ITEM
1. BUSINESS
Company
Overview
FingerMotion
(FingerMotion or the Company) The Company is a mobile data specialist company incorporated
in Delaware, USA, with its head office located at 1460 Broadway, New York, New York, 10036. The Company operates the following
lines of business: (i) telecommunications products and services; (ii) Short Message Services (SMS) and Multimedia
Messaging Services (MMS); (iii) a rich communication services (RCS) platform; (iv) big
data insights; and (v) a video games division (inactive).
Telecommunications
Products and Services
The
Company has offered telecommunication products and services in China since September 2018, with its current product mix consisting
of payment and recharge services, data plans, subscription plans, mobile phones, and loyalty points redemption. Chinese mobile
phone consumers often utilize third-party e-marketing websites to pay their phone bills. If the consumer connected directly to
the telecommunications provider to pay his or her bill, the consumer would miss out on any benefits or marketing discounts that
e-marketers provide. Thus, consumers log on to these e-marketers websites, click into their respective phone providers
store, and top up, or pay, their telecommunications provider for additional mobile data and talk time.
To
connect to the respective mobile telecommunications providers, these e-marketers must utilize a portal licensed by the applicable
telecommunication company that processes the payment. We have been granted one of these licenses by China United Network Communications
Group Co., Ltd. (China Unicom) and China Mobile Communications Corporation (China Mobile),
each of which is a major telecommunications provider in China. We principally earn revenue by providing mobile payment and recharge
services to customers of China Unicom and China Mobile.
FingerMotion
started and commercialized its Business to Business (B2B) model by integrating with various
e-commerce platforms to provide its mobile payment and recharge services to subscribers or end consumers. In the first quarter
of 2019 FingerMotion expanded its business by commercializing its first Business to Consumer (B2C)
model, offering the telecommunication providers products and services, including data plans, subscription plans, mobile
phones, and loyalty points redemption, directly to subscribers or customers of the e-commerce companies, such as PinDuoDuo (PDD)
and TMall (TMALL). The Company is planning to further expand its universal exchange platform by setting up
B2C stores on several other major e-commerce platforms in China. In addition to that, we have been assigned as one of Chinas
Mobiles loyalty redemption partner where we will be providing the services for their customers via our platform.
SMS
and MMS Services
In
beginning of 2019, the Company expanded into a second partnership with the telecom companies by acquiring bulk Short Message Service
(SMS) and Multimedia Messaging Service (MMS) bundles at reduced prices and offering
bulk SMS services to end consumers with competitive pricing. FingerMotions subsidiary, Beijing XunLian TianXia Technology
Co., Ltd. (Beijing Technology), retains a license from the Ministry of Industry and Information Technology
(MIIT) to operate the SMS and MMS business in the PRC. Similar to the mobile payment and recharge business,
Beijing Technology is required to make a deposit or bulk purchase in advance and has secured business customers, including premium
car manufacturers, hotel chains, airlines and e-commerce companies, that utilize Beijing Technologys SMS integrated platform
to send bulk SMS text messages monthly. Beijing Technology has the capability to manage and track the entire process, including
guiding the Companys customer to meet MIITs guidelines on messages composed, until the SMS messages have been delivered
successfully.
Rich
Communication Services
In
March 2020, the Company began development of an RCS platform, also known as MaaP (Messaging as a Platform). This RCS platform
will be a proprietary business messaging platform that enables businesses and brands to communicate and service their customers
on the 5G infrastructure, delivering a better and more efficient user experience at a lower cost. For example, with the new 5G
RCS message service, consumers will have the ability to list available flights by sending a message regarding a holiday, and will
also be able to book and buy flights by sending messages. This will allow telecommunication providers like China Unicom and China
Mobile to retain users on their systems, without having to utilize third party apps or log onto the internet, which will increase
their user retention. We expect this to open up a new marketing channel for the Companys current and prospective business
partners.
Big
Data Insights
In
July 2020, the Company launched its proprietary technology platform Sapientus as its big data insights arm to deliver
data-driven solutions and insights for businesses within the insurance, healthcare, and financial services industries. Utilizing
the information gathered via the Companys licensed access to telecommunication data, Sapientus transforms raw telco data
into basic building blocks, statistical measures, and behavioral inferences, while layering in auxiliary contextual information,
to extract behavioral insights and power revolutionary applications for insurance and financial services.
The
Companys proprietary risk assessment engine offers standard and customized scoring and appraisal services based on multi-dimensional
factors. The Company has the ability to provide potential customers and partners with various big data enabled applications including
preferred risk selection, precision marketing, product customization, and claims management (e.g. fraud detection). The Companys
mission is to deliver the next generation of data-driven solutions in the financial services, healthcare, and insurance industries
that result in more accurate risk assessments, more efficient processes, and a more delightful user experience.
Our
Video Game Division
The
video game industry covers multiple sectors and is currently experiencing a move away from physical games towards digital software.
Advances in technology and streaming now allow users to download games rather than visiting retailers. Video game publishers are
expanding their direct-to-consumer channels with mobile gaming, the current growth leader, and eSports and virtual reality gaining
momentum as the next big sectors.
In
June 2018, we temporarily paused its publishing and operating plans for existing games, and the Companys board of directors
decided to re-focus the companys resources into new business opportunities in China, particularly the mobile phone payment
and data business.
Corporate
Information
The
Company was initially incorporated as Property Management Corporation of America on January 23, 2014 in the State of Delaware.
On
June 21, 2017, the Company amended its certificate of incorporation to effect a 1-for-4 reverse stock split of the Companys
outstanding common stock, to increase the authorized shares of common stock to 200,000,000 shares and to change the name of the
Company from Property Management Corporation of America to FingerMotion, Inc. (the Corporate
Actions). The Corporate Actions and the amended certificate of incorporation became effective on June 21, 2017.
Our
principal executive offices are located at 1460 Broadway, New York, New York 10036, and our telephone number at that address is
(347) 349-5339.
Share
Exchange Agreement
Effective
July 13, 2017, the Company entered into that certain Share Exchange Agreement (the Share Exchange Agreement)
by and among the Company, Finger Motion Company Limited, a Hong Kong corporation (FMCL) and certain shareholders
of FMCL (the FMCL Shareholders). FMCL, a Hong Kong corporation, was formed on April 6, 2016 and is an information
technology company that specializes in operating and publishing mobile games. Pursuant to the Share Exchange Agreement, the Company
agreed to exchange the outstanding equity stock of FMCL held by the FMCL Shareholders for shares of common stock of the Company.
On the closing date of the Share Exchange Agreement, the Company issued approximately 12,000,000 shares of common stock to the
FMCL shareholders. In addition, the Company issued 600,000 shares to consultants in connection with the transactions contemplated
by the Share Exchange Agreement, and 2,562,500 additional shares to accredited investors, which was a concurrent financing but
not a condition of closing the Share Exchange Agreement.
As
a result of the Share Exchange Agreement and the other transactions contemplated thereunder, FMCL became a wholly owned subsidiary
of the Company. The Company operates its video game division through FMCL. However, in June 2018, the Company decided to pause
the operation of the game division as it saw the opportunity in the telecommunication business and have since refocused into this
business.
VIE
Agreements
On
October 16, 2018, the Company, through its indirect wholly owned subsidiary, Shanghai JiuGe Business Management Co., Ltd. (JiuGe
Management), entered into a series of agreements known as variable interest agreements (the VIE Agreements)
pursuant to which Shanghai JiuGe Information Technology Co., Ltd. (JiuGe Technology) became our contractually
controlled affiliate. The use of VIE agreements is a common structure used to acquire PRC corporations, particularly in certain
industries in which foreign investment is restricted or forbidden by the PRC government. The VIE Agreements include a Consulting
Services Agreement, a Loan Agreement, a Power of Attorney Agreement, a Call Option Agreement, and a Share Pledge Agreement in
order to secure the connection and commitments of the JiuGe Technology. We operate our mobile payment platform business through
JiuGe Technology.
The
VIE Agreements included:
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a
consulting services agreement through which JiuGe Management is mainly engaged in data marketing, technical services, technical
consulting and business consultancy to JiuGe Technology (the JiuGe Technology Consulting Services Agreement);
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a
loan agreement through which JiuGe Management grants a loan to the Legal Representative of JiuGe Technology for the purpose of
capital contribution (the JiuGe Technology Loan Agreement);
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a
power of attorney agreement under which the owner of JiuGe Technology has vested their collective voting control over JiuGe Technology
to JiuGe Management and will only transfer their equity interests in JiuGe Technology to JiuGe Management or its designee(s) (the
JiuGe Technology Power of Attorney Agreement);
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a
call option agreement under which the owner of JiuGe Technology has granted to JiuGe Management the irrevocable and unconditional
right and option to acquire all of their equity interests in JiuGe Technology or transfer these rights to a third party (the JiuGe
Technology Call Option Agreement); and
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a
share pledge agreement under which the owner of JiuGe Technology has pledged all of their rights, titles and interests in JiuGe
Technology to JiuGe Management to guarantee JiuGe Technologys performance of its obligations under the JiuGe Technology
Consulting Services Agreement (the JiuGe Technology Share Pledge Agreement).
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In
the first half of 2018, JiuGe Technology secured contracts with China Unicom and China Mobile to distribute mobile data for businesses
and corporations in 9 provinces/municipalities, namely Chengdu, Jiangxi, Jiangsu, Chongqing, Shanghai, Zhuhai, Zhejiang, Shaanxi
and Inner Mongolia.
In
September 2018, JiuGe Technology launched and commercialized mobile payment and recharge services to businesses for China Unicom.
The JiuGe Technology mobile payment and recharge platform enables the seamless delivery of real-time payment and recharge services
to third-party channels and businesses. We earn a negotiated rebate amount from each of China Unicom and China Mobile for all
monies paid by consumers to China Unicom and China Mobile that we process. To encourage consumers to utilize our portal instead
of using our competitors platforms or paying China Unicom or China Mobile directly, we offer mobile data and talk time
at a rate discounted from these companies stated rates, which are also the rates we must pay to them to purchase the mobile
data and talk time provided to consumers through the use of our platform. Accordingly, we earn income on the rebates we receive
from the telecommunications companies, reduced by the amounts by which we discount the mobile data and talk time sold through
our platform.
In
October 2018, China Unicom and China Mobile awarded JiuGe Technology with contracts that established partnerships for data analysis,
that could unlock potential value-added services.
Acquisition
of Beijing Technology
On
March 7, 2019, the Company through JiuGe Technology acquired Beijing XunLian TianXia Technology Co., Ltd. (Beijing Technology),
a company in the business of providing mass SMS text services to businesses looking to communicate with large numbers of their
customers and prospective customers. Through Beijing Technology, the Company entered into the business of mass SMS text message
service as a compliment to its mobile payment and recharge business. The mass SMS text message service offers bulk SMS services
to end consumers with competitive pricing. Currently, the Companys SMS integrated platform is processing more than 150
million SMS text messages per month. Beijing Technology retains a license from the Ministry of Industry and Information Technology
to operate SMS and MMS business in the PRC. Similar to the mobile recharge business, Beijing Technology is required to make a
deposit or bulk purchase in advance and has secured business customers that will utilize Beijing Technologys SMS integrated
platform to send bulk SMS text messages monthly. Beijing Technology has the capability to manage and track the entire process,
including to assist the Companys clients to fulfill the government guidelines, until the SMS messages have been delivered
successfully.
China
Unicom Cooperation Agreement
On
July 7, 2019, JiuGe Technology entered into that certain Yunnan Unicom Electronic Sales Platform Construction and Operation Cooperation
Agreement (the Cooperation Agreement) with China United Network Communications Limited Yunnan Branch (China
Unicom Yunnan). Under the Cooperation Agreement, JiuGe Technology is responsible for constructing and operating China
Unicom Yunnans electronic sales platform through which consumers can purchase various goods and services from China Unicom
Yunnan, including mobile telephones, mobile telephone service, broadband data services, terminals, smart devices
and related financial insurance. The Cooperation Agreement provides that JiuGe Technology is required to construct and operate
the platforms webpage in accordance with China Unicom Yunnans specifications and policies, and applicable law, and
bear all expenses in connection therewith. As consideration for the services it provides under the Cooperation Agreement, JiuGe
Technology receives a percentage of the revenue received from all sales it processes for China Unicom Yunnan on the platform.
The
Cooperation Agreement expires three years from the date of its signature, but it may be terminated by (i) JiuGe Technology upon
three months written notice or (ii) by China Unicom Yunnan unilaterally. The Cooperation Agreement contains customary representations
from each party regarding such partys authority to enter into and perform under the Cooperation Agreement, and provides
customary events of default, including for various types of failure to perform. Any disputes arising between the parties under
the Cooperation Agreement will be adjudicated in Chinese courts.
This
description of the Cooperation Agreement does not purport to be complete and is qualified in its entirety by reference to the
terms of the Cooperation Agreement, which is attached hereto as Exhibit 10.7 and is incorporated herein by this reference.
China
Mobile Cooperation Agreement
In
December 2020, JiuGe Technology entered into a strategic cooperation agreement (the China Mobile Cooperation Agreement)
with China Mobiles subsidiary, China Mobile Financial Technology Co., Ltd. (China Mobile Financial)
to explore and create a new forward-leaning business model that combines the traditional loyalty point redemption business with
an e-commerce platform designed to create a higher evolution of brand loyalty.
From
the beginning of 2020, JiuGe Technology began actively seeking cooperation with China Mobile Financial, given China Mobiles
years of experience in the financial services industry. Currently, of China Mobiles estimated 900 million subscribers,
only an estimated 600 million currently participate and accumulate points within the loyalty reward program, often referred to
as Points Mall, meaning there is still plenty of room for growth. These estimated 600 million subscribers have accumulated
an aggregate of points worth an estimated 20 billion yuan (approximately US$2.86 billion) (Source: China Securities Journal, China
Mobile will open points ecological stock, customer points worth over 20 billion yuan, Yang Jie, November
15, 2019).
The
Points Mall business is the US equivalent of a loyalty rewards program. The program uses points as
a form of currency that allows users to exchange them for products and services. The loyalty program strives to keep its content
fresh and is on the lookout for partnerships with other unique brands to expand the universe of redemption products and services
offered.
Intercorporate
Relationships
The
following is a list of all of our subsidiaries and the corresponding date of jurisdiction of incorporation or organization and
the ownership interest of each. All of our subsidiaries are directly or indirectly owned or controlled by us:
Name of Entity
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Place of Incorporation /
Formation
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Ownership Interest
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Finger Motion Company Limited (1)
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Hong Kong
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100%
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Finger Motion (CN) Global Limited (2)
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Samoa
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100%
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Finger Motion (CN) Limited (3)
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Hong Kong
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100%
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Shanghai JiuGe Business Management Co., Ltd.(4)
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PRC
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100%
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Shanghai JiuGe Information Technology Co., Ltd.(5)
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PRC
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Contractually controlled (5)
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Beijing XunLian TianXia Technology Co., Ltd.(6)
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PRC
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Contractually controlled
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Finger Motion Financial Group Limited(7)
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Samoa
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100%
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Finger Motion Financial Company Limited(8)
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Hong Kong
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100%
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Shanghai TengLian JiuJiu Information Communication Technology Co., Ltd.(9)
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PRC
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Contractually controlled
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Notes:
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(1)
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Finger
Motion Company Limited is a wholly-owned subsidiary of FingerMotion, Inc.
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(2)
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Finger
Motion (CN) Global Limited is a wholly-owned subsidiary of FingerMotion, Inc.
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(3)
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Finger
Motion (CN) Limited is a wholly-owned subsidiary of Finger Motion (CN) Global Limited.
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(4)
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Shanghai
JiuGe Business Management Co., Ltd. is a wholly-owned subsidiary of Finger Motion (CN) Limited.
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(5)
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Shanghai
JiuGe Information Technology Co., Ltd. is a variable interest entity that is contractually controlled by Shanghai JiuGe Business
Management Co., Ltd.
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(6)
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Beijing
XunLian TianXia Technology Co., Ltd. is a 99% owned subsidiary of Shanghai JiuGe Information Technology Co., Ltd.
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(7)
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Finger
Motion Financial Group Limited is a wholly-owned subsidiary of FingerMotion, Inc.
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(8)
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Finger
Motion Financial Company Limited is a wholly-owned subsidiary of Finger Motion Financial Group Limited.
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(9)
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Shanghai
TengLian JiuJiu Information Communication Technology Co., Ltd. is a 99% owned subsidiary of Shanghai JiuGe Information Technology
Co., Ltd.
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Products
and Services
Telecommunications
Products and Services
Historically,
telecommunication operators focused their efforts on expanding their retail presence; however, consumer behaviors and demands
have shifted from offline to online. In 2018, the Company developed a proprietary universal exchange platform called PigeonHoles
Integration System, which provides seamless integration between telecommunication operators and online stores servicing
Chinese consumers all around China.
The
Companys products and services offerings include the following:
Product / Service
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Details
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Recharge Services
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The Company offers recharge services to consumers throughout China.
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Data Plan
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The Company offers mobile data plans to consumers, including 5G plans.
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Mobile Phone
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The Company offers mobile phones to consumers online. Upon order completion, the Companys up-stream partners or phone distributors (VSens and ZhengZhouXinSiWei) will arrange direct delivery to the customer.
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Loyalty Points Redemption
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As one of China Mobiles loyalty point redemption partners, the Company provides loyalty point redemption services for their customers via the Companys platforms.
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Subscription Plan
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The Company acquires new customers by offering telecommunication subscription plans. The Company shares revenue with telecommunication operators on a new subscribers spending over the following 12 months.
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Up-Stream
Partners
The
Company partners with all three major telecommunication operators in China, namely China Mobile, China Unicom and China Telecom,
to offer its products and services:
Telecommunication Operator
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Products and Services
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China Mobile
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Recharge Service
Data Plan
Loyalty Points Redemption
Subscription Plans
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China Unicom (1)
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Recharge Service
Data Plan
Subscription Plan
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China Telecom
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Recharge Service
Data Plan
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Notes:
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(1)
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The
Company anticipates extending its services with China Unicom to include loyalty points redemption in the very near future.
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In
2020, the Company entered into arrangements with two third party smartphone distributors (VSens and ZhengZhouXinSiWei) to extend
their product offerings across online stores on various platforms. The Company plans to commercialize the offering in the first
quarter of 2021.
Down-Stream
Partners
The
Company currently operates online stores and pages on various e-commerce and social media platforms, gaining access to millions
of users without having to incur the associated marketing expenditures or user acquisition investments.
Name of Online Stores
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Partners / Platform
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Details
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JiuGe TongXin Store
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TMall.com
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Telco Products & Services
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JiuGe Digital Store
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TMall.com
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Mobile Phones
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HeNan China Mobile Store
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TMall.com
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China Mobile Flagship Store
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YunNan China Unicom Store
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TMall.com
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China Unicom Flagship Store
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ChiFeng China Mobile Store
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TMall.com
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China Mobile Flagship Store
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YunNan China Unicom Store
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PingDuoDuo.com
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China Unicom Flagship Store
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JiuGe Mobile Data Store
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PingDuoDuo.com
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Telco Products & Services
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YunNan China Unicom Store
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JD.com
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China Unicom Flagship Store
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SMS
and MMS Service
Short
Message Service (SMS) remains the only secure and reliable communication medium that connects all telecommunication operators
globally. In 2019, the telecommunications industry in China sent a total of around 1,506 billion SMS,1 equivalent to
a market size of RMB 39.2 billion (~$5.85 billion), a year-on-year increase of 37.5% compared to 2018.2 The Company
was responsible for 1.2 billion, or 0.08% of market share.
There
are strict policies imposed by the Chinese government regulating message broadcasting via the SMS protocol. One key metric being
monitored is the rate of public complaints on messages received via SMS, with the aim of fighting spam messages and blocking uncensored
messages.
In
early 2019, the Company completed beta testing of its proprietary SMS Integrated System and the commercialization phase began
in April 2019. The SMS Integrated System provides a robust back-end control panel for corporate partners to access and manage
their own messaging settings. Corporate partners can upload a list of targeted members, compose text or multimedia messages and
define broadcasting settings. All messages must be submitted to the ministry for review before being delivered to telecommunication
operators back-end for broadcasting.
The
mass SMS text message service offers bulk SMS services to end consumers with competitive pricing. Beijing Technology retains a
license from the Ministry of Industry and Information Technology to operate SMS and MMS business in the PRC. Similar to the mobile
payment and recharge business, Beijing Technology is required to make a deposit or bulk purchase in advance, and has secured business
customers that will utilize Beijing Technologys SMS integrated platform to send bulk SMS text messages monthly. Beijing
Technology has the capability to manage and track the entire process, including guiding the Companys customer to meet governments
guidelines on messages composed, until the SMS messages have been delivered successfully
The
Companys SMS Integrated System performs more than 150 million SMS transactions monthly. The Company focuses its efforts
on:
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Continuously
enhancing the SMS Integrated System to offer a more flexible, reliable, and scalable platform.
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1
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Source:
http://data.chinabaogao.com/dianxin/2020/0364R5222020.html
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2
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Source:
https://jxca.miit.gov.cn/cms_files/filemanager/oldfile/jxca/upload/202003/202003111516300286.pdf
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Working
closely with telecommunication operators in a select few provinces allows the Companys business development team to negotiate
and secure better bulk purchase pricing from time to time.
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The
Companys corporate partners span various industries such as airlines, insurance and financial services, e-commerce and
consumer markets; diversifying sources of revenue improves the stability of the Companys revenue stream and minimizes seasonal
fluctuations with SMS volume.
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Rich
Communication Services (RCS) Platform
Telecommunication
operators around the world have reached consensus on the need to upgrade the operator messaging service from SMS to Rich Communication
Services (RCS) messaging in the 5G era. Worldwide, the GSM Association (GSMA) indicates 90 operators have launched RCS, attracting
473 million users and projecting an estimated value of $74 billion by 2021.3
On
April 8, 2020, Chinas three major telecommunication operators, namely China Mobile, China Telecom and China Unicom, released
a 5G messaging white paper outlining their commitment to mandate all compatible handsets sold in the country support RCS.4
5G
messaging service or RCS can support not only Person-to-Person (P2P) messaging, but also Application-to-Person (A2P) messaging.
Through P2P messaging, RCS offers a richer text-messaging system, provides phonebook polling and is capable of transmitting in-call
multimedia features. A2P messaging enables businesses and brands to communicate with users via chatbot, facilitates the sharing
of high-quality videos but also more direct interfacing with the internet; consumers will no longer have to download multiple
mobile apps and can, for instance, directly buy train tickets and book flights by just sending messages.
In
March 2020, the Companys management allocated resources dedicated for the research and development of a RCS platform –
MaaP (Messaging as a Platform). This RCS platform is expected to be a proprietary business messaging platform that enables businesses
and brands to communicate and service their customers on 5G infrastructure, delivering better user experience, more efficiently
and cost effectively. This is expected to open up a new marketing channel for the Companys current and prospective business
partners.
In
the third quarter of the fiscal year ended 2022, the Company anticipates commercializing the following RCS platforms:
RCS
Platform for Telecommunication Products and Services
The
Company intends to launch its own brand on the platform for the telecommunication products and services it currently carries.
The platform is expected to provide the Company with direct access to 5G mobile users. Furthermore, the Company can continue building
and enhancing its brand on the platform serving as the most comprehensive one-stop shop for telecommunication products and services.
RCS
Platform for Partners and Brands
The
Company is targeting to engage larger partners and brands on this new RCS platform. It is currently working and negotiating with
one of the largest phone distributors in China to be among the first partners launching services on the platform.
Big
Data Insights
The
Company launched its proprietary platform Sapientus in July 2020 as its big data insights arm to deliver data-driven
solutions and insights for businesses within the insurance and financial services industries. Leveraging the Companys strong
tech and data backbone, Sapientus specializes in data mining and insights extraction. The Companys flexible data structure
is built from the ground up, by transforming raw telco data into basic building blocks, statistical measures and behavioral inferences,
while layering in auxiliary contextual information, to extract behavioral insights and power revolutionary applications for insurance
and financial services.
Sapientus
equips insurance industry partners with a range of capabilities such as:
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Behavior
insights and scoring derived from a time series of live telco data, along with an expansive set of auxiliary data, enabling deeper
contextual understanding of a customers behavior propensity and risk inclination for more granular segmentation;
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Source:
https://www.gsma.com/futurenetworks/rcs/
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Source:
https://www.gsma.com/futurenetworks/wp-content/uploads/2020/04/5G-Messaging-White-Paper-EN.pdf
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Transactional
integration giving real-time feedback enriched with risk and behavior insights on current and prospective customers, thereby further
promoting digital transformations in the industry – e.g. online underwriting, claims processing and fraud detection, etc.;
and
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Insight-driven
data analytic services, sufficiently adaptive to incorporate new information such as emerging claim and marketing data, and synchronize
with the Companys partners operating and risk assessment philosophy via continual learning and honing.
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Sapientus
deep bench of insurance and data science expertise is expected to attract an expanding client base, supporting risk calibrations
and insights extraction using advanced statistical methods and analytic techniques. The Companys proprietary risk assessment
engine offers standard and customized scoring and appraisal services based on multi-dimensional factors, enabled by extensive
data coverage through exclusive telco partnerships. The Company augments and shares value with its partners through various big
data enabled applications including preferred risk selection, precision marketing, product customization, and claims management
(e.g. fraud detection).
The
Companys mission is to deliver the next generation of data-driven insurance solutions that result in more accurate risk
assessments, more efficient processes and a more delightful customer journey.
The
Company anticipates development of Sapientus in three key stages:
Stage
1: Initialization
During
the initialization stage, the Companys focus on building its brand and honing its rating framework and analytics. To accomplish
this, the Company will be partnering with reinsurers to increase its visibility as well as assimilate its data analytics into
the reinsurers value chain. Potential engagements include underwriting enhancement, market segmentation, product design
as well as facilitation of claims review and adjudication. Revenue during this time will be sourced mainly from offering proprietary
rating system and related services that are customized to fit the Companys reinsurer partners specific needs. Furthermore,
establishing collaborative facilities with reinsurers allows the Company to integrate posterior information (claims, underwriting
experience, and campaign feedback) for improving its scoring / measurement system.
Stage
2: Expansion
The
expansion stage shifts the Companys revenue focus from offering rating system alone to earning commissions and profit shares
through channel expansion and innovative product designs enabled by more granular customer segmentation. Channel expansion could
be achieved by cross-selling through the Companys affiliated company and brokerage arm, supported by leads generation for
niche marketing and further upselling. In addition, developing customized product solutions with reinsurers will augment value
proposition, offering more personalized and efficient coverage based on the latent risks of individuals. Precision marketing enhances
product take-up rates, while preferred risk selection is expected to attract profitable business and improve portfolio results.
As such, added value can be generated and shared among Sapientus and its (re)insurer and distribution partners.
Stage
3: Integration
As
Sapientus matures, the Company enters the integration stage. Behavioral dynamics can prove to be very versatile in supporting
many possibilities beyond insurance. Having accumulated more diverse data and insights enriches the Companys rating perspective,
enabling it to offer a universal rating platform that can be commonly adopted across the industry. The Companys platform
can be readily integrated with other systems, helping the Company extend reach beyond insurance applications. For example, the
Companys generalized rating system can help conduct smart underwriting for financial loans or craft out consumer behaviors
and risk propensities to inform ecommerce business decisions. The Companys platform can be used standalone as an independent
rating tool, as well as offered as part of an integrated system, joining forces with various ecosystem partners on data access,
customer relationships, advanced analytics, product and service capabilities. Types of value that can be realized through ecosystems
include:
|
■
|
Friction
reduction: Creating a one-stop shop or interface for consumers by removing the hassle of switching among multiple providers;
|
|
■
|
Network
effects: Generating synergy value for stakeholders by pooling and sharing information and resources to serve common needs;
and
|
|
■
|
Data
integration: Mining and analyzing available data, applying learnings to deliver convenience and tangible benefits to customers.
|
Growth
Strategy
The
Companys growth strategy is a multi-pronged approach, continually asking Whats next? and consisting
of the following:
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■
|
Enhancing
PigeonHoles Integration System and the SMS Integrated System. Maintaining a stable and robust platform will give the Company
the flexibility to manage new product offering and packages in order to increase revenue. This will be the key critical success
factor for the Companys expansion plans.
|
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■
|
Expanding
customer base. Along with the stability of the Companys platform and its ability to access working capital, the Companys
growth will be based on increasing its market share through expanding its base in its current geographic regions of operations
and through expanding its presence into other regions. The Companys offerings can be targeted to a wider group of customers,
which should improve overall revenue.
|
|
■
|
New
Product line expansion. The Company will constantly increase its product offerings from its telco partners by designing new
packages and offerings in order to differentiate the Company from its competition.
|
|
■
|
Enhancing
values. The Company will continue to build brand loyalty and enhance its customer service to ensure customer retention and
repeat sales. In December 2020, the Company signed a Strategic Cooperation Agreement for Loyalty Program Business with China Mobile
Financial Technology Co., Ltd. The agreement is to explore and create a new forward-learning business model that combines the
traditional loyalty point redemption business with an e-commerce platform designed to create a higher evolution of brand loyalty.
|
|
■
|
Diversification.
Breaking away from the Companys core and traditional business, the Company is moving into the insurance technology
(insuretech) space with Sapientus and the Companys big data analytics arm. The Company will continue to explore
opportunities in the financial technology services (fintech), healthcare and advertising industries.
|
|
■
|
Focusing
on strength and investing in talent. The Company will continue to build the strongest team in all of its various businesses.
The company will also continue to build its core values to enhance and differentiate its support and services to ensure it is
able to stand out from its competitors.
|
Sales
and Marketing
|
■
|
The
Companys sales and marketing efforts are focused on promoting brand awareness of its JiuGe telecommunication stores currently
operating on most major e-commerce and social media platforms in China.
|
|
■
|
The
Company is continuously planning, in cooperation with its telco partners, seasonal and targeted marketing events in different
provinces and cities.
|
|
■
|
Since
the inception of JiuGe Technology in 2018, the Company has secured contracts and agreements to work with nine 9 online stores
and twenty 20 business partners. The Companys strategy is to expand into the entire China region and to reach out to a
wider base of customers and users that can benefit from the Companys product offerings.
|
|
■
|
The
Companys new agreement with China Mobile on the loyalty redemption business is a step towards the Companys customer
retention strategy that will also enable it to cross-sell additional products and offerings from the Company.
|
|
■
|
The
Company will continue to focus on, and expand, its roster of corporate clients to improve sales in its SMS business, and will
focus on expanding into different industries.
|
Research
& Development
|
■
|
RCS
Platform - As a leader in the 5G ecosystem in China, the Company is developing the RCS platform to strengthen its first-mover
advantage in MaaP (Messaging as a Platform). This messaging platform enables businesses and brands to communicate and service
their customers on 5G infrastructure, delivering a more efficient, more cost efficient, and more robust user experience. This
should open up a new marketing channel for the Companys current and prospective business partners.
|
|
■
|
Big
Data Insights - Beginning in January 2019, the Company has continuously researched industry reports and compiled data
published by researchers and have incorporated its findings into its Sapientus data blocks. By integrating with external data
sources, the Companys R&D departments can develop innovative insuretech and fintech products to the Companys
re-insurance and financial services companies and partners.
|
Competition
Our
industry is highly competitive, rapidly changing, highly innovative and increasingly subject to regulatory scrutiny and oversight.
We compete against a wide range of businesses, including those that are larger than we are, have a dominant and secure position
or offer other products and services to consumers and merchants that we do not offer. We believe we are in an advantageous position
compared to many of our competitors or potential competitors because we have been granted an exclusive license to act as an authorized
processor of payments in China for China Unicom and China Mobile.
Our
mobile payments business competes principally against two alternatives. First, we compete directly with other holders of licenses
from the major mobile telecommunications providers in China. We understand there are a limited number of these licenses, but believe
that certain other license holders are large, diversified companies with deep financial resources. We also compete with payment
processors that are not authorized licensees of the mobile telecommunications companies but nevertheless provide similar services.
Separately, and more generally, we compete with all forms and methods of paying for additional data and minutes, including credit
and debit cards, other electronic payment platforms and bank transfers.
Because
we have been awarded a contract to process payments for China Unicom and China Mobile and, are therefore, able to offer services
directly to market with value added services, we believe the Company is in an advantageous position as compared to its competition.
We look to take advantage of the position that we have been afforded.
Intellectual
Property
The
Company has sufficient intellectual property rights to operate its mobile payment and recharge platform system. Specifically,
the Company has registered patents for its mobile payment and recharge platform system. The Company will continue to enhance the
system to meet market and consumer demands and requirements. The Company has also implemented strict controls to ensure the safe
and secure keeping of any source codes.5
The
Company has registered the following patents:
Patent
Registration
Number
|
Region
|
Title
|
Inventors
|
Applicant
|
Status
as of
the date of
this Annual
Report
|
2019SR0439119
|
Shanghai,
China
|
PigeonHoles
Integration System (1)
|
Shanghai
JiuGe Business Management Co. Ltd
|
Shanghai
JiuGe Business Management Co. Ltd
|
Obtained
|
|
|
|
|
|
|
2020SR0741902
|
Shanghai,
China
|
SMS
Integrated System(2)
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Obtained
|
|
|
|
|
|
|
2020SR0792227
|
China
|
JiuGe
Customer Profiling Software V1.0.0 (3)
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Obtained
|
|
|
|
|
|
|
2020SR0772385
|
China
|
JiuGe
TELCO Big Data Software V1.0.0 (4)
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Obtained
|
|
|
|
|
|
|
2020SR0809253
|
China
|
JiuGe
Risk Assessment System Software V1.0.0 (5)
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Obtained
|
|
|
|
|
|
|
2020SR0860695
|
China
|
JiuGe
Internet Big Data Software V1.0.0 (6)
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Obtained
|
|
|
|
|
|
|
2020SR0867792
|
China
|
JiuGe
Mobile Digital Precision Marketing Software V1.0.0 (7)
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Shanghai
JiuGe Information Technology Co. Ltd
|
Obtained
|
Notes:
|
(1)
|
PigeonHoles
Integration System is the Companys proprietary universal exchange platform which provides seamless integration between
telecommunication operators and online stores servicing PRCs customers.
|
|
|
|
|
(2)
|
The
Companys SMS Integrated System provides a robust back-end control panel for corporate partners to access and manage their
own messaging settings. Corporate partners can upload a list of targeted members, compose text or multimedia messages and define
broadcasting settings.
|
|
|
|
|
(3)
|
Patent
based on JiuGes big data analysis and commercialization of consumers profile
|
|
|
|
|
(4)
|
Patent
based on JiuGes big data analysis for telecommunication products and services
|
|
|
|
|
(5)
|
Patent
based on JiuGes big data analysis on risk assessment system
|
|
|
|
|
(6)
|
Patent
based on JiuGes big data analysis for online product.
|
|
|
|
|
(7)
|
Patent
based on JiuGes big data analysis for online digital contents on mobile
|
Regulation
We
operate in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments
industry. That focus continues to become even more heightened as regulators on a global basis focus on such important issues as
countering terrorist financing, anti-money laundering, privacy, cybersecurity and consumer protection. Some of the laws and regulations
to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to
the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation.
New or changing laws and regulations, including how such laws and regulations are interpreted and implemented, as well as increased
penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of
operations, and financial condition. Therefore, as we grow, we will need to develop the capacity to monitor these areas closely
to design compliant solutions for our customers who depend on us.
Government
regulation impacts key aspects of our business. We are subject to regulations that affect the payments industry in the markets
in which we operate.
Payments
Regulation. Various laws and regulations govern the payments industry in China, where our mobile payment and recharge platform
principally operates. Our activities in this regard are, or may be, supervised by one or more financial regulatory authorities,
including the Peoples Bank of China. Other national or provincial regulatory agencies may have or assert jurisdiction over
our activities, including agencies and authorities outside of China, if our platform is utilized by consumers in such jurisdictions.
The laws and regulations applicable to the payments industry in any given jurisdiction are subject to interpretation and change.
Anti-Money
Laundering and Counter-Terrorist Financing. FingerMotion is subject to anti-money laundering (AML) laws
and regulations in China, the U.S. and other jurisdictions, as well as laws designed to prevent the use of the financial systems
to facilitate terrorist activities. As we grow our business, we will need to develop an AML program designed to prevent our payment
network from being used to facilitate money laundering, terrorist financing, and other illicit activities, or to do business in
countries or with persons and entities included on designated country or person lists promulgated by the U.S. Department of the
Treasurys Office of Foreign Assets Controls (OFAC) and equivalent authorities in China and other countries
whose jurisdiction we may become subject as a result of our operations. Any AML and sanctions compliance program we put in place
will need to involve policies, procedures and internal controls designed to address these legal and regulatory requirements and
assist in managing money laundering and terrorist financing risks.
Data
Protection and Information Security. Aspects of our operations or business may be subject to privacy and data protection regulation
in China, the U.S. and elsewhere. In the U.S., we are subject to privacy information safeguarding requirements under the Gramm-Leach-Bliley
Act that require the maintenance of a written, comprehensive information security program, among other laws, which we do not currently
have in place. Regulatory authorities around the world are considering numerous legislative and regulatory proposals concerning
privacy and data protection that may contain additional privacy and data protection obligations than exist today. In addition,
the interpretation and application of these privacy and data protection laws in China, the U.S. and elsewhere are often uncertain
and in a state of flux.
Anti-Corruption.
FingerMotion is subject to applicable anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery
Act, and similar anti-corruption laws in the jurisdictions in which we operate. Anti-corruption laws generally prohibit offering,
promising, giving, accepting or authorizing others to provide anything of value, either directly or indirectly, to or from a government
official or private party in order to influence official action or otherwise gain an unfair business advantage, such as to obtain
or retain business.
Additional
Regulatory Developments. Various regulatory agencies continue to examine a wide variety of issues, including virtual currencies,
identity theft, account management guidelines, privacy, disclosure rules, cybersecurity and marketing that may impact the Companys
business.
Compliance
with Environmental Laws
Compliance
with foreign, federal, state and local laws that have been enacted or adopted regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, have not had a material effect on our capital expenditures, earnings
or competitive position.
Employees
As
of February 28, 2021, we had 69 total employees, of whom all were full time. We have approximately 60 employees in China, 3 employees
in Malaysia, 2 employees in Hong Kong, 1 employee in Taiwan, 2 employees in USA and 1 employee in Canada. We believe that we enjoy
good relations with our employees.
ITEM
1A. RISK FACTORS
In
addition to the information contained in this Annual Report on Form 10-K, we have identified the following material risks and
uncertainties which reflect our outlook and conditions known to us as of the date of this Annual 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.
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 Annual 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 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 February 28, 2021, we
had an accumulated deficit of $12.2 million. 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 12, 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 in recent weeks. A continuation or worsening
of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access
capital, on our business, results of operations and financial condition, on the market price of our common shares, and on consumer
demand for consumer services, including those offered by our Company.
We
depend on our key personnel and other highly skilled personnel, and if we fail to attract, retain, motivate or integrate our personnel,
our business, financial condition and results of operations could be adversely affected.
Our
success depends in part on the continued service of our founders, senior management team, key technical employees and other highly
skilled personnel and on our ability to identify, hire, develop, motivate, retain and integrate highly qualified personnel for
all areas of our organization. We may not be successful in attracting and retaining qualified personnel to fulfill our current
or future needs. Our competitors may be successful in recruiting and hiring members of our management team or other key employees,
and it may be difficult for us to find suitable replacements on a timely basis, on competitive terms or at all. If we are unable
to attract and retain the necessary personnel, particularly in critical areas of our business, we may not achieve our strategic
goals.
Our
concentration of earnings from two telecommunications companies may have a material adverse affect on our financial condition
and results of operations.
We
currently derive 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 shareholderof 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.