax in accordance with applicable PRC regulations, they may be subject
to certain sanctions and other penalties, which could have a material adverse impact on our business.
Under PRC laws, Rise King WFOE and the PRC Operating
Entities will be obligated to withhold and pay individual income tax in respect of the salaries and other income received by their employees
who are subject to PRC individual income tax. Such companies may be subject to certain sanctions and other liabilities under PRC laws
in case of failure to withhold and pay individual income taxes for its employees in accordance with the applicable laws.
In addition, the SAT has issued several circulars
concerning employee stock options. Under these circulars, employees working in the PRC (which could include both PRC employees and expatriate
employees subject to PRC individual income tax) are required to pay PRC individual income tax in respect of their income derived from
exercising or otherwise disposing of their stock options. Our PRC entities will be obligated to file documents related to employee stock
options with relevant tax authorities and withhold and pay individual income taxes for those employees who exercise their stock options.
While tax authorities may advise us that our policy is compliant, they may change their policy, and we could be subject to sanctions.
Because Chinese laws will govern almost all of our business’
material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant loss of
business, business opportunities or capital.
The Chinese legal system is similar to a civil
law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential
value. Although legislation in the PRC over the past 40 years has significantly improved the protection afforded to various forms of foreign
investment and contractual arrangements in the PRC, these laws, regulations and legal requirements are relatively new. Due to the limited
volume of published judicial decisions, their non-binding nature, the short history since their enactments, the discrete understanding
of the judges or government agencies of the same legal provision, inconsistent professional abilities of the judicators, and the inclination
to protect local interest in the court rooms, interpretation and enforcement of PRC laws and regulations involve uncertainties, which
could limit the legal protection available to us, and foreign investors, including you. The inability to enforce or obtain a remedy under
any of our future agreements could result in a significant loss of business, business opportunities or capital and could have a material
adverse impact on our business, prospects, financial condition, and results of operations. 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 a period of time after the violation. In addition,
any litigation in the PRC, regardless of outcome, may be protracted and result in substantial costs and diversion of resources and management
attention.
The non-U.S. activities of our non-U.S. subsidiaries and VIEs
may be subject to U.S. taxation.
We conduct a substantial portion of our business
through our operating subsidiaries and VIEs in China and are subject to income tax in the PRC. ZW Data Action Technologies Inc. is a Nevada
corporation and is subject to income tax in the United States. New U.S. federal tax legislation, commonly referred to as the Tax Cuts
and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform significantly modified
the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for
taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial
tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign
subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries;
and providing for new taxes on certain foreign earnings.
The U.S. Tax Reform includes provisions for a new
tax on global intangible low-taxed income (“GILTI”) effective for tax years of non-U.S. corporations beginning after December 31,
2017. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations
(“CFCs”), subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income
tax liability, subject to some limitations. The new GILTI tax would be imposed on us when our subsidiaries and VIEs that are CFCs generate
income that is subject to Subpart F of the U.S. Internal Revenue Code beginning after December 31, 2017, and any such resulting U.S. corporate
income tax imposed on us would reduce our consolidated net income.
Risks Related to our Securities
Insiders have substantial control over us, and they could delay
or prevent a change in our corporate control even if our other stockholders wanted it to occur.
Our executive officers, directors, and principal
stockholders hold approximately 19% of our outstanding Common Stock. Accordingly, these stockholders are able to exert substantial
influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This
could delay or prevent an outside party from acquiring or merging with us even if our other stockholders wanted it to occur.
There may not be sufficient liquidity in the market for our securities
in order for investors to sell their securities.
There is currently only a limited public market for our Common Stock and there can be no assurance
that a trading market will develop further or be maintained in the future. As of April 12, 2021, the closing trade
price of our Common Stock was $2.63 per share. As of April 13, 2021, we had approximately 615 shareholders of record
of our Common Stock, not including shares held in street name. In addition, during the past two fiscal years our Common Stock
has had a trading range with a low price of $0.56 per share and a high price of $2.29 per share.
The market price of our Common Stock may be volatile.
The market price of our Common Stock has been and
will likely continue to be highly volatile, as is the stock market in general. Some of the factors that may materially affect the market
price of our Common Stock are beyond our control, such as changes in financial estimates by industry and securities analysts, conditions
or trends in the industry in which we operate or sales of our common stock. These factors may materially adversely affect the market price
of our Common Stock, regardless of our performance. In addition, the public stock markets have experienced extreme price and trading volume
volatility particularly for companies whose primary operations are located in the PRC. This volatility has significantly affected the
market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of our Common Stock.
The outstanding options and warrants may adversely affect us in
the future and cause dilution to existing stockholders.
We currently have common stock purchase options
outstanding to purchase up to 277,976 shares of our Common Stock in the aggregate issued to our management, executive directors and employees,
subject to forfeiture upon an employee's cessation of employment at the discretion of the Company. The exercise price of these options
is $3.00 per share, and these options will expire on November 29, 2021. We also have warrants outstanding to purchase up to 5,130,705
shares of our Common Stock, of which 129,000 warrants will expire on July 18, 2021, 2,030,865 will expire on December 14, 2023, and the
remaining 2,970,840 warrants will expire on August 18, 2024. The exercise prices of these warrants range from $1.4927 to $4.4875 per share,
subject to adjustment in certain circumstances. Exercise of these options and warrants may cause dilution in the interests of other stockholders
as a result of the additional Common Stock that would be issued upon exercise. In addition, sales of the shares of our Common Stock issuable
upon exercise of these options and warrants could have a depressive effect on the price of our stock, particularly if there is not a coinciding
increase in demand by purchasers of our Common Stock. Further, the terms on which we may obtain additional financing during the period
any of these options and warrants remain outstanding may be adversely affected by the existence of these options and warrants as well.
We may need additional capital and may sell additional securities
or other equity securities or incur indebtedness, which could result in additional dilution to our shareholders or increase our debt service
obligations.
We may require additional cash resources due to
changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our cash
resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit
facility. The sale of additional equity securities or equity-linked debt securities could result in additional dilution to our shareholders.
The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants
that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if
at all.
We have not paid dividends in the past and do not expect to pay
dividends in the future, and any return on investment may be limited to the value of our stock.
We have never paid any cash dividends on our Common
Stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future and any return on investment may be
limited to the value of our stock. We plan to retain any future earning to finance growth.
Techniques employed by manipulative short sellers in Chinese small
cap stocks may drive down the market price of our common stock.
Short selling is the practice of selling securities
that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities
back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the
sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that
purchase than it received in the sale. As it is therefore in the short seller’s best interests for the price of the stock
to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of, negative
opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for
themselves after selling a stock short. While traditionally these disclosed shorts were limited in their ability to access mainstream
business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document
creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s
credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large
Wall Street firm and independent research analysts. These short attacks have, in the past, led to selling of shares in the market,
on occasion in large scale and broad base. Issuers with business operations based in China and who have limited trading volumes
and are susceptible to higher volatility levels than U.S. domestic large-cap stocks, can be particularly vulnerable to such short attacks.
These short seller publications are not regulated
by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements
imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions they
express may be based on distortions of actual facts or, in some cases, fabrications of facts. In light of the limited risks involved
in publishing such information, and the enormous profit that can be made from running just one successful short attack, unless the short
sellers become subject to significant penalties, it is more likely than not that disclosed shorts will continue to issue such reports.
While we intend to strongly defend our public filings
against any such short seller attacks, oftentimes we are constrained, either by principles of freedom of speech, applicable state law
(often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against
the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy – oftentimes
blogging from outside the U.S. with little or no assets or identity requirements – should we be targeted for such an attack, our
stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by
market participants.
The NASDAQ may delist our securities from quotation on its exchange
which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
Our Common Stock is traded on the Nasdaq Stock
Market LLC (“NASDAQ”), a national securities exchange. On April 21, 2020, we received a notice (the “Notice”)
from NASDAQ indicating that our Common Stock failed to comply with the $1.00 minimum bid price required for continued listing on The Nasdaq
Capital Market under Nasdaq Listing Rule 5550(a)(2) based upon the closing bid price of the Common Stock for the 30 consecutive business
days prior to the date of the Notice. To regain compliance, the minimum bid price of the Common Stock must meet or exceed $1.00 per share
for a minimum ten consecutive business days at any point prior to December 28, 2020. On June 23, 2020, we received a written notice (the
“Letter”) from the Listing Qualifications department (the “Staff”) of The NASDAQ notifying us that the Staff had
determined that for ten consecutive business days, from June 9 to June 22, 2020, the closing bid price of the Common Stock had been at
$1.00 per share or greater and that accordingly, we have regained compliance with Listing Rule 5550(a)(2).
Although,
we have regained compliance under the Nasdaq Listing Rule 5550(a)(2), there can be no assurance that we will meet the continued listing
requirements of NASDAQ or will otherwise be in compliance with other NASDAQ listing criteria. If NASDAQ delists our Common Stock
from trading on its exchange, we could face significant material adverse consequences including:
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a limited availability of market quotations for our securities;
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a determination that our Common Stock is a “penny stock” which will require brokers trading in our Common Stock to adhere
to more stringent rules and possibly resulting in a reduced level of trading activity in the secondary trading market for our Common Stock;
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a limited amount of news and analyst coverage for our company; and
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a decreased ability to issue additional securities or obtain additional financing in the future.
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The audit report included in this annual report is prepared by
an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you may be deprived of the benefits of
such inspection.
Our independent registered public accounting firm
that issues the audit reports included in our annual reports filed with the U.S. Securities and Exchange Commission (the “SEC”),
as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight
Board (United States) (the “PCAOB”), is required by the laws of the United States to undergo regular inspections by the PCAOB
to assess its compliance with the applicable laws of the United States and professional standards. Because our auditor is located in the
People’s Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections and access critical accounting
records without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB. Inspections conducted by
the PCAOB outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may
be addressed as part of the inspection process to improve future audit quality and prevent accounting irregularities. This lack of PCAOB
inspections in China prevents the PCAOB from regularly evaluating audit documentation located in China and its related quality control
procedures. As a result, investors may be deprived of the benefits of PCAOB inspections. In a joint public statement on April 21, 2020,
the Chairman of the SEC, the Chairman of the PCAOB, SEC Chief Accountant and Directors of the SEC Divisions of Corporation Finance and
Investment Management reminded market participants that this inability of the PCAOB to inspect the audit work and practices of PCAOB-registered
accounting firms in China (including Hong Kong, to the extent their audit clients have operations in China) represented a significant
risk to both investors and finance professionals.
The recent proposed rule changes submitted by
NASDAQ, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging
market companies upon assessing the qualification of their auditors, especially non-U.S. auditors who are not inspected by the PCAOB.
These developments could add uncertainties to our Common Stock.
On May 20, 2020, the U.S. Senate passed S.
945, the Holding Foreign Companies Accountable Act, or the Act. The Act was approved by the U.S. House of Representatives on December
2, 2020 and signed into law by the U.S. President on December 18, 2020. In essence, the Act requires the U.S. Securities and Exchange
Commission (the “SEC”) to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges
or trade “over-the-counter” if the auditor of the registrant’s financial statements is not subject to PCAOB inspection
for three consecutive years, beginning in 2021. In addition, on May 18, 2020, The Nasdaq Stock Market, LLC submitted three proposals
to the SEC to adopt additional listing criteria applicable to companies that primarily operate in countries where there are secrecy laws,
blocking statutes, national security laws or other laws or regulations restricting access to information by regulators of U.S. listed
companies. Enactment of the Act and any additional rulemaking efforts to increase U.S. regulatory access to audit information could cause
investor uncertainty for affected issuers, including us, the market price of our Common Stock could be adversely affected, and we could
be delisted if we are unable to cure the situation to meet the PCAOB inspection requirement in time. It is unclear if and when any of
such proposed legislation or listing requirements will be enacted or approved.
If we become directly subject to the scrutiny involving U.S. listed
Chinese companies, we may have to expend significant resources to investigate and/or defend the matter, which could harm our business
operations, stock price and reputation.
U.S. public companies that have substantially all
of their operations in China have been the subject of intense scrutiny by investors, financial commentators and regulatory agencies. Much
of the scrutiny has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial
reporting and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock of many U.S. listed China-based companies
that have been the subject of such scrutiny has sharply decreased in value. Many of these companies are now subject to shareholder lawsuits
and/or SEC enforcement actions that are conducting internal and/or external investigations into the allegations. If we become the subject
of any such scrutiny, whether any allegations are true or not, we may have to expend significant resources to investigate such allegations
and/or defend our company. Such investigations or allegations will be costly and time-consuming and distract our management from
our business plan and could result in our reputation being harmed and our stock price could decline as a result of such allegations, regardless
of the truthfulness of the allegations.