ITEM
1A. RISK FACTORS
In
addition to the information contained in our Annual Report on Form 10-K for the fiscal year ended February 28, 2021, and this
Quarterly Report on Form 10-Q, we have identified the following material risks and uncertainties which reflect our outlook and
conditions known to us as of the date of this Quarterly Report. These material risks and uncertainties should be carefully reviewed
by our stockholders and any potential investors in evaluating the Company, our business and the market value of our common stock.
Furthermore, any one of these material risks and uncertainties has the potential to cause actual results, performance, achievements
or events to be materially different from any future results, performance, achievements or events implied, suggested or expressed
by any forward-looking statements made by us or by persons acting on our behalf. Refer to Cautionary Note Regarding Forward-looking
Statements as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2021.
There
is no assurance that we will be successful in preventing the material adverse effects that any one or more of the following material
risks and uncertainties may cause on our business, prospects, financial condition and operating results, which may result in a
significant decrease in the market price of our common stock. Furthermore, there is no assurance that these material risks and
uncertainties represent a complete list of the material risks and uncertainties facing us. There may be additional risks and uncertainties
of a material nature that, as of the date of this Quarterly Report, we are unaware of or that we consider immaterial that may
become material in the future, any one or more of which may result in a material adverse effect on us. You could lose all or a
significant portion of your investment due to any one of these material risks and uncertainties.
Risks
Related to the Business
We
have a limited operating history and, as a result, our past results may not be indicative of future operating performance.
We
have a limited operating history, which makes it difficult to forecast our future results. You should not rely on our past results
of operations as indicators of future performance. You should consider and evaluate our prospects in light of the risks and uncertainty
frequently encountered by companies like ours.
If
we fail to address the risks and difficulties that we face, including those described elsewhere in this Risk Factors
section, our business, financial condition and results of operations could be adversely affected. Further, because we have limited
historical financial data and operate in an evolving market, any predictions about our future revenue and expenses may not be
as accurate as they would be if we had a longer operating history or operated in a more predictable market. We have encountered
in the past, and will encounter in the future, risks and uncertainties frequently experienced by growing companies with limited
operating histories in rapidly changing industries. If our assumptions regarding these risks and uncertainties are incorrect or
change, or if we do not address these risks successfully, our results of operations could differ materially from our expectations
and our business, financial condition and results of operations could be adversely affected.
We
have a history of net losses and we may not be able to achieve or maintain profitability in the future.
For
all annual periods of our operating history we have experienced net losses. We generated a net loss of approximately $0.91 million
during the three month period ended May 31, 2021 and net losses of approximately $4.3 million, $3.0 million and $2.9 million for
the years ended February 28, 2021, 2020 and 2019, respectively. As of May 31, 2021 and February 28, 2021, we had an accumulated
deficit of approximately $13.12 million and $12.2 million, respectively. We have not achieved profitability, and we may not realize
sufficient revenue to achieve profitability in future periods. Our expenses will likely increase in the future as we develop and
launch new offerings and platform features, expand in existing and new markets, increase our sales and marketing efforts and continue
to invest in our platform. These efforts may be more costly than we expect and may not result in increased revenue or growth in
our business. If we are unable to generate adequate revenue growth and manage our expenses, we may continue to incur significant
losses in the future and may not be able to achieve or maintain profitability.
If
we fail to effectively manage our growth, our business, financial condition and results of operations could be adversely affected.
We
are currently experiencing growth in our business. This expansion increases the complexity of our business and has placed, and
will continue to place, strain on our management, personnel, operations, systems, technical performance, financial resources and
internal financial control and reporting functions. Our ability to manage our growth effectively and to integrate new employees,
technologies and acquisitions into our existing business will require us to continue to expand our operational and financial infrastructure
and to continue to retain, attract, train, motivate and manage employees. Continued growth could strain our ability to develop
and improve our operational, financial and management controls, enhance our reporting systems and procedures, recruit, train and
retain highly skilled personnel and maintain user satisfaction. Additionally, if we do not effectively manage the growth of our
business and operations, the quality of our offerings could suffer, which could negatively affect our reputation and brand, business,
financial condition and results of operations.
The
impact of the novel coronavirus (COVID-19) pandemic on the global economy, our operations and consumer demand for consumer goods
and services remains uncertain, which could have a material adverse impact on our business, results of operations and financial
condition and on the market price of our common shares.
In
December 2019, a strain of novel coronavirus (now commonly known as COVID-19) was reported to have surfaced in Wuhan, China. COVID-19
has since spread rapidly throughout many countries, and, on March 11, 2020, the World Health Organization declared COVID-19 to
be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada
and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction
in economic activity in countries that have had significant outbreaks of COVID-19. Although our operating subsidiaries and contractually
controlled entity report that is operation have not been materially affected at this point, significant uncertainty remains as
to the potential impact of the COVID-19 pandemic on our operations and on the global economy as a whole. It is currently not possible
to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The
COVID-19 pandemic has resulted in significant financial market volatility and uncertainty over the last year or so.. A continuation
or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability
to access capital, on our business, results of operations and financial condition, on the market price of our common shares, and
on consumer demand for consumer services, including those offered by our Company.
We
depend on our key personnel and other highly skilled personnel, and if we fail to attract, retain, motivate or integrate our personnel,
our business, financial condition and results of operations could be adversely affected.
Our
success depends in part on the continued service of our founders, senior management team, key technical employees and other highly
skilled personnel and on our ability to identify, hire, develop, motivate, retain and integrate highly qualified personnel for
all areas of our organization. We may not be successful in attracting and retaining qualified personnel to fulfill our current
or future needs. Our competitors may be successful in recruiting and hiring members of our management team or other key employees,
and it may be difficult for us to find suitable replacements on a timely basis, on competitive terms or at all. If we are unable
to attract and retain the necessary personnel, particularly in critical areas of our business, we may not achieve our strategic
goals.
Our
concentration of earnings from two telecommunications companies may have a material adverse affect on our financial condition
and results of operations.
We
currently derive a substantial amount of our total revenue through contracts secured with China Unicom and China Mobile. If we
were to lose the business of one or both of these mobile telecommunications companies, if either were to fail to fulfill its obligations
to us, if either were to experience difficulty in paying rebates to us on a timely basis, if either negotiated lower pricing terms,
or if either increased the number of licensed payment portals it permits to process its payments, it could have a material adverse
effect on our competitive position, business, financial condition, results of operations and cash flows. Additionally, we cannot
guarantee that the volume of revenue we earn from China Unicom and China Mobile will remain consistent going forward. Any substantial
change in our relationships with either China Unicom or China Mobile, or both, whether due to actions by our competitors, regulatory
authorities, industry factors or otherwise, could have a material adverse effect on our business, financial condition and results
of operations.
Any
actual or perceived security or privacy breach could interrupt our operations, harm our brand and adversely affect our reputation,
brand, business, financial condition and results of operations.
Our
business involves the processing and transmission of our users personal and other sensitive data. Because techniques used
to obtain unauthorized access to or to sabotage information systems change frequently and may not be known until launched against
us, we may be unable to anticipate or prevent these attacks. Unauthorized parties may in the future gain access to our systems
or facilities through various means, including gaining unauthorized access into our systems or facilities or those of our service
providers, partners or users on our platform, or attempting to fraudulently induce our employees, service providers, partners,
users or others into disclosing names, passwords, payment information or other sensitive information, which may in turn be used
to access our information technology systems, or attempting to fraudulently induce our employees, partners or others into manipulating
payment information, resulting in the fraudulent transfer of funds to criminal actors. In addition, users on our platform could
have vulnerabilities on their own mobile devices that are entirely unrelated to our systems and platform but could mistakenly
attribute their own vulnerabilities to us. Further, breaches experienced by other companies may also be leveraged against us.
For example, credential stuffing attacks are becoming increasingly common and sophisticated actors can mask their attacks, making
them increasingly difficult to identify and prevent. Certain efforts may be state-sponsored or supported by significant financial
and technological resources, making them even more difficult to detect.
Although
we have developed systems and processes that are designed to protect our users data, prevent data loss and prevent other
security breaches, these security measures cannot guarantee security. Our information technology and infrastructure may be vulnerable
to cyberattacks or security breaches; also, employee error, malfeasance or other errors in the storage, use or transmission of
personal information could result in an actual or perceived privacy or security breach or other security incident.
Any
actual or perceived breach of privacy or security could interrupt our operations, result in our platform being unavailable, result
in loss or improper disclosure of data, result in fraudulent transfer of funds, harm our reputation and brand, damage our relationships
with third-party partners, result in significant legal, regulatory and financial exposure and lead to loss of confidence in, or
decreased use of, our platform, any of which could adversely affect our business, financial condition and results of operations.
Any breach of privacy or security impacting any entities with which we share or disclose data (including, for example, our third-party
providers) could have similar effects.
Additionally,
defending against claims or litigation based on any security breach or incident, regardless of their merit, could be costly and
divert managements attention. We cannot be certain that our insurance coverage will be adequate for data handling or data
security liabilities actually incurred, that insurance will continue to be available to us on commercially reasonable terms, or
at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims
against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on our reputation,
brand, business, financial condition and results of operations.
Systems
failures and resulting interruptions in the availability of our platform or offerings could adversely affect our business, financial
condition and results of operations.
Our
systems, or those of third parties upon which we rely, may experience service interruptions or degradation because of hardware
and software defects or malfunctions, distributed denial-of-service and other cyberattacks, human error, earthquakes, hurricanes,
floods, fires, natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts,
terrorist attacks, computer viruses, ransomware, malware or other events. Our systems also may be subject to break-ins, sabotage,
theft and intentional acts of vandalism, including by our own employees. Some of our systems are not fully redundant and our disaster
recovery planning may not be sufficient for all eventualities. Our business interruption insurance may not be sufficient to cover
all of our losses that may result from interruptions in our service as a result of systems failures and similar events.
We
have not experienced any system failures or other events or conditions that have interrupted the availability or reduced or affected
the speed or functionality of our offerings. These events, were they to occur in the future, could adversely affect our business,
reputation, results of operations and financial condition.
The
successful operation of our business depends upon the performance and reliability of Internet, mobile, and other infrastructures
that are not under our control.
Our
business depends on the performance and reliability of Internet, mobile and other infrastructures that are not under our control.
Disruptions in Internet infrastructure or the failure of telecommunications network operators to provide us with the bandwidth
we need to provide our services and offerings could interfere with the speed and availability of our platform. If our platform
is unavailable when platform users attempt to access it, or if our platform does not load as quickly as platform users expect,
platform users may not return to our platform as often in the future, or at all, and may use our competitors products or
offerings more often. In addition, we have no control over the costs of the services provided by national telecommunications operators.
If mobile Internet access fees or other charges to Internet users increase, consumer traffic may decrease, which may in turn cause
our revenue to significantly decrease.
Our
business depends on the efficient and uninterrupted operation of mobile communications systems. The occurrence of an unanticipated
problem, such as a power outage, telecommunications delay or failure, security breach or computer virus could result in delays
or interruptions to our services, offerings and platform, as well as business interruptions for us and platform users. Furthermore,
foreign governments may leverage their ability to shut down directed services, and local governments may shut down our platform
at the routing level. Any of these events could damage our reputation, significantly disrupt our operations, and subject us to
liability, which could adversely affect our business, financial condition and operating results. We have invested significant
resources to develop new products to mitigate the impact of potential interruptions to mobile communications systems, which can
be used by consumers in territories where mobile communications systems are less efficient. However, these products may ultimately
be unsuccessful.
We
may be subject to claims, lawsuits, government investigations and other proceedings that may adversely affect our business, financial
condition and results of operations.
We
may be subject to claims, lawsuits, arbitration proceedings, government investigations and other legal and regulatory proceedings
as our business grows and as we deploy new offerings, including proceedings related to our products or our acquisitions, securities
issuances or business practices. The results of any such claims, lawsuits, arbitration proceedings, government investigations
or other legal or regulatory proceedings cannot be predicted with certainty. Any claims against us, whether meritorious or not,
could be time-consuming, result in costly litigation, be harmful to our reputation, require significant management attention and
divert significant resources. Determining reserves for litigation is a complex and fact-intensive process that requires significant
subjective judgment and speculation. It is possible that such proceedings could result in substantial damages, settlement costs,
fines and penalties that could adversely affect our business, financial condition and results of operations. These proceedings
could also result in harm to our reputation and brand, sanctions, consent decrees, injunctions or other orders requiring a change
in our business practices. Any of these consequences could adversely affect our business, financial condition and results of operations.
Furthermore, under certain circumstances, we have contractual and other legal obligations to indemnify and to incur legal expenses
on behalf of our business and commercial partners and current and former directors and officers.
We
may require additional funding to support our business.
To
grow our business, FingerMotion currently looks to take advantage of the immense mobile phone payment market, estimated at a monthly
gross transaction volume (GTV) is estimated at US$153 billion in 2019 and is expected to increase to US$165 billion by 2024 (source:
https://telecomstechnews.com/news/2019/nov/21/total-mobile-service-revenue-china-hit-165bn-end-2024-reveals-globaldata/).
For the Company to continue to grow, the deposit with the Telecoms needs to increase, as the GTV we process is dependent on the
size of the deposit we have with each Telecom. We will likely need to raise additional capital to materially increase the amounts
of these deposits. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities
may have rights, preferences or privileges senior to those of our common stock, and our existing stockholders may experience dilution.
Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities
and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue
business opportunities. We cannot be certain that additional funding will be available to us on favorable terms, or at all. If
we are unable to obtain adequate funding or funding on terms satisfactory to us, when we require it, our ability to continue to
support our business growth and to respond to business challenges could be significantly limited, and our business, financial
condition and results of operations could be adversely affected.
Claims
by others that we infringed their proprietary technology or other intellectual property rights could harm our business.
Companies
in the Internet and technology industries are frequently subject to litigation based on allegations of infringement or other violations
of intellectual property rights. In addition, certain companies and rights holders seek to enforce and monetize patents or other
intellectual property rights they own, have purchased or otherwise obtained. As we gain a public profile and the number of competitors
in our market increases, the possibility of intellectual property rights claims against us grows. From time to time, third parties
may assert claims of infringement of intellectual property rights against us. Many potential litigants, including some of our
competitors and patent-holding companies, have the ability to dedicate substantial resources to assert their intellectual property
rights. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending
against the claim, could distract our management from our business and could require us to cease use of such intellectual property.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, we risk
compromising our confidential information during this type of litigation. We may be required to pay substantial damages, royalties
or other fees in connection with a claimant securing a judgment against us, we may be subject to an injunction or other restrictions
that prevent us from using or distributing our intellectual property, or we may agree to a settlement that prevents us from distributing
our offerings or a portion thereof, which could adversely affect our business, financial condition and results of operations.
With
respect to any intellectual property rights claim, we may have to seek out a license to continue operations found to be in violation
of such rights, which may not be available on favorable or commercially reasonable terms and may significantly increase our operating
expenses. Some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to
us. If a third party does not offer us a license to its intellectual property on reasonable terms, or at all, we may be required
to develop alternative, non-infringing technology, which could require significant time (during which we would be unable to continue
to offer our affected offerings), effort and expense and may ultimately not be successful. Any of these events could adversely
affect our business, financial condition and results of operations.
Risks
Related to Our Securities
Our
stock has limited liquidity.
Our
common stock trades on the OTCQX operated by OTC Markets Group Inc. Trading volume in our shares may be sporadic and the price
could experience volatility. If adverse market conditions exist, you may have difficulty selling your shares.
The
market price of our common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control,
including the following:
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actual
or anticipated fluctuations in our operating results;
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changes
in financial estimates by securities analysts or our failure to perform in line with such estimates;
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changes
in market valuations of other companies, particularly those that market services such as ours;
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announcements
by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
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introduction
of product enhancements that reduce the need for our products; and
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departure
of key personnel.
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We
do not intend to pay dividends for the foreseeable future.
We
have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance
the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As
a result, stockholders must rely on sales of their common stock after price appreciation as the only way to realize any future
gains on their investment.
If
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the
market price and trading volume of our common stock could decline.
The
trading market for our common stock may depend in part on the research and reports that securities or industry analysts publish
about us, our business, our market or our competition. The analysts estimates are based upon their own opinions and are
often different from our estimates or expectations. If one or more of the analysts who cover us downgrade our common stock, provide
a more favorable recommendation about our competitors or publish inaccurate or unfavorable research about our business, the price
of our securities would likely decline. If few securities analysts commence coverage of us, or if one or more of these analysts
cease coverage of us or fail to publish reports on us regularly, demand for our securities could decrease, which might cause the
price and trading volume of our common stock to decline.
We
are subject to federal legislation to protect investors against corporate fraud.
Federal
legislation, such as the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act, has resulted in the adoption of various
corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of
these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements
of national securities exchanges, such as the NYSE or the Nasdaq Stock Market, on which their securities are listed. Among the
corporate governance measures that are required under the rules of national securities exchanges are those that address board
of directors independence, audit committee oversight and the adoption of a code of ethics.
We
have not yet adopted any of these corporate governance measures such as an audit or other independent committees of our board
of directors. Additionally, since our securities are not yet listed on a national securities exchange, we are not required to
do so. If we expand our board membership in future periods to include independent directors, we may seek to establish an audit
and other committees of our board of directors. It is possible that if we were to adopt some or all of these corporate governance
measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested
directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating
and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such
as compensation packages to our senior officers and recommendations for director nominees are made by a majority of directors
who have an interest in the outcome of the matters being decided. Prospective investors should consider our current lack of corporate
governance measures in making their investment decisions.
If
we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce
timely and accurate financial statements or comply with applicable regulations could be impaired.
As
a public company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley
Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial
reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under
the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to
improve our internal control over financial reporting. We have expended, and anticipate that we will continue to expend, significant
resources in order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over
financial reporting.
Our
current controls and any new controls that we develop may become inadequate because of changes in the conditions in our business.
Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future.
Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement,
could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of
our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting
could also adversely affect the results of periodic management evaluations and annual independent registered public accounting
firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually
be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures
and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other
information, which would likely adversely affect the market price of our common stock
Financial
Industry Regulatory Authority (FINRA) sales practice requirements may also limit a shareholders ability to
buy and sell our Common Shares, which could depress the price of our Common Shares.
In
addition to the penny stock rules described above, FINRA has adopted rules that require a broker-dealer to have
reasonable grounds for believing that the investment is suitable for that customer before recommending an investment to a customer.
Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable
efforts to obtain information about the customers financial status, tax status, investment objectives, and other information.
Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will
not be suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend
that their customers buy our Common Shares, which may limit your ability to buy and sell our Common Shares, have an adverse effect
on the market for our Common Shares, and thereby depress our price per Common Share.
Risks
Related to the VIE Agreements
The
PRC government may determine that the VIE Agreements are not in compliance with applicable PRC laws, rules and regulations
JiuGe
Management manages and operates the mobile data business through JiuGe Technology pursuant to the rights its holds under the VIE
Agreements. Almost all economic benefits and risks arising from JiuGe Technologys operations are transferred to JiuGe Management
under these agreements.
There
are risks involved with the operation of our business in reliance on the VIE Agreements, including the risk that the VIE Agreements
may be determined by PRC regulators or courts to be unenforceable. Our PRC counsel has provided a legal opinion that the VIE Agreements
are binding and enforceable under PRC law, but has further advised that if the VIE Agreements were for any reason determined to
be in breach of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion
in dealing with such breach, including:
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imposing
economic penalties;
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discontinuing
or restricting the operations of JiuGe Technology or JiuGe Management;
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imposing
conditions or requirements in respect of the VIE Agreements with which JiuGe Technology or JiuGe Management may not be able to
comply;
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requiring
our company to restructure the relevant ownership structure or operations;
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taking
other regulatory or enforcement actions that could adversely affect our companys business; and
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revoking
the business licenses and/or the licenses or certificates of JiuGe Management, and/or voiding the VIE Agreements.
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Any
of these actions could adversely affect our ability to manage, operate and gain the financial benefits of JiuGe Technology, which
would have a material adverse impact on our business, financial condition and results of operations.
Our
ability to manage and operate JiuGe Technology under the VIE Agreements may not be as effective as direct ownership.
We
conduct our mobile data business in the PRC and generate virtually all of our revenues through the VIE Agreements. Our plans for
future growth are based substantially on growing the operations of JiuGe Technology. However, the VIE Agreements may not be as
effective in providing us with control over JiuGe Technology as direct ownership. Under the current VIE arrangements, as a legal
matter, if JiuGe Technology fails to perform its obligations under these contractual arrangements, we may have to (i) incur substantial
costs and resources to enforce such arrangements, and (ii) rely on legal remedies under PRC law, which we cannot be sure would
be effective. Therefore, if we are unable to effectively control JiuGe Technology, it may have an adverse effect on our ability
to achieve our business objectives and grow our revenues.
As
the VIE Agreements are governed by PRC law, we would be required to rely on PRC law to enforce our rights and remedies under them;
PRC law may not provide us with the same rights and remedies as are available in contractual disputes governed by the law of other
jurisdictions.
The
VIE Agreements are governed by the PRC law and provide for the resolution of disputes through arbitral proceedings pursuant to
PRC law. If JiuGe Technology or its shareholders fail to perform the obligations under the VIE Agreements, we would be required
to resort to legal remedies available under PRC law, including seeking specific performance or injunctive relief, or claiming
damages. We cannot be sure that such remedies would provide us with effective means of causing JiuGe Technology to meet its obligations
or recovering any losses or damages as a result of non-performance. Further, the legal environment in China is not as developed
as in other jurisdictions. Uncertainties in the application of various laws, rules, regulations or policies in PRC legal system
could limit our liability to enforce the VIE Agreements and protect our interests.
The
payment arrangement under the VIE Agreements may be challenged by the PRC tax authorities.
We
generate our revenues through the payments we receive pursuant to the VIE Agreements. We could face adverse tax consequences if
the PRC tax authorities determine that the VIE Agreements were not entered into based on arms length negotiations. For
example, PRC tax authorities may adjust our income and expenses for PRC tax purposes which could result in our being subject to
higher tax liability or cause other adverse financial consequences.
Shareholders
of JiuGe Technology have potential conflicts of interest with our company which may adversely affect our business.
Li
Li is the legal representative and general manager, and also a shareholder of JiuGe Technology. There could be conflicts that arise
from time to time between our interests and the interests of Ms. Li. There could also be conflicts that arise between us and JiuGe
Technology that would require our shareholders and JiuGe Technologys shareholders to vote on corporate actions necessary
to resolve the conflict. There can be no assurance in any such circumstances that Ms. Li will vote her shares in our best interest
or otherwise act in the best interests of our company. If Ms. Li fails to act in our best interests, our operating performance
and future growth could be adversely affected.
We
rely on the approval certificates and business license held by JiuGe Management and any deterioration of the relationship between
JiuGe Management and JiuGe Technology could materially and adversely affect our business operations.
We
operate our mobile data business in China on the basis of the approval certificates, business license and other requisite licenses
held by JiuGe Management and JiuGe Technology. There is no assurance that JiuGe Management and JiuGe Technology will be able to
renew their licenses or certificates when their terms expire with substantially similar terms as the ones they currently hold.
Further,
our relationship with JiuGe Technology is governed by the VIE Agreements that are intended to provide us with effective control
over the business operations of JiuGe Technology. However, the VIE Agreements may not be effective in providing control over the
application for and maintenance of the licenses required for our business operations. JiuGe Technology could violate the VIE Agreements,
go bankrupt, suffer from difficulties in its business or otherwise become unable to perform its obligations under the VIE Agreements
and, as a result, our operations, reputations and business could be severely harmed.
If
JiuGe Management exercises the purchase option it holds over JiuGe Technologys share capital pursuant to the VIE Agreements,
the payment of the purchase price could materially and adversely affect our financial position.
Under
the VIE Agreements, JiuGe Technologys shareholders have granted JiuGe Management an option for the maximum period of time
permitted by law to purchase all of the equity interest in JiuGe Technology at a price equal to one dollar or the lowest applicable
price allowable by PRC laws and regulations. As JiuGe Technology is already our contractually controlled affiliate, JiuGe Managements
exercising of the option would not bring immediate benefits to our company, and payment of the purchase prices could adversely
affect our financial position.
Risks
Related to Doing Business in China
Changes
in Chinas political or economic situation could harm us and our operating results.
Economic
reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government
could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations
and profitability. Some of the things that could have this effect are:
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Level
of government involvement in the economy;
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Control
of foreign exchange;
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Methods
of allocating resources;
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Balance
of payments position;
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International
trade restrictions; and
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International
conflict.
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The
Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development,
or OECD, in many ways. For example, state-owned enterprises still constitute a large portion of the Chinese economy and weak corporate
governance and a lack of flexible currency exchange policy still prevail in China. As a result of these differences, we may not
develop in the same way or at the same rate as might be expected if the Chinese economy was similar to those of the OECD member
countries.
Uncertainties
with respect to the PRC legal system could limit the legal protections available to you and us.
We
conduct substantially all of our business through our operating subsidiary and affiliate in the PRC. Our principal operating subsidiary
and affiliate, JiuGe Management and JiuGe Technology, are subject to laws and regulations applicable to foreign investments in
China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes,
and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws
and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However,
since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations and rules are not always
uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available
to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources
and management attention. In addition, most of our executive officers and all of our directors are not residents of the United
States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult
for investors to effect service of process in the United States or to enforce a judgment obtained in the United States against
our Chinese operations, subsidiary and affiliate.
You
may have difficulty enforcing judgments against us.
We
are a Delaware holding company, but Finger Motion (CN) Limited is a Hong Kong company, and our principal operating affiliate and
subsidiary, JiuGe Technology and JiuGe Management, are located in the PRC. Most of our assets are located outside the United States
and most of our current operations are conducted in the PRC. In addition, most of our directors and officers are nationals and
residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the
United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons.
It may also be difficult for you to enforce in U.S. courts judgments predicated on the civil liability provisions of the U.S.
federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the
substantial majority of whose assets are located outside the United States. In addition, there is uncertainty as to whether the
courts of the PRC would recognize or enforce judgments of U.S. courts. The recognition and enforcement of foreign judgments are
provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with
the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or
on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition
and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in
the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates
basic principles of PRC law or national sovereignty, security or the public interest. Therefore, it is uncertain whether a PRC
court would enforce a judgment rendered by a court in the United States.
The
PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The
PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations,
including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other
matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements.
However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations
of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest
we then hold in Chinese properties or joint ventures.
Future
inflation in China may inhibit our ability to conduct business in China.
In
recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During
the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. These factors have led to the
adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of
credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls
on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market
for our products and our company.
Restrictions
on currency exchange may limit our ability to receive and use our revenues effectively.
The
majority of our revenues will be settled in Chinese Renminbi (RMB), and any future restrictions on currency exchanges may limit
our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other
payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the
RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested
enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China
authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment
and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent
restrictions on the convertibility of the RMB.
Fluctuations
in exchange rates could adversely affect our business and the value of our securities.
The
value of our common stock will be indirectly affected by the foreign exchange rate between U.S. dollars and RMB and between those
currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative
to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change
in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend
we issue that will be exchanged into U.S. dollars as well as earnings from, and the value of, any U.S. dollar-denominated investments
we make in the future.
Since
July 2005, the RMB is no longer pegged to the U.S. dollar. Although the Peoples Bank of China regularly intervenes in the
foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate
significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very
limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not
entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness
of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign
currencies.
Restrictions
under PRC law on our PRC subsidiarys ability to make dividends and other distributions could materially and adversely affect
our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to our shareholders, and
otherwise fund and conduct our businesses.
Substantially
all of our revenue is earned by JiuGe Management, our PRC subsidiary. PRC regulations restrict the ability of our PRC subsidiary
to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividends by our
PRC subsidiary only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and
regulations. Our PRC subsidiary is also required under PRC laws and regulations to allocate at least 10% of our annual after-tax
profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50%
of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable
to us in the form of loans, advances or cash dividends. Any limitations on the ability of our PRC subsidiary to transfer funds
to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our
business, pay dividends and otherwise fund and conduct our business.
Failure
to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject
our PRC resident shareholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our
PRC subsidiary or affiliate, limit our PRC subsidiarys and affiliates ability to distribute profits to us or otherwise
materially adversely affect us.
In
October 2005, the Chinese State Administration of Foreign Exchange (SAFE), issued the Notice on Relevant
Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside
China, generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before
establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing
outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued
by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (1) purporting to cover
the establishment or acquisition of control by PRC residents of offshore entities which merely acquire control over
domestic companies or assets, even in the absence of legal ownership; (2) adding requirements relating to the source of the PRC
residents funds used to establish or acquire the offshore entity; covering the use of existing offshore entities for offshore
financings; (3) purporting to cover situations in which an offshore SPV establishes a new subsidiary in China or acquires an unrelated
company or unrelated assets in China; and (4) making the domestic affiliate of the SPV responsible for the accuracy of certain
documents which must be filed in connection with any such registration, notably, the business plan which describes the overseas
financing and the use of proceeds. Amendments to registrations made under Circular 75 are required in connection with any increase
or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in
any assets located in China to guarantee offshore obligations and Notice 106 makes the offshore SPV jointly responsible for these
filings. In the case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation
date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006; this date was
subsequently extended indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange
transactions undertaken by the SPV and its affiliates were in compliance with applicable laws and regulations. Failure to comply
with the requirements of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other penalties
under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPVs
affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer
or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.
We
have advised our shareholders who are PRC residents, as defined in Circular 75, to register with the relevant branch of SAFE,
as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiary
and affiliate. However, we cannot provide any assurances that their existing registrations have fully complied with, and they
have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required
by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether
SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our
present and prospective PRC subsidiarys and affiliates ability to conduct foreign exchange activities, such as the
remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC
resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures
required by Circular 75. We also have little control over either our present or prospective direct or indirect shareholders or
the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident shareholders
to comply with Circular 75, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit our subsidiarys and affiliates ability to make
distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
Under
the New EIT Law, we may be classified as a resident enterprise of China. Such classification will likely result
in unfavorable tax consequences to us and our non-PRC shareholders.
Under
the New EIT Law effective on January 1, 2008, an enterprise established outside China with de facto management bodies
within China is considered a resident enterprise, meaning that it can be treated in a manner similar to a Chinese
enterprise for enterprise income tax purposes. The implementing rules of the New EIT Law define de facto management as substantial
and overall management and control over the production and operations, personnel, accounting, and properties of the enterprise.
On
April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese
Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies,
or the Notice, further interpreting the application of the New EIT Law and its implementation non-Chinese enterprise or group
controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by
a Chinese enterprise or group will be classified as a non-domestically incorporated resident enterprise if (i) its
senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel
decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate
chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management
often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income
and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains unclear
as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures
on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
Given
the above conditions, although unlikely, we may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax
authorities determine that we are a resident enterprise for PRC enterprise income tax purposes, a number of unfavorable
PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable
income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on
financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although
under the New EIT Law and its implementing rules dividends paid to us from our PRC subsidiary would qualify as tax-exempt
income, we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange
control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound
remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible
that future guidance issued with respect to the new resident enterprise classification could result in a situation
in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by
our non-PRC shareholders from transferring our shares. We are actively monitoring the possibility of resident enterprise
treatment.
If
we were treated as a resident enterprise by PRC tax authorities, we would be subject to taxation in both the U.S.
and China, and our PRC tax may not be creditable against our U.S. tax.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our business.
We
are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments
to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the
purpose of obtaining or retaining business. We have operations, agreements with third parties and we earn the majority of our
revenue in China. PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized
payments or offers of payments by our executive officers, employees, consultants, sales agents or other representatives of our
Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these
practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective,
and the executive officers, employees, consultants, sales agents or other representatives of our Company may engage in conduct
for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or
civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and
financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations
committed by companies in which we invest or that we acquire.
Because
our business is located in the PRC, we may have difficulty establishing adequate management, legal and financial controls, which
we are required to do in order to comply with U.S. securities laws.
PRC
companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes
strong corporate governance, internal controls and, computer, financial and other control systems. Some of our staff is not educated
and trained in the Western system, and we may have difficulty hiring new employees in the PRC with such training. As a result
of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial
data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western
standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required
under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our
internal controls, which could impact the reliability of our financial statements and prevent us from complying with Commission
rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of compliance
could have a materially adverse effect on our business.